Tom Shumate's Tennessee Non-Compete Law Blog

When Will Law Firms Learn...

The Buffalo News reports that the New York Supreme Court voided clauses in a law firm's employment contract forbidding a departing attorney from notifying firm clients of his departure and setting a 43.56% lien on any future work done for former firm clients by the departing attorney. The Court held that the restrictions violated the ethics rules for attorneys. I believe that Tennessee courts would rule the same way. Clients should have the ability to retain counsel of their choosing and should not be prevented from following their attorney when he leaves a firm. Most law firms know this, but they continue to include such restrictions in firm employment agreements to dissuade departing attorneys from taking clients with them. Apparently the risk of having some clauses held to be unenforceble (or even unethical) is outweighed by the risk of losing firm clients. You can read the article here.

Make Sure That Non-Competition Restrictions Apply Whether the Employee Is Fired With or Without Cause

David Woolf and Mark E. Furlane's article, United States: The Fired Employee's Non-Compete Agreement, provides a good overview of the impact of an employer's termination of an employee (with or without cause) on the employer's efforts to later enforce a noncompete agreement signed by the terminated employee. Since noncompete agreements "remain creatures of equity," they encourage employers to address this issue on the front-end:

So what should an employer who, arguably, wants to have his cake and eat it too do? First, think about the issue in the drafting stage and make sure that your agreement expressly provides that the restrictions apply whether the employee is terminated voluntarily or involuntarily and regardless of the reason. Leaving such language out can give a court an easy reason to deny enforcement.

You can read the entire article here.

Update on 2012 Amendment to Statute Governing Health Care Non-Compete Agreements

Josh McCreary wrote a good article on the status of health care non-compete agreements in light of the 2012 Amendments to Tenn. Code Ann. 63-1-148 (effective January 1, 2012), which eliminate the six-year employment limitation and extend its application to osteopathic physicians. He also discusses many of the unanswered questions created by the Legislature's continued tinkering with the language of the statute. You can read it here. 

First Tennessee Non-Compete Case of 2011

    In the only non-compete case decided by a Tennessee appellate court so far in 2011, the Court of Appeals reversed the trial court and held that Otter's was the prevailing party in a suit against its former C.O.O., Coppage, and was entitled to recover it's attorney's fees pursuant to the fee provision in the non-compete agreement. Although both parties made multiple claims against the other and requested an award of attorney's fees, Otter's was awarded a preliminary injunction and a temporary restraining order and was able to convince the trial court to order Coppage to return the confidential and trade secret information he apparently retained after his termination. Coppage, on the other hand, only won a small judgment against Otter's based on its breach of a Membership Interest Purchase Agreement.  That agreement, unlike the non-compete, did not include a fee provision, so Coppage was unable to recover his fees.

    The Court of Appeals also affirmed the trial court's decision to extend the temporary injunction through the end of the two year period during which Coppage was precluded from competing with Otter's. This is not surprising given the evidence that Coppage kept confidential and trade secret information, including Otter's operations manual, after he was terminated and may have been sending information to Otter's main competitor, McDougal's Chicken. Don't expect courts to give you the benefit of the doubt if you fail to return confidential and trade secret information after leaving an employer.

Otter's Chicken Tender, LLC v. Joey Coppage, 2011 Tenn. App. LEXIS 347 (Tenn. App. 2011).

The Tennessee Bar Association Released My Educational Games on Covenants Not to Compete and Preventing Legal Malpractice

I created an educational game on noncompetes for the Tennessee Bar Association. Attorneys across the state can play it to obtain continuing legal education credit.  I also created one called, "Preventing Legal Malpractice: Know Thy Enemy." These games are probably the most fun you can have while knocking out your CLE requirements. You can register for them here.

Tennessee Legislature Considers Amending Tenn. Code Ann. Sec. 63-1-148 to Exempt Primary Care Physicians from Non-Competes

In Murfreesboro Medical Clinic, P.A. v. Udom, the Tennessee Supreme Court banned noncompete agreements between physicians and their private employers.  The Legislature responded by enacting Tenn. Code Ann. 63-1-148, which allows physician noncompetes in some situations. As enacted, Tenn. Code Ann. 63-1-148 exempts emergency physicians from being restricted by noncompetes.  The Legislature is considering adding primary care physicians to the list of physicians that may not be restricted by noncompetes. The following status of the proposed legislation was provided by the Tennessee Bar Association:

SB 0110 Johnson J. HB 0031 Casada

Covenant not-to-compete exemption: primary care physicians. Exempts primary care physicians, in addition to emergency medicine physicians, from covenants restricting rights to compete. (S: Johnson J.; H: Casada) Senate Status: Referred to Senate General Welfare. House Status: Referred to House General Subcommittee of Health & Human Resources.

Can Making Whoopie (Pies) Compete with Cupcakes?

The Nashville Business Journal and the Commercial Appeal report that the Nashville-based GiGi's Cupcakes franchise is threatening legal action against a former employee who is opening a business in Memphis that would pair cupcakes and other tasty treats, such as whoopie pies and macaroons, with wine.  GiGi's claims the former employee signed a noncompete while working for the franchise and is precluded from opening a cupcake shop.  Sounds like some tasty litigation!

hot pUTato

 
After Lane Kiffin, the widely despised former University of Tennessee football coach, hired the runninng backs coach away from the Tennessee Titans, the Titans sued Kiffin and his new employer, the University of Southern California, in federal court for interfering with its contractual relations with the running backs coach and for inducing the breach of his contract.  Since that time, two federal judges have recused themselves to avoid any appearance of impropriety -- Judge Campbell, who attended UT College of Law and has a daughter who is applying to USC, and Judge Trauger, whose husband was involved in negotiating the deal to bring the Titans to Nashville. The case has now been reassigned to Senior Judge John T. Nixon. Given the importance of football in Tennessee, this case might never be heard were it not for the lifetime tenure granted to federal judges.  As it stands now, this case is set for trial on August 2, 2011. You can read more about this story here.

Tennessee Court of Appeals Enforces One-Sided Arbitration Clause in Non-Compete Dispute

In Victor J. Thomas, M.D., et al., v. Pediatrix Medical Group of Tennessee, P.C., Drs. Thomas and Kennedy filed a complaint seeking a declaratory judgment that the restrictive covenants contained in their employment contracts were rendered invalid by the Tennessee Supreme Court's decision in Murfreesboro Medical Clinic, P.A. v. Udom, 166 S.W.3d 674 (Tenn. 2005). Pediatrix responded by moving to dismiss the complaint and seeking to force the doctors to arbitrate the dispute based on the arbitration clause contained in their employment agreements. The trial court denied Pediatrix's motion, so it appealed as a matter of right pursuant to the Tennessee Uniform Arbitration Act. 

On appeal, the Tennessee Court of Appeals honed in on the language in the employment agreement requiring that "any controversy or claim arising out of or relating to" the employment agreement be arbitrated.  The doctors countered that the severability language contained in their employment agreements was intended to sever any disputes regarding the enforceabilty of the restrictive covenants from the arbitration clause.  The Court of Appeals properly noted that the severability language was intended to apply in the event that a court determined that the restrictive covenants were unenforceable so that those provisions could be severed from the employment contract so that the remaining clauses would be enforceable. 

Finally, the doctors argued that the court should resolve the enforceability of the restrictive covenants because of the lack of authority available to the arbitrators on the issues of:  (1) whether the Murfreesboro Medical Clinic decision should be applied retroactively to an employment contract executed before the opinion was issued; and (2) whether Tenn. Code Ann. 63-1-148, which was enacted to partially nullify the opinion in Murfreesboro Medical Clinic, should be applied retroactively to employment agreements which were executed before the statute was enacted but which did not end until after the statute was enacted.  The Court of Appeals felt that a panel of experienced arbitrators could resolve those issues as easily as a court.  Based on those determinations, the Court of Appeals reversed the trial court and directed that it order the parties to arbitrate the issues in dispute. 

While this was not a particularly "sexy" opinion, it is interesting that five years after the Murfreesboro Medical Clinic decision was issued, there appears to be little published guidance regarding its retroactive application or the retroactive application of Tenn. Code Ann. 63-1-148.  This opinion suggests that these issues are not "novel" or "untested by the courts" and can be resolved by the "well established law in Tennessee regarding the retroactive application of statutes, the rules of statutory construction as well as the legislative history of the statute...."  Nonetheless, the Court of Appeals did not provide any hint as to the those outcomes since it did not need to do so to resolve the issues before it.

It is also interesting that the Court of Appeals was not concerned with the fact the employment agreement was drafted so as to allow Pediatrix to seek injunctive relief to enforce the restrictive covenants contained in the employment agreement, but the doctors were precluded from filing a declaratory judgment action seeking to declare those same restrictive covenants unenforceable.  Rather than focusing on whether the rights were reciprocal, the Court of Appeals sought to enforce the terms of the employment agreement as drafted. 

Blog Reports Increased Litigation Regarding Enforceability of Non-Compete Agreements

On his LawMarketing Blog, Larry Bodine reports that the recession continues to boost labor and employment practices and has resulted in increased litigation regarding the enforceability of non-compete agreements.  You can read the entire article here.