COURT OFFERS GUIDANCE TO TENNESSEE
EMPLOYERS REGARDING NON-COMPETE AGREEMENTS 

On June 23, 2008, in Hanger Prosthetics & Orthotics East, Inc. v. Kitchens, the Tennessee Court of Appeals issued an opinion that offers welcome guidance to Tennessee employers on the often confusing subject of non-compete agreements.  For years, Tennessee courts have sent mixed signals regarding the enforceability of such agreements, declaring that they will be enforced when reasonably necessary to protect an employer’s legitimate business interests, while at the same time emphasizing that they are a disfavored species of contract because they are considered to be in restraint of trade. 

At the time Hanger Prosthetics hired William Kitchens, he had no prior experience as a prosthetist.  Hanger provided him with extensive training and encouraged him to develop close relationships with the doctors in area hospitals.  Over time, Kitchens became so closely identified with Hanger that the Court described him as being the “face of the company.”

At the onset of his employment with Hanger, Kitchens had executed an Employment Agreement containing a non-compete clause that restricted his ability to compete with Hanger for 2 years within 75 miles of the locations at which he performed services for Hanger.  Accordingly, when Kitchens left Hanger to work for a competitor, Choice Medical, Inc., Hanger sued to enforce the restrictions set forth in the non-compete provision of the Employment Agreement.

The Court of Appeals declared that Hanger had shown “legitimate protectable interests” justifying the enforcement of the restrictive covenant against Kitchens and affirmed the decision of the trial court upholding the non-compete agreement.  In enforcing the restrictions, the Court focused on the extensive training provided to Kitchens by Hanger, as well as the close relationships Kitchens developed through his repeated contact with Hanger’s customers.  Significantly, the Court not only upheld the restrictions but also affirmed the trial court’s ruling that Kitchens was liable to Hanger for damages equal to Hanger’s lost profits.  The lost profits were calculated by determining gross revenue lost due to Kitchens’ work for Choice Medical minus the cost of goods and expenses fairly attributable to the sale of those goods.

Hanger had also filed suit against Choice Medical under the Tennessee statute prohibiting any person or entity from inducing another to breach his contractual obligations to a third party, Tennessee Code Annotated § 47-50-109.  Finding that Choice Medical had hired Kitchens despite being made aware of Kitchens’ non-compete agreement with Hanger, the Court declared that triple damages should be awarded to Hanger.  The Court ultimately affirmed an award of more than $720,000.00, with roughly $240,000.00 assessed against Kitchens and Choice Medical jointly and severally, with the remaining $480,000.00 assessed against Choice Medical alone for inducing Kitchens to breach his agreement with Hanger.

Lessons for Employers

Non-compete Agreements Will be Enforced if “Reasonable.” 
The restrictions contained within a non-compete agreement must be reasonable, i.e., no broader than necessary to protect the employer’s legitimate business interests.  Tennessee courts have long held that non-compete periods of 1-2 years will typically be deemed reasonable, and territorial restrictions such as that upheld in the Hanger Prosthetics case (75 miles from the defendant’s place of work) have also commonly been upheld.  Tennessee courts also tend to uphold customer-based restrictions that limit the ability of a former employee to solicit customers of his former employer, if all other conditions supporting enforcement are present.

Non-compete Agreements Will Be Enforced if Legitimate Protectable Business Interests Can Be Shown
Tennessee Courts will enforce non-compete agreements to the extent that they are reasonably necessary to protect the employer’s interests without imposing undue hardship on the employee.  In other words, courts will balance the interests of the employer in protecting its investments in confidential and proprietary information and training, as well as in maintaining its customer relationships, against the restraints imposed on an individual by the enforcement of the restrictive covenant.  If, as in Hanger Prosthetics, the employer stands to lose a significant share of its customers due to the relationships formed between them and a departing employee, that fact, combined with evidence of such things as special training or confidential information, will persuade a court to enforce the covenant not to compete.

Tennessee Statute Provides Strong Sanctions Against an Employer Hiring an Individual with Knowledge of a Non-compete Agreement in Favor of a Prior Employer. 
As seen in Hanger Prosthetics, not only may an employer sue a former employee to enforce a non-compete agreement, the employer may also sue any company that hires the individual subject to the restrictive covenant with knowledge of its existence.  Because the penalty set forth in the applicable statute, T.C.A. § 47-50-109, is steep (triple the damages established as a result of the breach), employers seeking to recover damages have a big stick to wave at companies likely to hire their departing employees.

For employers suffering the departure of an employee subject to restrictions, it is important to put any entity likely to hire the individual on notice of any non-compete agreement as quickly as possible so that, if the departing individual is hired, the treble damages under Tennessee statute will be available.  For companies hiring employees in a competitive industry, it is a good practice to ensure that individuals considered for hire are not under any restrictive covenants.  It is often desirable to have incoming employees execute a document expressly certifying that they are not subject to any restrictions whatsoever in performing work for the new employer, including any non-compete agreement.

Note:  The decision in the Hanger Prosthetics case was issued only a week ago and is subject to appeal.  We will continue to monitor the case and will keep you advised of any developments.