The impact of the pandemic on the U.S. workforce is mind-numbing. During the week of March 21 alone, 3.3 million Americans applied for unemployment, which shattered the previous national one-week filing record.[1] Many of those who are newly unemployed are bound by post-employment restrictions they signed with their previous employers. One study estimates that roughly 18% of workers are currently bound by a non-compete agreement, and about 37% of workers report having had a non-compete at some point during their career.[2]
Based on those numbers, millions of unemployed workers may be bound by non -compete agreements. With so many unemployed workers scrambling to find gainful employment, many of whom are bound by non-competes, this raises the question: Will Tennessee courts enforce post-employment restrictions during a pandemic? There is no clear answer, but the short answer is probably the same as in most non-compete cases: It depends on the facts.
Background
Whether a worker was discharged, with or without cause, will not by itself invalidate a Tennessee non-compete agreement. Tennessee is one of approximately 28 states that allow non-competes to be enforced against discharged employees.[3] Tennessee, unlike some other states, also does not prevent non-competes from being enforced against lower-wage workers or independent contractors. So there is no bright-line rule that invalidates non-competes even in the midst of a pandemic.
This means that Tennessee courts will evaluate non-competes using factors that have been developed through decades of case law. Generally speaking, Tennessee courts have held that non-competition covenants or restrictions in employment contracts are not favored in Tennessee because they restrain trade. However, they are not invalid per se and will be enforced if they are reasonable under the circumstances. Courts will consider these factors in determining the reasonableness of the restrictions:
(1) the consideration supporting the agreements;
(2) the threatened danger to the employer in the absence of such an agreement;
(3) the economic hardship imposed on the employee by such a covenant; and
(4) whether or not such a covenant is contrary to the public interest.[4]
During a pandemic, the economic hardship imposed on the employee will take center stage. Courts have recognized that this factor “must be considered, and can be an important factor, in determining whether the covenant will be deemed reasonable and enforced.”[5] However, in my experience, although Tennessee courts consider the hardship to the employee, it is typically given less weight than the other factors. But there is a good reason for that. If there is no consideration, there is no enforceable non-compete, so the employer does not get off the starting line. And if the employer cannot establish that it has a protectable business interest that would require a non-compete, then a court need not even examine the other factors as there is no unfair competition to restrain. So a court often can resolve a non-compete dispute without making an in-depth analysis of the hardship to the worker.
When courts do examine the hardship to the employee, it is often considered in the context of who created the hardship. Was the worker fired without cause a mere two weeks after he signed a two-year non-compete? (The employer wears the black hat.) Or did the worker quit, steal trade secrets, and then try to start a competing business across the street? (The employee wears the black hat.) In both situations, the restrictions create some hardship for the worker, but in the latter situation the hardship was self-induced, which a court will consider when balancing the equities.
The Pandemic Prism
So how will Tennessee courts interpret and enforce non-competes during a pandemic—a hardship that neither side created? I believe they will still apply the same factors, but I anticipate that they may view them through a “pandemic prism.” Consideration will still be required to have an enforceable agreement, and employers will still have to demonstrate that they have a protectable business interest. But I predict that the hardship to the worker will be given greater deliberation and that courts will interpret the restrictions more narrowly than before. Keep in mind that Tennessee courts already interpret post-employment restrictions narrowly. That is because they dislike restraints on trade but will enforce the parties’ agreement if there is a demonstrated need for the restrictions and they are reasonable. That is also because the employer typically drafts the agreement, and any ambiguities in the language may be construed against the drafter since it had the opportunity to avoid the ambiguity. But with so many workers unemployed, many businesses not even operating, and the job pool drying up, I suspect that courts will be inclined to enforce the restrictions even more narrowly than they have in the past.
It will also be interesting to see whether courts hold that certain restrictions are contrary to the public interest because so many workers are unemployed, which puts a greater burden on the government to provide unemployment compensation and other assistance. Since the government has provided unprecedented assistance in the form of the various stimulus packages, a court could hold that public policy prevents a court from enforcing a non-compete under the particular facts of that case or perhaps narrow the restrictions under the rule of reasonableness, which allows courts to enforce the restrictions only to the extent they believe they are reasonable. Outside of the pandemic context, however, Tennessee courts have typically only held that public policy considerations invalidate a non-compete in the context of certain professionals such as health care providers and attorneys. So it would be a significant change for Tennessee courts to invalidate non-competes in this situation based on public policy concerns.
What This Means for Workers
Ultimately, employees and contractors cannot assume that their restrictions are unenforceable simply because they were laid off during a pandemic. Restrictions are typically interpreted based on the parties’ intentions at the time they signed the agreement; a pandemic occurring months or years after signing won’t change that. Workers should consider whether it is probable that their former employer will seek to enforce the post-employment restrictions. Even if their former employers enforce the restrictions, the pandemic should give those workers more leverage during negotiations since the risk may be greater that the court would hold that the restrictions are either unenforceable or enforce them more narrowly due to the hardship to the workers. If the workers cannot negotiate a reasonable resolution with their former employer, now could be a good time to seek a declaratory judgment to restrict the scope of the restrictions or to nullify them altogether since courts may be more sympathetic to their position. But if the employee voluntarily quit or engaged in bad conduct before or after his or her termination, I wouldn’t bet on the court having a lot of sympathy.
What This Means for Employers
Employers still have to protect their business interests—especially during a pandemic. But doing so right now means that employers need to pick their battles carefully. Courts are not going to care what the restrictions say the worker cannot do if the employer cannot demonstrate a protectable business interest justifying the expansive restrictions. Employers should focus on what protections they actually need. If the employer does business nationally but the employee only worked for it in Tennessee, now is probably not the time to seek to enforce a nationwide non-compete. Instead, employers should focus on what they need to protect their trade secrets, customer relationships, and specialized training. Now is not the time to enforce unnecessary restrictions simply because a worker agreed to it years ago when he or she needed a job.
That said, keep in mind that if an employer allows some former workers to violate their non-competes after being discharged, other employees will try to rely on that as proof that the employer does not actually have a business interest worthy of protection as evidenced by its failure to do so.
We’re Here to Help
If you need assistance interpreting or enforcing a non-compete under this new “pandemic prism,” the attorneys at Meridian Law stand ready to assist you. Please feel free to contact Tom Shumate at [email protected] or (615) 229-7499. www.meridian.law
Photo by Jon Tyson on Unsplash
[1] https://tcf.org/content/commentary/new-data-show-true-march-jobless-rate-near-20-percent/
[2] https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf
[3] https://www.seyfarth.com/images/content/4/3/v3/43770/19-6958%2050%20State%20Non-Compete%20Reference%20M2.pdf
[4] Med. Educ. Assistance Corp. v. State ex rel. E. Tennessee State Univ. Quillen Coll. of Med., 19 S.W.3d 803, 814 (Tenn. Ct. App. 1999) (emphasis added).
[5] Dill v. Cont’l Car Club, Inc., No. E2013-00170-COA-R3CV, 2013 WL 5874713, at *12 (Tenn. Ct. App. Oct. 31, 2013).
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