Employee Non-Competition Agreements Part 1: The Basics

This post is the first of a multi-part series discussing employee non-competition agreements (“non-competes”). This installment describes the different forms of contractual limitations employers often use in an effort to protect their business interests following a key employee’s departure and the factors Tennessee courts analyze when asked to enforce non-competes. Future posts will discuss non-competition agreements from both the employer and employee’s perspective and some of the unique aspects of physician non-competes.

Non-competition agreements constitute one of the more restrictive forms of contractual limitations on an employee’s subsequent employment activities. It is important to understand the difference between a true non-compete and other types of employee contracts that impose somewhat lesser restrictions on post-employment activities. Generally speaking, a non-compete is a written agreement signed by an employee providing that during the term of employment and for a defined period of time afterward, the employee will not engage in activities deemed competitive with the employer. These agreements typically define competitive activities to include engaging in the same business as the employer within a specified geographic area and (or) providing the same business services or products as those offered by the employer to those who were customers or prospective customers of the employer during the employee’s job tenure with the employer.

Other forms of employment agreements designed to restrict an employee’s post-employment activities include (1) customer non-solicitation agreements; (2) employee non-solicitation agreements; and (3) confidential information non-disclosure agreements. The customer non-solicitation agreement, unlike the non-compete, is not designed to remove the departing employee from competition with the employer. It instead allows the departing employee to engage in direct competition; but only prohibits the employee from contacting, initiating communications with or otherwise “reaching out” to the employer’s customers in an effort to lure them away. Employee non-solicitation agreements prohibit departing employees from hiring or attempting to hire other persons employed by the employer for a designated period of time. These are not designed to prevent competition or contact with customers, but to protect the employer’s investment in its workforce. Confidential information non-disclosure agreements also do not preclude an employee from engaging in direct competition, or even attempting to lure away customers or other employees. These agreements provide that the departing employee may not disclose the employer’s confidential information to others or use it for the employee’s benefit or in such a way that will cause damage to the employer.

Many employers choose to require its executive, R&D and sales staff to sign employment contracts with components of each of these forms of agreements. Other employers in the same industries, however, often decide not to impose non-competes on employees and simply rely on the lesser restrictive confidential information non-disclosure and customer non-solicitation agreements. The next installment in this series will discuss why businesses in the same industry reach different conclusions on whether to use non-competes.

While Tennessee courts will enforce a well-crafted and reasonable non-competition agreement, those same courts will not hesitate to reject agreements that are found to be overreaching and unfair. That is because the Tennessee Supreme Court long ago stated that such agreements are “not favored” since they are restraints on trade. Nonetheless, Tennessee courts will enforce such agreements provided that (1) the employer has a legitimate “protectable interest” that will be impaired or damaged should the non-competition restriction not be enforced; (2) the restriction is narrowly drawn so as only to protect the employer’s legitimate protectable interest and not to punish the employee; (3) the restriction will not cause an unreasonable economic hardship on the departing employee; and (4) both the geographic scope and duration of the restriction are reasonable under the circumstances.

The next installment in this series will discuss non-competition agreements from the employer’s perspective and address how employers should craft agreements in a way to meet the criteria outlined above. It will also address pitfalls to avoid in both drafting and attempting to enforce non-compete agreements.