Is this Non-Compete Agreement Enforceable?

noncompete agreementI am often asked by business clients to prepare non-compete agreements for employees. As you might imagine, many businesses feel more secure knowing that their key employees are restricted from leaving and then going to work for business competitors. I am also asked by business executives to review non-compete agreements and consult on whether and how to strategically pursue a career opportunity. In both instances, the crucial issue centers on whether the non-compete is legally enforceable.

The enforceability of a non-compete agreement is treated differently in every state. Some states, such as Florida, have enacted statutes that regulate non-compete agreements while other states, such as Tennessee, have a body of law applicable to non-competes that has been developed by the courts.

In Tennessee, covenants not to compete are generally disfavored by the courts because they are deemed to be a restraint of trade and may place an inequitable burden upon a worker’s ability to earn a living. This does not mean a court will not enforce a non-compete agreement. Indeed, courts in Tennessee have not hesitated to uphold them where the restrictions are found to be reasonable. “Reasonableness”, of course, is often difficult to define, so the agreement must be analyzed in the context of the circumstances of each case.

There are a number of concepts or factors courts will consider when dealing with the enforceability of a non-compete agreement:

The basic requirement for enforceability of a covenant not to compete is the existence of a legitimate business interest.

Courts will consider 1) whether there was consideration supporting the agreement; 2) the potential harm to the employer in absence of the agreement; 3) the economic hardship imposed on the employee; and 4) whether the agreement violates public policy. Time and geographic location/territorial limitations are also important considerations — the time and territorial limits set forth in the agreement must be no greater than necessary to protect the business interest of the employer. In sum, the courts must balance the employer’s need to be protected from the dangers of unfair competition against the employee’s right to practice his or her trade and earn a living.

Tennessee courts have recognized that a court may modify an unreasonable covenant not to compete so as to render it reasonable. In other words, if the agreement is unnecessarily burdensome to the employee (e.g., the period of restriction is 10 years), the court can modify the agreement and impose a more reasonable restriction (e.g., 2 years).

If the non-compete agreement is deliberately unreasonable and oppressive, a court will be more likely to throw out the entire agreement. Accordingly, when drafting a non-compete agreement, forms purchased on the Internet will likely be inadequate. In order to be enforceable, it is important to have an agreement specifically tailored for your business objectives. This area of the law is complex and is very fact specific. For example, there are public policy limitations on non-compete agreements for certain professionals, such as physicians.

If you have questions concerning drafting, enforcing or challenging a non-compete agreement, contact the business litigation lawyers at Thompson Burton, PLLC.