Academic journal article The University of Memphis Law Review

Covenants Not to Compete: Time for Legislative and Judicial Reform in Tennessee

Academic journal article The University of Memphis Law Review

Covenants Not to Compete: Time for Legislative and Judicial Reform in Tennessee

Article excerpt

I. INTRODUCTION

The employment relationship has gone through dramatic changes in the last fifty years, and, with few exceptions, the notion of company loyalty and life long employment is a thing of the past.1 As a consequence, many employers have adopted the use of covenants not to compete in employment contracts as a mechanism to ensure protection of trade secrets, other confidential information, and investment in employee training.2 Traditionally a contractual tool used only with highly paid, upper-level employees, the use of covenants not to compete has become common place even with rank and file employees.3 While employers view the use of covenants not to compete as a method to protect legitimate business interests,4 employees typically dislike them for the corresponding reasons.

Covenants not to compete curtail legitimate career expectations, as well as limit the returns on an employee's educational investments.5 It is not surprising, therefore, that courts have been called upon to enforce, reform, or void such agreements, particularly when employees subject to such restrictive covenants leave their employment for better opportunities in the same or similar industry or field.6 Despite common misperceptions, courts generally uphold covenants not to compete-if the covenants comply with reasonable standards.

Although negotiation is expected in employment contracts for some executive employees, those signed by most ordinary employees are form contracts drafted by the employer with little, if any, negotiation.7 In addition to the covenant not to compete, such employment contracts typically contain employer-sided attorney fee, assignment, and choice of law provisions that further serve to constrain the employee. These contracts are generally presented shortly after employment on a take it or leave it basis, when the employee has little or no bargaining power.8 Consequently, most employees have little motivation or ability to decline to sign them or to negotiate less onerous terms.

When an employee decides to leave a job, however, covenants not to compete operate as significant impediments to future employment and may even prevent employees from becoming successfully self-employed. In addition to being sued for damages,9 courts may issue injunctions that prohibit employees from engaging in conduct that violates non-competes.10 Employers can also be held liable in hiring someone who violates an agreement with a previous employer by, for example, sharing secrets, approaching former customers, or simply for hiring such an employee.11 In some cases, employers can recover damages from both the former employee and a new employer who has collaborated in the employee's transgressions.12

This article analyzes the current state of Tennessee law concerning the enforceability of contractual restrictions on postemployment competition. In order to provide the appropriate public policy framework, a brief history of the development of covenants not to compete is presented in Part II. Part II is then followed by Parts III and IV, which set forth a selected analysis of the law and policy of other jurisdictions in an effort to suggest improvement to Tennessee law. Part V concludes and offers specific recommendations.

II. HISTORICAL BACKGROUND OF COVENANTS NOT TO COMPETE

A. English Common Law Roots

During the Middle Ages, English courts found all restraints on trade to be void and unenforceable, including post-employment covenants not to compete.13 The common law reflected the prevailing public policy which was strongly influenced by the economic, labor, and cultural identity of the early guild system.14 During this period, English courts struck down restrictive employment covenants based on the laws and traditions of this system,15 as well as the desire to achieve commercial fairness and economic independence.16 This trend continued even as the importance of the guild system declined,17 due at least in part to a policy shift which promoted free trade and encouraged individual initiative. …

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