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."
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