Employee Non-Competition Agreements Part 2: The Employer’s Perspective

In my last post I discussed the differences between the various types of employment agreements designed to restrict an employee’s post-employment activities and identified the factors Tennessee courts analyze when determining whether to enforce a non-competition agreement (“non-compete”).

The threshold test, however, is whether the employer has a legitimate “protectable interest” that will be damaged absent enforcement of the restriction on competition. Thus, in Tennessee, courts will not enforce non-compete agreements that an employer may require its employees to sign simply to prevent competition from them in the future. Those courts instead will uphold the right of former employees to engage in open and fair competition.

I have been following a lawsuit recently filed in a federal district court in Illinois against a franchisee of the Jimmy John’s sandwich chain. In that, a group of Jimmy John’s employees whose jobs are making sandwiches are challenging the validity of non-compete agreements they were required to sign when first employed. Those agreements prevent them from working in any capacity for a restaurant that derives at least 10% of its revenue from selling deli sandwiches within 3 miles of any Jimmy John’s sandwich shop for a period of 2 years. According to the plaintiffs in that lawsuit, that limitation, if enforceable, would restrict their employment in 44 states and in an area of over 6,000 square miles. These are mostly low hourly wage employees whose primary job duties involve food handling and preparation. Is there truly a protectable interest on Jimmy John’s part justifying this prohibition? In other words, will Jimmy John’s somehow be unfairly disadvantaged if one of these sandwich making employees takes a job at a Subway across the street?

Not all employee knowledge and skill amounts to a protectable interest. In fact, the knowledge and skill set of most employees probably does not amount to a true protectable interest. Tennessee courts regularly hold that general job skills or industry knowledge gained simply by years of experience in a particular job or industry does not by itself amount to a protectable interest and a non-compete agreement based solely on such knowledge and experience will be unenforceable. Instead, courts will only find a protectable interest exists when (1) the employee had access to trade secrets or other confidential information regarding the employer’s business (processes, formulas, financials, sales strategies, certain customer data, etc.); (2) the employer invested substantial money and time to provide specialized training to the employee in the employer’s industry; or (3) the employee had such regular dealings with the employer’s customers that the customers are likely to regard the employee as “the face of the employer.” If you are an employer and cannot make a strong case that your employee falls into one of these categories, the chances of successfully enforcing a non-compete agreement are not particularly good.

Virtually every time I attend court on a non-compete matter the judge at some point says something to the effect of “I do not like these agreements and I will not enforce this one without some clear evidence of a protectable interest and that the employee will have an unfair competitive advantage if allowed to compete against the former employer.” I believe there are three things an employer must do to provide itself the best chance of successfully enforcing such agreements. The first is to objectively assess whether any of your employees truly possess or have access to information that would give her an unfair competitive advantage if she takes a position in competition against you. Exercising objectivity in this analysis as the employer is very difficult, but extremely important. Second, determine whether you can attain the protection you need by lesser means, such as a customer non-solicitation agreement, which allows the departing employee to earn a living, but not to call upon your customers. Most courts are much more comfortable enforcing an agreement that only prohibits a former employee from calling upon certain customers, as opposed to a blanket ban from the industry in which he may have spent decades and provides the only job opportunities in which he can derive a comparable income. Finally, non-compete agreements should be prepared by legal counsel in the state where it will be enforced. State laws in this area vary greatly and relying on “one size fits all” contracts is a fairly common route to defeat in court.