Covenants Not to Compete: Time for Legislative and Judicial Reform in Tennessee
38 Pages Posted: 27 Jun 2019
Date Written: 2004
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.' As a consequence, many employers have adopted the use of covenants not to compete in employment contracts as a mechanism 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 6 industry or field. 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. 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, courts may issue injunctions that prohibit employees from engaging in conduct that violates non-competes.' 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. In some cases, employers can recover damages from both the former employee and a new employer who has collaborated in the employee's transgressions. 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 I. Part H 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.
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