Tom Shumate's Tennessee Non-Compete Law Blog

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).

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. 

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 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."