Keeping it Fair on Both Sides
by Brandon M. Allen, JD
McDonald, Levy & Taylor
Non-compete agreements are a valuable tool utilized to protect businesses when used appropriately.
It is likely that most employees are familiar with, or have been required to sign, a non-compete agreement presented by an employer. It is also likely that many employers have considered the usage of these agreements when hiring and training new employees. Non-compete contracts typically go in one direction, meaning that the employer presents the agreement not to compete to the employee, and the employee is required to sign the agreement in order to begin her work. This may seem unfair, as the employer is almost always in the superior position of offering a job to the employee. In fact, the employee may feel obligated to sign unless she is prepared to return to the job postings and look for another job.
While these contracts may sound unfair to employees, they serve a valid purpose for employers when used properly and legally.
An agreement not to compete may show up as a separate legal document, or it could be conveniently tucked away in another employment contract as a simple restrictive covenant preventing the employee from taking some action. Employees also have rights under an agreement not to compete, along with limitations on what they should be asked to give up or actions they can be prohibited from taking.
In Tennessee, agreements not to compete are governed by law.
These contracts are highly litigated, and Tennessee Courts tend to disfavor the agreements because they have an inherent likelihood of restraining trade. Conversely, employers choose to continue their usage of these contracts for many reasons. Often, employers invest highly into a new employee by providing training and knowledge required to do the job. They also share trade secrets that could jeopardize their businesses if an employee learned the trade and then moved to a competitor or opened up a new business to compete. This is a risk for an employer who is looking for new talent but is also burdened with the obligation to protect the business.
The key to a valid non-compete agreement is drafting reasonable covenants.
An employer who relies on an unfair agreement is likely to be overturned in court, resulting in a contract that is not enforceable and the accrual of legal fees to cover litigation. The definition of reasonable in a non-compete agreement also comes with its own set of complexities. Employers may ask that employees refrain from working within a specific proximity of the employer’s location after leaving or waiting a specific length of time before they can do so. Determining whether these covenants are enforceable and reasonable depends on whether the employer has a protectable business interest served by the agreement.
For example, if a medical device company hires and invests in a sales representative who is introduced to trade secrets, it may be enforceable to prohibit the representative from selling an identical product for a competitor who is located in the same area for six months after ending employment. Conversely, prohibiting a truck driver from working at any business as a driver within 250 miles for six months after ending employment is likely too restrictive.
If the contract is arbitrary and rooted primarily in the intent to affect an employee’s ability to find a new job, it is likely to fail in enforceability.
If the intent is to protect and guard trade secrets and may provide a previous employee an unfair advantage in the industry, then Tennessee Courts are likely to uphold the covenants.
The law on non-compete agreements is evolving. Whether you are an employer seeking to draft an agreement that protects the business interests of your organization or an employee who has been asked to sign a contract that you feel may impact your rights upon your departure, we are happy to assist. Please feel free to call McDonald, Levy & Taylor, PLLC, and schedule a consult to discuss your legal needs anytime.