Tom Shumate's Tennessee Non-Compete Law Blog

Don't Put All of Your Eggs in One Basket

Some employers take the time and incur the expense of drafting beautiful non-compete and confidentiality agreements. They dutifully have them signed whenever a key employee is hired. They do this because they know how critical they can be to the well being of the company. Then they stick those priceless documents in the same file cabinet where they keep their supply catalogs and their favorite carry-out menus. Then, years later, when the employers reach into that same file cabinet to get the non-compete agreements of their now former employees who are competing with them, those agreements are nowhere to be found. Not surprisingly, those same employees now deny ever signing a non-compete.  Sound ridiculous?  I wish it was, but these facts are not that uncommon. 

So what are the lessons to be learned from this?

• Have witnesses observe the signing of the agreements;
• Keep a record of who witnessed the signing of each employee's non-compete agreement;
• Keep the originals under lock and key;
• Limit who has access to the keys;
• Never, ever allow the employees to have access to their original agreements.  If they need to see it, make them a copy;
• Keep multiple copies in multiple formats (hard copy and electronic); and
• Keep copies in multiple locations, including at least one copy stored off site.

Theft of Confidential Information: It's Not A Matter of If But When

According to a recent study by the Ponemon Institute and Symantec Corp., 59% of employees who left their jobs last year stole confidential information from their employers.  67% of those employees use that information at their new jobs.  So it's not a matter of whether employees are stealing their employers' confidential information.  They are.  The real question is what are you doing about it?  Now is the time to implement policies and procedures to prevent the theft of confidential information.  Because once the cow is out of the barn, it's tough to get it back.  Just ask Erin Andrews.

  

 

Computers, Tequila, and Handguns: Controlling Technology So It Doesn't Control You

I wrote an article on this topic that was published in the American Bar Association's webzine, Law Practice Today. You can read it here.  If you do not subscribe to this publication, you are missing out.  Each issue is packed with substantive content and practical advice.  (In the interest of full disclosure, I was a member of its Editorial Board so I'm biased.)

Down Economy Causing Rise in Non-Compete Litigation?

The Jacksonville Business Journal reports that the poor economy is causing an increase in non-compete litigation.  According to the article, as layoffs increase and more jobs are eliminated, employees are having a harder time finding new jobs.  As a result, more employees are tempted to violate their non-compete agreements.  While I don't disagree with the article as far as it goes, I would add that any increase in non-compete litigation is probably also a function of employers being less tolerant of violators given the state of the economy and their shrinking margins.

Interesting Arguments Don't Necessarily Make Winning Arguments -- Hanger Prosthetics & Orthotics East, Inc. v. Kitchens

Hanger sued to restrain Kitchens, one of its former employees and a certified orthotist, from working for a competitor, Choice Medical.  It also sued Kitchens and Choice Medical for various torts, including Kitchens' employment contract with Hanger contained a two-year covenant not to compete within 75 miles of Hanger.  Ultimately, the trial court held that the non-compete agreement was enforceable for a period of one year.  It also held that Choice Medical induced Kitchens to breach his non-compete agrement.  In the process of making that determination, the trial and appellate courts resolved several interesting arguments made by the Defendants.

First, Kitchens argued at trial that he was an "allied health professional" [huh?] so the non-compete agreement was void as against public policy pursuant to the Tennessee Supreme Court's holding in Murfreesboro Medical Center, P.A., v. Udom, 166 S.W.3d 674 (Tenn. 2005).  The trial court disagreed since restrictive covenants are widespread in the orthotics industry, have not been addressed by the American Board Certification in Orthotics and Prosthetics, and, most importantly, patients rarely choose the orthotist. 

Second, Kitchens and Choice Medical argued that the non-compete agreement was not enforceable because there was not a protectable interest at the exact moment of the agreement.  They relied on Allright Auto Parks, Inc. v. Berry, 409 S.W.2d 361 (Tenn. 1966), in which the Court noted that it was "the duty of this Court to construe contracts as of the date of their making."  The Court of Appeals made quick work of that argument.  It held:  "We agree in general terms that it is necessary to examine the validity of the covenant not to compete as of the date that it was entered into.  However, that does not mean that future events are not or cannot be within the contemplation of the parties to the agreement when it is signed."  Based on this holding, proof of what the employer and employee intended to accomplish in the future is now a proper consideration when determining whether a non-compete agreement was valid when it was entered. 

Third, after the trial court awarded treble damages against Choice Medical to the tune of $480,364.00, Choice Medical argued that there was no clear showing that it intended to induce Kitchens to breach his contract or that it had a malicious intent.  The only evidence relied on by Choice Medical to counter the trial court's finding that Choice Medical hired Kitchens to take advantage of the existing relationships he developed while working for Hanger was that it had its attorneys review Kitchens' non-compete agreement before he was hired.  But Choice Medical failed to provide any proof regarding what its attorneys advised it after reviewing the agreement.  The Court of Appeals noted correctly that the attorneys could have advised Choice Medical that it should not have hired Kitchens and that it hired him over their objections.

Nashville, Tennessee Covenant Not to Compete Attorney -- $200K Non-Compete?

As reported today by nashvillepost.com, CSS Industries, which recently purchased C.R.Gibson, paid at least one employee $200,000.00 for entering a four-year covenant not to compete.  The Form 10K states in part:  "With the acquisition of the C.R. Gibson business, the Company recorded intangible assets relating to tradenames that are not subject to amortization in the amount of $19,500,000. Additionally, the Company recorded $18,900,000 relating to customer lists which are being amortized over 15 years and $200,000 relating to a covenant not to compete that is being amortized over four years."  You can view the full Form 10K here.  Must be nice to get paid more than most people make per year to NOT do your job!

Are Technophobes Incompetent?

I recently attended a continuing legal education seminar at which the speaker questioned whether a client involved in a non-compete dispute would be better off hiring an experienced litigator or a green but computer-savvy attorney.  He was trying to make a point about how advances in technology are redefining an attorney's duty to provide competent representation.  In his opinion, providing competent representation is no longer limited to an understanding of the relevant law.  It also requires some understanding of the interplay between law and technology.  As a result, a greener but more techno-savvy lawyer may be more competent than a much more senior attorney.

I agree.  Comment 5 to Rule 1.1 of the Tennessee Rules of Professional Conduct provides:  "Competent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem, and the use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation...."  Likewise, Comment 6 provides:  "To maintain the requisite knowledge and skill, a lawyer should engage in regular continuing study and education that is pertinent to the lawyer’s practice...."    In my opinion, changes in the federal discovery rules and the corresponding increase in e-discovery require that practitioners of all levels educate themselves on technology issues affecting their practice.  This is particularly true in non-compete and business interference cases since they often involve either electronic discovery or the use of computer forensics to resolve claims of misappropriation of trade secrets and confidential information.  While I'm far from a techno-geek, I have learned a lot about these issues through experience, self-study, working closely with vendors, and my involvement with the Law Practice Management and Technology Sections of the Tennessee and American Bar Associations.  Needless to say, being a competent attorney is more challenging than it was in the past. 

Nashville, Tennessee Non-Compete Attorney -- Polly Wants the Facts

I was recently able to convince a judge to dismiss a plaintiff's claims against my client because the plaintiff had not pled sufficient facts supporting its claim that my client interfered with its former employees by inducing them to quit and steal confidential information.  I was pleased with the result but secretly wondered whether the ruling would stand if the plaintiff moved to amend its complaint after the judge's ruling or whether the decision would be reversed on appeal. At least in the Middle Section of the Tennessee Court of Appeals, it appears that I have nothing to worry about.

In Morris Properties, Inc., Realtors v. Norris Johnson, et al., No. M2007-00797-COA-R3-CV (M.S. Tenn. Ct. App. 2008), the Court affirmed the dismissal of Morris Properties, Inc.'s claim for tortious interference because it did not plead any facts establishing two of the elements -- intent and malice.  In doing so, the Court held that the complaint must "do more than simply parrot the legal elements of the causes of action...."  It must plead facts "that, if true, would support each required element [of the claim]."  The opinion implies that Morris Properties could have filed an amended complaint prior to the hearing on Defendants' motion to dismiss.  Since it did not, it had no basis to complain later. 

I believe that this decision is fair and supports judicial economy.  Defendants need to know what they allegedly did wrong in order to prepare a defense while the evidence is fresh.  And plaintiffs need to be proactive about attempting to remedy any defects in their complaints so that those issues can be resolved as soon as possible.

Nashville, Tennessee Non-Compete Lawyer -- Attorney Non-Compete Agreement Held Unenforceable Under Tennessee Model Rules of Professional Conduct

In Spiegel v. Thomas, Mann, & Smith, P.C., 811 S.W.2d 528, 530 (Tenn.1991), the Tennessee Supreme Court held that restraints which infringe on a lawyer's responsibility to “assist the legal profession in fulfilling its duty to make legal counsel available” are against public policy.  Id. at 530.  The Court based its holding on DR 2-108 of the now defunct Code of Professional Responsibility. Over 17 years have passed since that decision, so one would think that Tennessee law firms would know the law and would revise their partnership agreements accordingly.  Unfortunately, some firms still don't get it.  Lest their be any confusion regarding the viability of the Spiegel decision after the adoption of the Model Rules of Professional Conduct in 2003,the Tennessee Court of Appeals affirmed recently that attorney non-compete agreements are still against public policy pursuant to Rule 5.6 of the Model Rules of Professional Responsibility.  See, Arena v. Schulman, LeRoy & Bennett, 233 S.W.3d 809 (Tenn. App. 2006). 

Nashville, Tennessee Non-Compete Attorney -- Substance Over Form: Sole Proprietorship Reorganized As Corporation Has Standing to Enforce Non-Compete Agreements

Case Summary of Packers Supply Co. v. Weber, 2008 WL 1726103 (Tenn. Ct. App., April 14, 2008)

In 1997, Scott Lau founded an equipment supply business for meat processors called Packer's Supply House.  In February of 2001 and April of 2002, Mr. Lau hired two employees and had them sign non-compete agreements.  Those agreements provided that "Packer's Supply House Company" was "a Tennessee corporation," but the parties do not dispute that Mr. Lau did not incorporate the company until months later on September 9, 2002 when he formed Packer's Supply Co.

In September of 2005, Mr. Lau asked the two employees to sign new non-compete agreements.  When the employees refused, he fired one and the other resigned.  The two employees then formed a competing business called GIC Supply, so Packer's Supply Co. sued the two employees for violating their non-compete agreements. 

During the subsequent proceedings, the employees argued that Packer's Supply Co. lacked standing to enforce the non-compete agreements because they were executed by a different entity, Packer's Supply House.  However, Mr. Lau testified that he assigned all of the assets and liabilities of his sole proprietorship, Packer's Supply House, to Packer's Supply Co. in exchange for 100% of the stock of the corporation.  Defendants argued that the non-compete could not be assigned because it did not provide specifically that it was assignable and that Mr. Lau had no proof that the non-competes had been assigned other than his own self-serving testimony.  The trial court agreed with the employees and held that the non-competes were unenforceable.

On appeal, the Court of Appeals reaffirmed that non-competes are property rights that are generally assignable in the absence of a provision to the contrary.  Since the non-competes at issue did not preclude Mr. Lau from assigning them to Packer's Supply Co., the Court held that they were assignable. 

With regard to the employees' argument that Mr. Lau's testimony was insufficient to prove that the non-competes were assigned, the Court noted:

• The employees did not argue that any of the other assets of the sole proprietorship were not transferred to the corporation;
• The employees offered no explanation as to why the non-competes should be treated differently than the other assets transferred to the corporation; and
• Mr. Lau's testimony regarding the assignment of the non-competes was uncontradicted.

Finally, and perhaps most importantly, the Court emphasized that protecting a business from unfair competition is more important than changes in the corporate form of the business.  As indicated by the Court, "[employees] have no interest in the form of business the employer chose to use." 

Based on the above, the Court of Appeals reversed the trial court and held that the non-competes were assigned to Packer's Supply Co.  The Court did not, however, address whether the scope of the non-competes was reasonable. 

Discussion

Sadly, this appeal could have been avoided had either party included language in the non-compete agreement addressing whether it was assignable or if Mr. Lau had documented the assignment of the non-competes to the company.  As noted by the Court, "One possible way to document such an assignment would be through the minutes of the corporation's organizational meeting."