Jimmy John's makes low wage workers sign two-year non-competes. Their sandwiches are good but not that good.
Interesting article regarding the offensive use of injunctive relief by employees seeking to have their non-compete agreements held unenforceable. You can read it here.
Interesting article from The New York Times regarding the national trend of employers using non-compete agreements in a broader range of industries, including hairstylists and camp counselors. Noncompete Clauses Increasingly Pop Up in Array of Jobs I'm seeing this trend in Tennessee as well. I was recently asked to draft a non-compete agreement for a salon owner. I have not been asked to draft a non-compete for a summer camp. But if anyone from Camp Marymount is reading this, let me know if you need one. I'll make lil' Johnny think twice about trying to jump to Camp Widjiwagan!
[By Maxdelord (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons]
Some believe that non-competes will only be enforced when the former employee worked in an industry involving access to "high-tech" information, such as those working in the medical, manufacturing, and computer industries. As the following cases demonstrate - all of which involve nail technicians or manicurists - given the right set of facts, courts will enforce non-competes against workers in almost any field if the employer can demonstrate a legitimate business interest and if the restrictions are reasonable. But as we learned in Jurassic Park, just because we can do something doesn't mean that we should. In the non-compete arena, the stakes have to be worth it.
In Baker v. Hooper, 1998 Tenn. App. LEXIS 552 (Tenn. Ct. App. August 6, 1998), Patricia ("Patty") Baker, owner of Patty's Pampered Nails, hired Hooper and Ellison as contractors to work at her nail salon. They both signed contracts that included the following restrictions:
8. Contractor is not to compete by opening another licensed nail salon in Contractors name or being the managing nail technician of a competitive nail salon in McMinn County for one (1) year subsequent to termination date from Patty's Pampered Nails, or working as a nail technician in another salon or store for six (6) months in McMinn County subsequent to termination [*3] date from Patty's Pampered Nails.
While Hooper and Ellison worked at Patty's Pampered Nails, Patty paid for the vast majority of the advertising expenses (94%) for both her practice and the two contractors. When the parties parted ways, Hooper and Ellison went to work for a competitor located only half a block away. To make matters worse, they contacted 52 of the salon's clients using Client Profile cards they were required by Patty to maintain on each of the salon's customers, 34 of whom were clients of the salon before Hooper and Ellison started working there. Those 52 customers stopped using Patty's salon, which allegedly cost Patty about $14k in lost profits. When Patty found out, her nails came out. She sued Hooper and Ellison for breach of contract and sued their new employer for interfering with her contractual relationships. After the parties filed cross-motions for summary judgment, the trial court granted the defendants' motions and held the non-compete was an unreasonable restraint on trade.
On appeal, the Court of Appeals first questioned whether covenants not to compete apply to independent contractors. After failing to find any Tennessee authority on point, the Court reviewed decisions from other jurisdictions that applied non-competes to independent contractor relationships and held they would be enforced if they were reasonable. Although this is an unreported decision, other Tennessee courts have adopted its holding on this point. See, Southern Fire Analysis, Inc. v. Rambo, 2009 Tenn. App. LEXIS 170 (Tenn. Ct. App. Jan. 22, 2009); Pride Publ. Group Inc. v. Edwards, 2007 U.S. Dist. LEXIS 97059 (E.D. Tenn. May 23, 2007).
The Court then turned to the question of the reasonableness of the non-compete agreements. Since this dispute did not involve the issue of consideration for the agreement or any public policy concerns, the Court focused on the legitimate business interests of the employer. In doing so, it noted that the employer must show "special facts above and beyond ordinary competition that would give an unfair advantage to the employee when competing with his former employer." Id. at *12. The record demonstrated that Patty paid 94% of the advertising costs, which "greatly benefited" Hooper and Ellison. Id. Since they acquired a substantial number of clients primarily at the expense of Patty, and since customers seeking nail services typically seek manicurists rather than being sought by manicurists, the Court held that Patty was entitled to special protection to prevent Hooper and Ellison from leaving and taking salon customers to her detriment. Id. On that basis, it reversed the trial court's grant of summary judgment to Hooper and Ellison. Unfortunately, the trial court record was not sufficiently developed to enable the Court to determine whether the territorial and temporal restrictions were reasonable, so it remanded the case to the trial court to make that determination.
Poor Patty's bad luck continued at trial court level. After the case was tried, the trial court held that the geographic restriction was reasonable since the evidence demonstrated that defendants could have obtained work in the surrounding counties, but that the temporal restriction was overbroad. Baker v. Hooper, 50 S.W.3d 463 (Tenn. Ct. App. (E.S.) 2001). Yet, rather than striking the clause in its entirety, the trial court modified it by reducing the temporal restriction from six to two months. In doing so, the trial court relied on the fact that "nail care is a high maintenance pursuit because people generally had appointments twice a month to maintain their nails, [so] two months would be a sufficient time restriction to protect the plaintiff's business...." Id at *469.
Although the trial court found that the defendants violated the non-compete agreement by practicing in the same county within two months of leaving Patty's, it held that Patty failed to prove any actual damages, failed to mitigate her damages, and awarded her only $100.00 against each defendant in nominal damages. Although one can only imagine what her attorney's fees were at this point, Patty rubbed salt in her wounds by appealing again.
On the second appeal, the Court of Appeals affirmed the trial court's ruling in all respects. It held that the trial court acted within its discretion in modifying the temporal restriction in the non-compete. With regard to the award of only nominal damages, the Court of Appeals pointed out that Patty did not prove her damages to a reasonable degree. She put on proof of her gross income but purposefully omitted portions of her tax returns needed to determine her net profits for the years in question. Since that information was within Patty's control, the Court inferred that the information would have been adverse to her. Patty also failed to prove that the 52 customers who left after defendants left continued to be serviced by defendants at their new location. She also testified that she was booked when defendants left and could not have serviced all of the customers who left, but she did not hire another manicurist for at least three months. (This latter point seems more than a little unfair. What was poor Patty supposed to do, hire another employee just so she would be available in the event the 52 former customers returned en masse?)
While this decision shows that non-competes can be enforced, at least to some extent, even in a "low-tech" (or "no-tech") field like the nail care industry, it should make employers question whether the time and expense associated with protracted non-compete litigation is worth it given the amount of the potential recovery, particularly where, as here, the agreement did not entitle the employer to recover its attorney's fees. I will discuss more takeaways in the second part of this post.
I want to thank M. Lee Smith Publishers for inviting me to speak last week on "Intentional Interference with Business Relationships in Tennessee: An Overview, Update, and Litigation Tips." The webinar agenda included:
You can order the webinar presentation on CD here. I have also attached my presentation materials, which provide a good overview of the law in this area: Download Intentional Interference with Business Relationships 03.06.14
For purposes of analyzing the impact of the refusal to sign on an existing employment agreement, it is considered an involuntary termination. In Lewis v. MedAssets Net Revenue Sys., LLC, 2012 U.S. Dist. LEXIS 104714 (M.D. Tenn. July 26, 2012), the employee signed a non-compete agreement. Two years later, her employer wanted all "Manager-level positions and above" to be subject to a "single standardized non-compete agreement" and tried to get the employee to sign a new non-compete agreeent. Id. at *3. When the employee refused , she was terminated. Her employer then sued her to recover the $10,000 relocation bonus it paid her by claiming she breached her employment agreement by voluntarily terminating her employment within one year of her start date. Id. at *10. The United States District Court for the Middle District of Tennessee disagreed based on a ruling by the Tennessee Supreme Court:
In Teter v. Republic Parking Sys., Inc., 181 S.W.3d 330, 337-38 (Tenn. 2005), the Tennessee Supreme Court analyzed whether an employee's termination from employment was voluntary under circumstances analogous to those presented in the instant case. There, the employee signed an employment contract with his employer for an indefinite duration. Teter, 181 S.W.3d at 337. Due to a desire to restructure the division in which the employee worked, his employer later presented him with a new proposed employment contract. Id. While the parties attempted to renegotiate the employee's contract, his initial employment contract remained in effect. Id. According to his employer, if the employee did not sign the new contract, he would be terminated. Id. at 338. Nevertheless, the employee did not agree to the new contract. Id.
Based on these undisputed facts, the Tennessee Supreme Court concluded that the employer terminated the employee. In reaching this conclusion, it cited the following principles concerning the modification of contracts:
Modification of an existing contract cannot be accomplished by the unilateral action of one of the parties. There must be the same mutuality of assent and meeting of minds as required to make a contract. New negotiations cannot affect a completed contract unless they result in a new agreement.
Teter, 181 S.W.3d at 338. The court therefore concluded that, because the employee did not agree to modify his preexisting employment contract and his employer would not continue to employ him under that contract, the employee did not voluntarily resign his position, but was rather terminated by his employer. Id.
The undisputed facts here compel a similar conclusion....[B]ecause the plaintiff did not agree to modify the June 29, 2009 non-compete agreement and MedAssets would not continue to employ her under that contract, the court finds that the plaintiff did not voluntarily resign her position, but was rather terminated by MedAssets.
Id. at *28-31. As such, the former employee was not required to repay the $10,000 bonus.
Based on this ruling, employees and employers who are party to a non-compete "of an indefinite duration" should review the employment agreement beforehand to determine what rights and remedies may be lost if the employee is fired for not signing the new non-compete agreement. Id. at *11.
I'm proud to report that I have again been selected for inclusion in Super Lawyers – Rising Stars Edition 2013. According to Thomsen Reuters' website, each year, no more than 2.5 percent of the lawyers in Tennessee who are 40 or younger or have been practicing for less than 10 years are selected by the research team at Super Lawyers to receive this honor. Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys.
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.
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.
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.