Tennessee Court of Appeals Weighs in on Validity of Non-Compete Agreement for a Sales Professional

non-compete salespersonThe Wall Street Journal recently published an article regarding the rise in litigation over non-compete agreements. The article reports that litigation over non-competes has risen 60% in the last decade. While non-compete litigation may be on the rise, the courts have not necessarily clarified non-compete law. I have written blog posts about the general enforceability of non-compete agreements in Tennessee, applicability of non-compete agreements to independent contractors and non-compete agreements for healthcare professionals. In each instance, the enforceability of the non-compete agreement almost always depends on the unique circumstances of each case.

Because non-compete cases are highly fact-driven, I was excited to see a recent opinion from the Tennessee Court of Appeals, Carson Combs v. Brick Acquisition Company, E2012-02696-COA-R3-CV (Tenn. Ct. App., Oct. 30, 2013), which addresses one of the most common type of non-compete agreements – those applicable to salespersons.

In Combs v. Brick Acquisition Company, the dispute began when an employee resigned from his sales position. The employee became disgruntled after his employer was bought by a large national company. As most salespersons, this employee was subject to a non-compete agreement. The operative portion of the non-compete agreement provided:

In the event that Associate’s employment with the company is terminated and regardless of the reason therefore, Associate agrees that Associate will not, directly or indirectly, engage in any business competitive with the Company anywhere within a one hundred (100) mile radius of any Company plant, warehouse, distribution center, sales office, or sales territory of the Company for a period of two (2) years after said termination.

. . . .

Associate agrees that Associate will not, directly or indirectly, during Associate’s employment with the Company and for a period of two (2) years thereafter:

(1) In any way interfere with the Company’s relationships with any of its customers who have placed orders with the Company during the last five (5) years of the Associate’s employment with the Company;

(2) Solicit, contact, call upon, communicate with, attempt to communicate with, or do business with any customer, former customer or prospective customer of the Company for the purpose of such customer, former customer, or prospective customer engaging in business competitive with the Company or some person or business other than the Company.

On the day the employee resigned, he filed a declaratory judgment action asking a court to declare that his non-compete agreement was invalid. The trial court agreed with him and held that the non-compete agreement was void and unenforceable.

On appeal, however, the Tennessee Court of Appeals sided with the employer and found that the employer had a legitimate protectable business interest in enforcing the agreement and that the agreement was reasonable under the facts of the case.  In determining whether the employer had a protectable business interest, the court had to decide whether the employee would have an unfair advantage in competing with the employer. In doing so, the court looked to the following factors:

 (1) whether the employer provided the employee with specialized training;

(2) whether the employee is given access to trade or business secrets or other confidential information; and

(3) whether the employer’s customers tend to associate the employer’s business with the employee due to the employee’s repeated contacts with the customers on behalf of the employer.

Because the employee had access to confidential pricing and profit margin information and was the sole commercial brick salesperson for the company in the Chattanooga area, the court found that the employer had a legitimate protectable business interest. The court concluded that the salesperson was “the face of the company” and had access to confidential information that was not available to the employer’s competitors. After finding that the company had a legitimate protectable business interest, the court easily concluded that the time and geographic limitations were reasonable.

This case may prove to be important for non-compete challenges between employers and their sales professionals, especially high-level sales representatives. I think it is safe to say that most salespersons have access to certain product pricing, profit margin, customer accounts, competitive bids and similar data and information. In these types of non-compete disputes, courts will likely consider whether the information is truly confidential – is this information available to the public or the employer’s competitors? If the information is indeed confidential and salesperson has access to it, courts are more likely to find that the employer has a legitimate protectable business interest in enforcing the non-compete agreement.

Do you have questions or concerns regarding a non-compete agreement? Contact the Business Litigation & Dispute Resolution Attorneys at Thompson Burton PLLC, who are regularly called upon to prepare, review, negotiate, and litigate non-compete agreements on behalf of businesses and individuals.