[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.