Tom Shumate's Tennessee Non-Compete Law Blog

Tennessee Court of Appeals Rules Regionally Restrictive Condition to Redeeming a Physician’s Partnership Shares Does Not Violate Public Policy

In February 2017, in Edwards v. Urosite Partners, 2017 WL 1192109, No. M2016–01161–COA–R3–CV (Tenn. Ct. App. March 30, 2017),  the Tennessee Court of Appeals ruled that a partnership had the right to redeem the shares of a former partner who violated the terms of his Separation Agreement and Partnership Agreement.

Facts

The plaintiff, Dr. Robert Edwards, was a former partner in Urology Associates, P.C. (“UA”). Dr. Edwards and the other partners at UA were also all partners in Urosite, L.P., which was formed for the purpose of purchasing, owning, managing, and operating the real and personal property located at Urology Associates’ primary location.

The Partnership Agreement for Urosite required continued employment with UA. Should one of the Urosite partners terminate their employment with UA for any reason other than death, disability, or retirement from the practice of medicine, Urosite would have the right to redeem the exiting partner’s shares.

In December 2013, Dr. Edwards left the employment of UA. On January 10, 2014, Dr. Edwards executed a Separation Agreement with UA and Urosite, which provided that Urosite would not exercise its right to redeem his shares if he would limit his new practice to Giles and Hickman Counties. In other words, UA agreed that it would not redeem Dr. Edwards’ shares despite his departure so long as he would agree to restrict his practice to those two counties.

In the spring of 2014, the Veterans Administration requested that Dr. Edwards provide medical care to veterans in Rutherford and Davidson Counties. Dr. Edwards complied with this request. On March 31, 2015 (nearly a year later), Urosite informed Dr. Edwards that it was exercising its rights in accordance with the Partnership Agreement and Separation Agreement.

Dr. Edwards objected and filed a complaint for declaratory relief requesting the court to declare that Urosite had no right to redeem his shares because his work for the VA was not a material breach of the agreement; that the attempt to redeem his shares was untimely even if it did; and that the Separation Agreement’s geographically restrictive clause constituted an unenforceable restriction on his practice of medicine that violated public policy.

The trial court ruled against Dr. Edwards on all counts, and he appealed. The Court of Appeals affirmed the trial court’s decision in all respects.

Key Takeaways:

• “If” and “When” Signal Conditions, Not Covenants—For Conditions “Materiality” of a Breach is Immaterial (pardon the pun)

First, the Court decided that under the plain language of the Separation Agreement, the geographic restriction to Giles and Hickman Counties was a condition precedent, not a covenant. The Court ruled that the use of “if and when” in the Separation Agreement’s clause regarding Dr. Edwards practicing outside of Giles and Hickman Counties meant the parties intended this to be a condition.

Further, the Court ruled that when “enforcing the consequences of fulfilled conditions, a court does not consider materiality unless there are extraordinary circumstances of unfairness or injustice which demand equitable relief.” Therefore, the Court did not need to engage in the calculus of whether Dr. Edwards performing services for the VA constituted a material breach.

• If the Plain Language of an Agreement Does Not Set a Temporal Limitation on Exercising a Right, a Court Will Not Enforce One

The Court next weighed Dr. Edwards’s argument that Urosite’s exercise of its rights was untimely. The Court reviewed the plain language of the Agreement and noted that there is no temporal limitation on when Urosite can redeem an exiting partner’s shares. While Tennessee courts can ensure that restrictive covenants, such as non-competition and non-solicitation provisions have reasonable temporal restrictions, Tennessee law generally does not allow a Court to insert a term into the agreements where there was not one originally even if the contract as agreed to later becomes burdensome or unwise. So, here, the Court did not put a deadline on Urosite’s ability to redeem Dr. Edwards’ shares.

• Urosite’s Right to Redeem Dr. Edwards’ Shares Was Not an Unenforceable Restraint on Competition.

Finally, the Court decided that Urosite’s right to redeem Dr. Edwards’s shares conditioned on his practice outside of Giles and Hickman Counties was not an unenforceable restraint on competition.

Under Tennessee law, there is strong public interest (and case law) preventing restrictive covenants against physicians and other medical providers. This interest allows patients to exercise their fundamental right of selecting the physician they believe is best able to treat them, and restrictive covenants can interfere with that right.  The Court determined, however, that the Separation Agreement’s geographical condition was not a restrictive covenant as it did not actually impede Dr. Edwards’s right to practice. Instead it merely provided Urosite the opportunity to redeem his interest in the partnership should he elect to practice outside of Giles and Hickman Counties. Therefore, the Separation Agreement did not constitute a restrictive covenant that violated public policy. This provides a way that physician groups can restrict a physician’s ability to practice in geographic areas without violating the terms of Tenn. Code Ann. 63-1-148, which defines the limits on physician non-competition agreements.

Appraisal Company Must Show More Than Ordinary Competition to Prevent Appraiser from Working for Competitor

Davis v. Johnstone Group, Inc. involved a battle between two appraisal firms for the services of one John Jason Davis. Mr. Davis was hired by Johnstone Group, Inc. (“JCI”) in 1998 as a real estate appraiser trainee. JCI required Mr. Davis to sign an employment agreement that contained a non-competition clause.

Over the next seven years, Mr. Davis completed 180 hours of classroom training and 3,000 hours of practical appraisal experience under the supervision of Mark Johnstone, the owner of JCI. In November of 2005, Mr. Davis became a licensed Certified General Real Estate Appraiser. At that point, JCI had Mr. Davis sign a new employment agreement, which also contained a non-competition agreement.

Mr. Davis continued working for JCI until April 13, 2015, when have gave notice of his intention to go to work for Appraisal Services Group, Inc. (“ASG”). JCI sent a cease and desist letter to Mr. Davis and ASG on April 20, 2015. Shortly thereafter, on May 1, 2015, Mr. Davis filed a complaint in the Chancery Court for Madison County seeking a declaration that the non-compete agreement was unenforceable. Not surprisingly, JCI countersued Mr. Davis and ASG. On June 1, 2015,  Mr. Davis filed an answer to JGI’s counter-complaint in which he denied liability. Following a hearing, on July 6, 2015, the trial court granted the declaratory judgment requested by Mr. Davis and denied JCI’s request for injunctive relief and damages.

So how did JCI lose so quickly? First, it failed to show special facts above and beyond ordinary competition that would give Mr. Davis an unfair advantage over it. In other words, Tennessee courts believe that ordinary competition is a good thing, but they will restrict unfair competition:

Of course, any competition by a former employee may well injure the business of the employer. An employer, however, cannot by contract restrain ordinary competition. In order for an employer to be entitled to protection, there must be special facts present over and above ordinary competition. These special facts must be such that without the covenant not to compete the employee would gain an unfair advantage in future competition with the employer.

Davis v. Johnstone Grp., Inc., No. W201501884COAR3CV, 2016 WL 908902, at *4 (Tenn. Ct. App. Mar. 9, 2016) (citing Hasty v. Rent–A–Driver, Inc., 671 S.W.2d 471, 473 (Tenn.1984)).

In an effort to show that Mr. Davis was engaging in unfair competition, JCI argued that he received specialized training, had access to its trade secrets, and that its customers associated Mr. Davis with its business. The Court spent little time discussing the second and third factors. There was no evidence that Mr. Davis took any of JCI’s information. Even if he had, bidding and pricing factors change rapidly. The Court also found that Mr. Davis was not the “face of the business” since his work was signed off on by Mr. Johnstone, he was not an owner of the business, and he was not involved in running the business.

That meant that JCI’s hopes rested on the third factor - specialized training. JCI argued that the 180 hours of classroom training and 3,000 hours of supervised appraisal experience constituted specialized training that gave Mr. Davis an unfair advantage. There are many problems with this argument. Most of the training took place before JCI had Mr. Davis sign the new employment agreement in 2005. Even if it took place after 2005, every appraiser is required to receive the same training in order to be licensed. There was nothing unique or proprietary about that training. The same is true of JCI’s method of appraising. No evidence was presented that JCI’s method of appraising was unique or secret such that others did not use the same method. Because JCI failed to establish that it had a protectable business interest in preventing Mr. Davis from working for ASG, the Court did not reach the issue of whether the temporal (two-year) and geographic (150 mile radius from JCI’s office in Jackson, TN) restrictions were reasonable.

The second reason that JCI lost is that it failed to provide the Court of Appeals with a transcript or statement of the evidence. That meant that the Court was forced to presume that there was sufficient evidence to support the trial court’s judgment. It's tough to win when the Court must presume that you lost for good reason.

What are the lessons for employers? Well, if it’s worth appealing it’s worth doing right. If there is a transcript of the hearing, include it in the record on appeal so there’s no presumption in favor of the trial court’s ruling against your client. Employers also need to keep in mind that training, no matter how extensive or expensive, will not demonstrate a protectable business interest if it is not unique. If every appraiser is required to obtain it, then it isn’t unique to the employer for whom the employee worked when obtaining it. It’s just the general knowledge and skill of the employee, which does not create unfair competition: “[G]eneral knowledge and skill appertain exclusively to the employee, even if acquired with expensive training, and thus does not constitute a protectable interest of the employer.” Davis v. Johnstone Grp., Inc., No. W201501884COAR3CV, 2016 WL 908902, at *4 (Tenn. Ct. App. Mar. 9, 2016) (citing Hasty v. Rent–A–Driver, Inc., 671 S.W.2d 471, 473 (Tenn.1984)).

What are the lessons for the employee? Don’t be afraid to call the employer’s bluff if you believe its non-competition agreement is unreasonable. JCI tried to bluff Mr. Davis into compliance by threatening him and his new employer. Mr. Davis didn’t blink. He filed his declaratory judgment action and after just over two months of litigation (excluding the resulting appeal), he had his freedom. This goes to show that some jobs are worth fighting for. It is also worth pointing out that there was no indication of wrongdoing by Mr. Davis. If JCI had been able to show that he stole company data on the way out the door, I suspect the result would have been different. 

Trouble in Nail Paradise - Part I: Non-Competes Are Enforceable Against Independent Contractors And "Low-Tech" Industries If They Are Otherwise Reasonable

     [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.

If an employee refuses to sign a new non-compete, is that considered a voluntary resignation or an involuntary termination?

For purposes of analyzing the impact of the refusal to sign on an existing employment agreement, it is considered an involuntary termination.  In Lewis v. MedAssets Net Revenue Sys., LLC, 2012 U.S. Dist. LEXIS 104714 (M.D. Tenn. July 26, 2012), the employee signed a non-compete agreement. Two years later, her employer wanted all "Manager-level positions and above" to be subject to a "single standardized non-compete agreement" and tried to get the employee to sign a new non-compete agreeent.  Id. at *3.  When the employee refused , she was terminated.  Her employer then sued her to recover the $10,000 relocation bonus it paid her by claiming she breached her employment agreement by voluntarily terminating her employment within one year of her start date.  Id. at *10.  The United States District Court for the Middle District of Tennessee disagreed based on a ruling by the Tennessee Supreme Court:

In Teter v. Republic Parking Sys., Inc., 181 S.W.3d 330, 337-38 (Tenn. 2005), the Tennessee Supreme Court analyzed whether an employee's termination from employment was voluntary under circumstances analogous to those presented in the instant case. There, the employee signed an employment contract with his employer for an indefinite duration. Teter, 181 S.W.3d at 337. Due to a desire to restructure the division in which the employee worked, his employer later presented him with a new proposed employment contract. Id. While the parties attempted to renegotiate the employee's contract, his initial employment contract remained in effect. Id. According to his employer, if the employee did not sign the new contract, he would be terminated. Id. at 338. Nevertheless, the employee did not agree to the new contract. Id.

Based on these undisputed facts, the Tennessee Supreme Court concluded that the employer terminated the employee. In reaching this conclusion, it cited the following principles concerning the modification of contracts:

Modification of an existing contract cannot be accomplished by the unilateral action of  one of the parties. There must be the same mutuality of assent and meeting of minds as  required to make a contract. New negotiations cannot affect a completed contract unless  they result in a new agreement.

Teter, 181 S.W.3d at 338. The court therefore concluded that, because the employee did not agree to modify his preexisting employment contract and his employer would not continue to employ him under that contract, the employee did not voluntarily resign his position, but was rather terminated by his employer. Id.

The undisputed facts here compel a similar conclusion....[B]ecause the plaintiff did not agree to modify the June 29, 2009 non-compete agreement and MedAssets would not continue to employ her under that contract, the court finds that the plaintiff did not voluntarily resign her position, but was rather terminated by MedAssets.

Id. at *28-31.  As such, the former employee was not required to repay the $10,000 bonus.  

Based on this ruling, employees and employers who are party to a non-compete "of an indefinite duration" should review the employment agreement beforehand to determine what rights and remedies may be lost if the employee is fired for not signing the new non-compete agreement. Id. at *11.

 

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."