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Competition is a cornerstone of a free market economy and has helped breed many successful companies.

In recent years, however, non-competition agreements have been on the rise. These complex legal documents attempt to restrict employees from engaging in several types of activities, such as performing the same job responsibilities for a competitor; launching a new business that competes with the employee’s current employer; and luring clients away from the employee’s current employer.

This article explores what employers need to know about non-competition agreements.

Goals of non-competition agreements

Non-competition agreements protect an organization in several ways:

  • Protect future revenues by preventing defecting employees from taking clients
  • Protect the organization’s investments in human capital and attempts to retain well-qualified and trained staff
  • Protect the organization’s trade secrets

Penalties for disregarding non-competition agreements

An injunction is the most common relief awarded for violations of non-competition agreements. However, non-competition agreements frequently contain provisions that require the losing party to pay the prevailing party’s attorneys’ fees. Additionally, a former employee may be held liable for the damages caused by his or her breech of a non-compete.

What makes a non-competition agreement enforceable?

  • The employer has to have a legitimate protectable interest. Tennessee law recognizes three justifications for “protectable interest”:
    • To retain existing customers
    • To protect trade or business secrets and confidential information
    • To protect the investment the employer has made in training the employee
  • The non-competition agreement has to be reasonable. Tennessee courts have developed a non-exclusive list of factors in this determination, including:
    • What the employee got for agreeing not to compete when his or her employment ends. Under Tennessee law, the promise of continued employment is generally found to be sufficient consideration for a non-compete.
    • Threat or danger to the employer in the absence of an agreement. In other words, is it likely that the employer will lose existing customers, trade secrets, or a substantial investment in training the employee if the non-compete is not enforceable?
    • Economic hardship imposed on employee by the non-competition agreement. Will the employee be able to make a living if the non-compete is enforced?
    • Whether public interest is served by allowing the individual to participate in his or her trade freely and without monopolization. For example, physicians are not subject to non-competition agreements in Tennessee.
  • Basically, the agreement has to be sufficiently tailored to balance the employer’s interests with the employee’s right to work.A court will consider on a case-by-case basis the time, geography, and scope of the agreement. Oftentimes, Tennessee courts will rewrite a non-competition agreement to make it reasonable.In an unusual case, a court reduced from six months to two months an agreement that kept a nail technician from doing manicures and pedicures.  In support of this holding, the court reasoned that since customers visited the business an average of twice a month, the business would have at least four chances to keep the client’s business.

When hiring a new employee

When hiring a new employee, it’s important to ask whether the person is subject to any non-competition agreements. If the answer is yes, consult a qualified lawyer to determine specifically what the agreement prohibits and how it compares to the responsibilities you had in mind for the employee.

Non-competition agreements are also important if the person you’re hiring is going to be trusted with proprietary information or may be in position to take clients. A lawyer can help you draft an agreement that takes into account your situation and your particular trade or industry.