What are the Differences between Common Law and Statutory Claims for Tortious Interference with a Contract? and more...

What recourse does someone have when a third-party causes another person to breach a contract? Tennessee recognizes two types of claims for tortious interference with contracts.

1. Common The first kind of claim arises under common law. The term “common law” refers to the body of decisions developed in the courts going back decades—and sometimes even centuries—which courts rely on today.

2. The second kind of claim arises under state statute. Specifically, Tennessee Code § 47–50–109 makes it “unlawful for any person, by inducement, persuasion, misrepresentation, or other means, to induce or procure the breach or violation, refusal or failure to perform any lawful contract by any party” to the contract.

Elements. Plaintiffs may sue for either of these types of claims simultaneously. Both claims require the plaintiff to prove the same elements to win on their claim, including:

1. The existence of a legal contract;
2. The defendant’s knowledge of the contract’s existence;
3. The defendant’s intent to induce a breach of the contract;
4. Malicious actions by the defendant;
5. The actual occurrence of the breach;
6. That defendant’s actions were the proximate cause of the breach of contract; and
7. Injuries resulting from the breach of contract.[1]

Statute of Limitations. Both the common law and statutory claims expire after three years under the statute of limitations at Tennessee Code § 28-3-105.[2]

Types of Damages. Although the common law and statutory claims have many similarities, the primary, crucial distinction between the claims is the type of damages which plaintiffs can be awarded.

First, plaintiffs who successfully sue for common law tortious interference with a contract may recover both compensatory and punitive damages. While courts award compensatory damages to make injured persons “whole,” the purpose of punitive damages is to “deter misconduct,” punish the defendants, and make an example of them for others.[3]

Deciding on the appropriate amount of punitive damages is a rigorous process. Courts hold a second phase of the trial to consider several different factors, including:

• the defendants’ financial status and net worth;
• the nature and reprehensibility of their wrongdoing;
• their awareness of the harm they caused;
• the duration of the misconduct and whether the defendants attempted to conceal their actions;
• the expense the plaintiffs incurred;
• whether the defendants profited (in which case the punitive damages may need to exceed the profit);
• whether the defendants tried to make amends;
• and any other relevant circumstances.[4]

If courts fail to assess these criteria, their decisions may be overturned or remanded on appeal.[5]

Conversely, plaintiffs who successfully recover under the statutory claim are entitled to treble—or “triple”— damages.[6] Treble damages are a mandatory statutory award of damages three times the actual damages that the jury or court determines is owed.[7] Because treble damages are a cold calculation without regard to the defendants’ financial status, some courts have viewed treble damages as a “severe penalty.”[8]

Ultimately, in practice, the primary difference between the two is that while an award of punitive damages requires the court to carefully consider at least nine factors, an award of treble damages is relatively simple math.

Burden of Proof. However, both the common law punitive and statutory treble damages awards require a heightened burden of proof.

To obtain compensatory relief at common law, plaintiffs only need to prove their case by a preponderance of the evidence.[9] The preponderance of the evidence standard is the most common burden of proof in civil trials. A preponderance of the evidence is “[t]he greater weight of the evidence [ . . . ] that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other.”[10] In other words, a preponderance of the evidence is a likelihood of greater than 50% that the claim is true—regardless of whether the jury imagines this likelihood percentage as 99%, 51%, or even 50.0000001%.

However, to obtain punitive damages at common law or treble damages under the statute, a plaintiff must prove that the defendant acted intentionally, fraudulently, maliciously, or recklessly by “clear and convincing” evidence—a higher burden of proof.[11] Clear and convincing evidence is “evidence in which there is no serious or substantial doubt about the correctness of the conclusions drawn from the evidence.”[12] “While the ‘clear and convincing evidence’ standard does not require as much certainty as the ‘beyond a reasonable doubt’ standard” used in criminal trials, “it is more exacting than the ‘preponderance of the evidence’ standard.”[13] “In contrast to the ‘preponderance of the evidence standard,’ clear and convincing evidence demonstrates that the truth of the facts asserted is ‘highly probable,’ as opposed to ‘more probable than not.’”[14] Importantly, the statute automatically awards treble damages for plaintiffs who meet the clear and convincing evidence standard.[15]

Damages Election. The next question, then, is what decides whether plaintiffs receive punitive or treble damages? If a plaintiff is awarded both punitive and treble damages in a bifurcated hearing, the plaintiff has the option to elect whether to take punitive or treble damages—but the plaintiff cannot have both.[16] There is no hard and fast rule for whether an award of punitive damages or treble damages will be greater. Plaintiffs who have suffered a significant financial injury will likely want to receive triple their monetary damages. However, plaintiffs whose actual damages are nominal but who were injured by particularly egregious conduct may prefer that the jury award punitive damages.

Given these complexities and the 3-year statute of limitations, parties who have been injured by a third-party’s inducement of a breach of contract or have been accused of doing so should act quickly to preserve their rights or defenses and retain counsel to navigate them through the intricacies of prosecuting or defending these common law and statutory claims.

[1] See, e.g., Whalen v. Bourgeois, No. E2013-01703-COA-R3-CV, 2014 WL 2949500 at *10 (Tenn. Ct. App. June 27, 2014) (citations omitted).

[2] Tigg v. Pirelli Tire Corp., 232 S.W.3d 28, 31, n.1 (Tenn. 2007). Note, however, that some authorities have questioned whether the statutory claim should instead fall under the one (1) year statute of limitation at Tennessee Code § 28–3–104(a). See, e.g., Misco, Inc. v. U.S. Steel Corp., 784 F.2d 198, 204 (6th Cir. 1986).

[3] Whalen, 2014 WL 2949500 at *17; see also DAMAGES, Black’s Law Dictionary (11th ed. 2019). Generally, punitive damages are only available against a defendant if the defendant acted intentionally, fraudulently, maliciously, or recklessly. 

[4] Whalen, 2014 WL 2949500, at *17 (citations omitted).

[5] See, e.g., id.at *17–18.

[6] Polk & Sullivan v. United Cities Gas Co., 783 S.W.2d 538, 542 (Tenn. 1989); Buddy Lee Attractions, Inc. v. William Morris Agency, Inc., 13 S.W.3d 343, 359 (Tenn. Ct. App. 1999).

[7] See, e.g., DAMAGES, Black’s Law Dictionary (11th ed. 2019).

[8] Emmco Ins. Co. v. Beacon Mut. Indem. Co., 204 Tenn. 540, 550, 322 S.W.2d 226, 231 (1959)).

[9] Edwards v. Travelers Ins. of Hartford, Conn., 563 F.2d 105, 120 (6th Cir. 1977) (citing Emmco, 204 Tenn. at 550).

[10] PREPONDERANCE OF THE EVIDENCE, Black’s Law Dictionary (11th ed. 2019).

[11] Hodges v. S.C. Toof & Co., 833 S.W.2d 896, 901 (Tenn. 1992) (common law); Buddy Lee Attractions, Inc. v. William Morris Agency, Inc., 13 S.W.3d 343, 359 (Tenn. Ct. App. 1999) (citing Emmco, 322 S.W.2d 226) (statute).

[12] Hodges, 833 S.W.2d at 901 n. 3.

[13] Duran v. Hyundai Motor Am., Inc., 271 S.W.3d 178, 207 (Tenn. Ct. App. 2008) (citing Hodges, 833 S.W.2d at 901 n. 3.)

[14] Id. (citing Teter v. Republic Parking Sys., Inc., 181 S.W.3d 330, 341 (Tenn.2005); Hibdon v. Grabowski, 195 S.W.3d 48, 62–63 (Tenn.Ct.App.2005)).

[15] Buddy Lee Attractions, 13 S.W.3d at 359–60.

[16] Id. at 359.

By Erik Halvorson and Thomas W. Shumate IV

Intro

In a pair of dueling opinions fit for a law school exam on statutory construction, members of the Supreme Court debated the meaning of the words “so” and “entitled” in a recent 6-3 decision, which resolved a circuit split concerning the scope of the Computer Fraud and Abuse Act (“CFAA”). In the majority opinion, authored by Justice Barrett, the Court held that an individual does not violate the CFAA when he misuses his access to a computer to obtain information for personal gain. The Court interpreted the statute narrowly and held that the CFAA only prohibits the unauthorized obtaining of protected information, not the authorized use of protected information. While this case concerned a (hopefully) not often repeated fact pattern, its interpretation of the CFAA has wide-reaching implications, particularly in the context of departing employee cases.

Background

What is the CFAA? In a nutshell, the CFAA is a federal law that prohibits an individual from accessing information on a computer “without authorization” or in a manner that “exceeds authorized access.” The law imposes criminal penalties and civil damages for violations.

The term “exceeds authorized access” has split lower courts for years. On one side, the First, Fifth, Seventh, and Eleventh Circuits had adopted a broad construction of the phrase. They held that the CFAA prohibits individuals from misappropriating information they otherwise were entitled to access. On the other, the Second, Fourth, and Ninth Circuits interpreted the statute more narrowly and held that the CFAA only prohibited the unauthorized access of information, not its inappropriate use.

Before the Supreme Court’s Van Buren decision, the split profoundly impacted trade secret and restrictive covenant litigation. Employers in the latter jurisdictions had to prove that employees obtained information from sources they were not authorized to access. In contrast, employers in the former jurisdictions had a much easier path, only needing to prove that employees misused information that they were otherwise authorized to access. As a result, the Court’s decision limits an approach some employers would otherwise use to take restrictive covenant and trade secret cases to federal court.

Van Buren Facts

This case arose from defendant Van Buren’s time as a police sergeant in Georgia. Following a questionable interaction with a shady character in the community, Van Buren came onto the FBI’s radar as a potentially corrupt officer. As a result, the FBI set up a sting operation whereby a person would offer officer Van Buren $5,000 to search the state law enforcement database for a license plate to ensure that the plate in question did not belong to an undercover police officer. Even though this use of the database was against department policy, Van Buren used his valid credentials and ran the plate through the database on his patrol-car computer. His actions resulted in a felony charge from the federal government for violation of the CFAA.

At trial, a jury convicted Van Buren, finding that his use of the database for a non-law-enforcement purpose violated the CFAA. The trial court subsequently sentenced him to 18 months in prison. On appeal, the Eleventh Circuit applied its broad construction of the CFAA and held that Van Buren’s misuse of the database exceeded his authorization and thus violated the CFAA. The Supreme Court granted certiorari and reversed the Eleventh Circuit, electing to adopt the narrower construction of “exceeds authorized access” utilized by the Second, Fourth, and Ninth Circuits.

Van Buren Reasoning

In her majority opinion, Justice Barrett focused on a “gates-up-or-down inquiry” in which a person only violates the CFAA if he obtains information from a location in a computer system he is not authorized to access. Accordingly, those like Van Buren who have access to information for another purpose, (i.e., for whom the gate is up), do not violate the CFAA when they use that information for an unauthorized purpose. Thus, the inquiry is now a binary one. Either a person is entitled to access information, or he is not, and his purpose for accessing the information is irrelevant to his liability under the CFAA.

Writing for the dissent, Justice Thomas took a broader approach, comparing those like Van Buren to a valet driver who takes a car for a joyride rather than parking it as expected. Under the dissent’s interpretation, a person “exceeds authorized access” when he oversteps the scope of his authorization to access the information, not only when he obtains information from a location in a computer he is not authorized to access. Ultimately, however, Justice Thomas’s context-oriented approach did not win the day. From now on, the liability inquiry under the CFAA is restricted to whether the person is permitted to access the information for any purpose. If he is permitted access, there is no liability under the CFAA, regardless of how he uses the information in the future.

What’s Next?

This decision will have a significant impact on litigation strategy for departing employee cases. In the past, employers could allege that an employee’s misuse of company data violated the CFAA and thus bring such cases in federal court. After this decision, however, that avenue is no longer available, at least in those cases like Van Buren where an employee is permitted to access information for some purposes but not others.

That said, misappropriation of data still violates a host of other laws, including the federal Defend Trade Secrets Act. This law could act as an alternative pathway to federal court in many situations. An employee’s misuse of company information can still serve as the basis for breach of contract claims, even if such action no longer constitutes a violation of the CFAA.

Because the inquiry under the CFAA now addresses what information employees may obtain, not how they may use the information, employers should think strategically  about how employees may potentially misuse information before they are permitted access.  Conversely, employees should remain aware of how their use of company information may coincide with their employment agreement or violate state or federal laws such as those involving the breach of their duty of loyalty to their employer or misappropriation of trade secrets, even if such use no longer violates the CFAA.

The impact of the pandemic on the U.S. workforce is mind-numbing. During the week of March 21 alone, 3.3 million Americans applied for unemployment, which shattered the previous national one-week filing record.[1] Many of those who are newly unemployed are bound by post-employment restrictions they signed with their previous employers. One study estimates that roughly 18% of workers are currently bound by a non-compete agreement, and about 37% of workers report having had a non-compete at some point during their career.[2]

Based on those numbers, millions of unemployed workers may be bound by non -compete agreements. With so many unemployed workers scrambling to find gainful employment, many of whom are bound by non-competes, this raises the question: Will Tennessee courts enforce post-employment restrictions during a pandemic? There is no clear answer, but the short answer is probably the same as in most non-compete cases:  It depends on the facts.

Background

Whether a worker was discharged, with or without cause, will not by itself invalidate a Tennessee non-compete agreement. Tennessee is one of approximately 28 states that allow non-competes to be enforced against discharged employees.[3]  Tennessee, unlike some other states, also does not prevent non-competes from being enforced against lower-wage workers or independent contractors. So there is no bright-line rule that invalidates non-competes even in the midst of a pandemic.

This means that Tennessee courts will evaluate non-competes using factors that have been developed through decades of case law.  Generally speaking, Tennessee courts have held that non-competition covenants or restrictions in employment contracts are not favored in Tennessee because they restrain trade. However, they are not invalid per se and will be enforced if they are reasonable under the circumstances. Courts will consider these factors in determining the reasonableness of the restrictions:

(1) the consideration supporting the agreements;

(2) the threatened danger to the employer in the absence of such an agreement;

(3) the economic hardship imposed on the employee by such a covenant; and

(4) whether or not such a covenant is contrary to the public interest.[4]

During a pandemic, the economic hardship imposed on the employee will take center stage. Courts have recognized that this factor “must be considered, and can be an important factor, in determining whether the covenant will be deemed reasonable and enforced.”[5]  However, in my experience, although Tennessee courts consider the hardship to the employee, it is typically given less weight than the other factors. But there is a good reason for that. If there is no consideration, there is no enforceable non-compete, so the employer does not get off the starting line.  And if the employer cannot establish that it has a protectable business interest that would require a non-compete, then a court need not even examine the other factors as there is no unfair competition to restrain. So a court often can resolve a non-compete dispute without making an in-depth analysis of the hardship to the worker.

When courts do examine the hardship to the employee, it is often considered in the context of who created the hardship. Was the worker fired without cause a mere two weeks after he signed a two-year non-compete?  (The employer wears the black hat.) Or did the worker quit, steal trade secrets, and then try to start a competing business across the street? (The employee wears the black hat.) In both situations, the restrictions create some hardship for the worker, but in the latter situation the hardship was self-induced, which a court will consider when balancing the equities. 

The Pandemic Prism

So how will Tennessee courts interpret and enforce non-competes during a pandemic—a hardship that neither side created?  I believe they will still apply the same factors, but I anticipate that they may view them through a “pandemic prism.” Consideration will still be required to have an enforceable agreement, and employers will still have to demonstrate that they have a protectable business interest.  But I predict that the hardship to the worker will be given greater deliberation and that courts will interpret the restrictions more narrowly than before. Keep in mind that Tennessee courts already interpret post-employment restrictions narrowly. That is because they dislike restraints on trade but will enforce the parties’ agreement if there is a demonstrated need for the restrictions and they are reasonable.  That is also because the employer typically drafts the agreement, and any ambiguities in the language may be construed against the drafter since it had the opportunity to avoid the ambiguity.  But with so many workers unemployed, many businesses not even operating, and the job pool drying up, I suspect that courts will be inclined to enforce the restrictions even more narrowly than they have in the past.

It will also be interesting to see whether courts hold that certain restrictions are contrary to the public interest because so many workers are unemployed, which puts a greater burden on the government to provide unemployment compensation and other assistance. Since the government has provided unprecedented assistance in the form of the various stimulus packages, a court could hold that public policy prevents a court from enforcing a non-compete under the particular facts of that case or perhaps narrow the restrictions under the rule of reasonableness, which allows courts to enforce the restrictions only to the extent they believe they are reasonable. Outside of the pandemic context, however, Tennessee courts have typically only held that public policy considerations invalidate a non-compete in the context of certain professionals such as health care providers and attorneys. So it would be a significant change for Tennessee courts to invalidate non-competes in this situation based on public policy concerns.

What This Means for Workers

Ultimately, employees and contractors cannot assume that their restrictions are unenforceable simply because they were laid off during a pandemic.  Restrictions are typically interpreted based on the parties’ intentions at the time they signed the agreement; a pandemic occurring months or years after signing won’t change that. Workers should consider whether it is probable that their former employer will seek to enforce the post-employment restrictions.  Even if their former employers enforce the restrictions, the pandemic should give those workers more leverage during negotiations since the risk may be greater that the court would hold that the restrictions are either unenforceable or enforce them more narrowly due to the hardship to the workers. If the workers cannot negotiate a reasonable resolution with their former employer, now could be a good time to seek a declaratory judgment to restrict the scope of the restrictions or to nullify them altogether since courts may be more sympathetic to their position. But if the employee voluntarily quit or engaged in bad conduct before or after his or her termination, I wouldn’t bet on the court having a lot of sympathy.

What This Means for Employers

Employers still have to protect their business interests—especially during a pandemic.  But doing so right now means that employers need to pick their battles carefully. Courts are not going to care what the restrictions say the worker cannot do if the employer cannot demonstrate a protectable business interest justifying the expansive restrictions. Employers should focus on what protections they actually need.  If the employer does business nationally but the employee only worked for it in Tennessee, now is probably not the time to seek to enforce a nationwide non-compete.  Instead, employers should focus on what they need to protect their trade secrets, customer relationships, and specialized training. Now is not the time to enforce unnecessary restrictions simply because a worker agreed to it years ago when he or she needed a job. 

That said, keep in mind that if an employer allows some former workers to violate their non-competes after being discharged, other employees will try to rely on that as proof that the employer does not actually have a business interest worthy of protection as evidenced by its failure to do so.

We’re Here to Help

If you need assistance interpreting or enforcing a non-compete under this new “pandemic prism,” the attorneys at Meridian Law stand ready to assist you. Please feel free to contact Tom Shumate at tom.shumate@meridian.law or (615) 229-7499.  www.meridian.law

Photo by Jon Tyson on Unsplash

[1] https://tcf.org/content/commentary/new-data-show-true-march-jobless-rate-near-20-percent/

[2] https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf

[3] https://www.seyfarth.com/images/content/4/3/v3/43770/19-6958%2050%20State%20Non-Compete%20Reference%20M2.pdf

[4] Med. Educ. Assistance Corp. v. State ex rel. E. Tennessee State Univ. Quillen Coll. of Med., 19 S.W.3d 803, 814 (Tenn. Ct. App. 1999) (emphasis added).

[5] Dill v. Cont’l Car Club, Inc., No. E2013-00170-COA-R3CV, 2013 WL 5874713, at *12 (Tenn. Ct. App. Oct. 31, 2013). 

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In February 2017, in Edwards v. Urosite Partners, 2017 WL 1192109, No. M2016–01161–COA–R3–CV (Tenn. Ct. App. March 30, 2017),  the Tennessee Court of Appeals ruled that a partnership had the right to redeem the shares of a former partner who violated the terms of his Separation Agreement and Partnership Agreement.

Facts

The plaintiff, Dr. Robert Edwards, was a former partner in Urology Associates, P.C. (“UA”). Dr. Edwards and the other partners at UA were also all partners in Urosite, L.P., which was formed for the purpose of purchasing, owning, managing, and operating the real and personal property located at Urology Associates’ primary location.

The Partnership Agreement for Urosite required continued employment with UA. Should one of the Urosite partners terminate their employment with UA for any reason other than death, disability, or retirement from the practice of medicine, Urosite would have the right to redeem the exiting partner’s shares.

In December 2013, Dr. Edwards left the employment of UA. On January 10, 2014, Dr. Edwards executed a Separation Agreement with UA and Urosite, which provided that Urosite would not exercise its right to redeem his shares if he would limit his new practice to Giles and Hickman Counties. In other words, UA agreed that it would not redeem Dr. Edwards’ shares despite his departure so long as he would agree to restrict his practice to those two counties.

In the spring of 2014, the Veterans Administration requested that Dr. Edwards provide medical care to veterans in Rutherford and Davidson Counties. Dr. Edwards complied with this request. On March 31, 2015 (nearly a year later), Urosite informed Dr. Edwards that it was exercising its rights in accordance with the Partnership Agreement and Separation Agreement.

Dr. Edwards objected and filed a complaint for declaratory relief requesting the court to declare that Urosite had no right to redeem his shares because his work for the VA was not a material breach of the agreement; that the attempt to redeem his shares was untimely even if it did; and that the Separation Agreement’s geographically restrictive clause constituted an unenforceable restriction on his practice of medicine that violated public policy.

The trial court ruled against Dr. Edwards on all counts, and he appealed. The Court of Appeals affirmed the trial court’s decision in all respects.

Key Takeaways:

• “If” and “When” Signal Conditions, Not Covenants—For Conditions “Materiality” of a Breach is Immaterial (pardon the pun)

First, the Court decided that under the plain language of the Separation Agreement, the geographic restriction to Giles and Hickman Counties was a condition precedent, not a covenant. The Court ruled that the use of “if and when” in the Separation Agreement’s clause regarding Dr. Edwards practicing outside of Giles and Hickman Counties meant the parties intended this to be a condition.

Further, the Court ruled that when “enforcing the consequences of fulfilled conditions, a court does not consider materiality unless there are extraordinary circumstances of unfairness or injustice which demand equitable relief.” Therefore, the Court did not need to engage in the calculus of whether Dr. Edwards performing services for the VA constituted a material breach.

• If the Plain Language of an Agreement Does Not Set a Temporal Limitation on Exercising a Right, a Court Will Not Enforce One

The Court next weighed Dr. Edwards’s argument that Urosite’s exercise of its rights was untimely. The Court reviewed the plain language of the Agreement and noted that there is no temporal limitation on when Urosite can redeem an exiting partner’s shares. While Tennessee courts can ensure that restrictive covenants, such as non-competition and non-solicitation provisions have reasonable temporal restrictions, Tennessee law generally does not allow a Court to insert a term into the agreements where there was not one originally even if the contract as agreed to later becomes burdensome or unwise. So, here, the Court did not put a deadline on Urosite’s ability to redeem Dr. Edwards’ shares.

• Urosite’s Right to Redeem Dr. Edwards’ Shares Was Not an Unenforceable Restraint on Competition.

Finally, the Court decided that Urosite’s right to redeem Dr. Edwards’s shares conditioned on his practice outside of Giles and Hickman Counties was not an unenforceable restraint on competition.

Under Tennessee law, there is strong public interest (and case law) preventing restrictive covenants against physicians and other medical providers. This interest allows patients to exercise their fundamental right of selecting the physician they believe is best able to treat them, and restrictive covenants can interfere with that right.  The Court determined, however, that the Separation Agreement’s geographical condition was not a restrictive covenant as it did not actually impede Dr. Edwards’s right to practice. Instead it merely provided Urosite the opportunity to redeem his interest in the partnership should he elect to practice outside of Giles and Hickman Counties. Therefore, the Separation Agreement did not constitute a restrictive covenant that violated public policy. This provides a way that physician groups can restrict a physician’s ability to practice in geographic areas without violating the terms of Tenn. Code Ann. 63-1-148, which defines the limits on physician non-competition agreements.

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• Appraisal Company Must Show More Than Ordinary Competition to Prevent Appraiser from Working for Competitor

Davis v. Johnstone Group, Inc. involved a battle between two appraisal firms for the services of one John Jason Davis. Mr. Davis was hired by Johnstone Group, Inc. (“JCI”) in 1998 as a real estate appraiser trainee. JCI required Mr. Davis to sign an employment agreement that contained a non-competition clause.

Over the next seven years, Mr. Davis completed 180 hours of classroom training and 3,000 hours of practical appraisal experience under the supervision of Mark Johnstone, the owner of JCI. In November of 2005, Mr. Davis became a licensed Certified General Real Estate Appraiser. At that point, JCI had Mr. Davis sign a new employment agreement, which also contained a non-competition agreement.

Mr. Davis continued working for JCI until April 13, 2015, when have gave notice of his intention to go to work for Appraisal Services Group, Inc. (“ASG”). JCI sent a cease and desist letter to Mr. Davis and ASG on April 20, 2015. Shortly thereafter, on May 1, 2015, Mr. Davis filed a complaint in the Chancery Court for Madison County seeking a declaration that the non-compete agreement was unenforceable. Not surprisingly, JCI countersued Mr. Davis and ASG. On June 1, 2015,  Mr. Davis filed an answer to JGI’s counter-complaint in which he denied liability. Following a hearing, on July 6, 2015, the trial court granted the declaratory judgment requested by Mr. Davis and denied JCI’s request for injunctive relief and damages.

So how did JCI lose so quickly? First, it failed to show special facts above and beyond ordinary competition that would give Mr. Davis an unfair advantage over it. In other words, Tennessee courts believe that ordinary competition is a good thing, but they will restrict unfair competition:

Of course, any competition by a former employee may well injure the business of the employer. An employer, however, cannot by contract restrain ordinary competition. In order for an employer to be entitled to protection, there must be special facts present over and above ordinary competition. These special facts must be such that without the covenant not to compete the employee would gain an unfair advantage in future competition with the employer.

Davis v. Johnstone Grp., Inc., No. W201501884COAR3CV, 2016 WL 908902, at *4 (Tenn. Ct. App. Mar. 9, 2016) (citing Hasty v. Rent–A–Driver, Inc., 671 S.W.2d 471, 473 (Tenn.1984)).

In an effort to show that Mr. Davis was engaging in unfair competition, JCI argued that he received specialized training, had access to its trade secrets, and that its customers associated Mr. Davis with its business. The Court spent little time discussing the second and third factors. There was no evidence that Mr. Davis took any of JCI’s information. Even if he had, bidding and pricing factors change rapidly. The Court also found that Mr. Davis was not the “face of the business” since his work was signed off on by Mr. Johnstone, he was not an owner of the business, and he was not involved in running the business.

That meant that JCI’s hopes rested on the third factor - specialized training. JCI argued that the 180 hours of classroom training and 3,000 hours of supervised appraisal experience constituted specialized training that gave Mr. Davis an unfair advantage. There are many problems with this argument. Most of the training took place before JCI had Mr. Davis sign the new employment agreement in 2005. Even if it took place after 2005, every appraiser is required to receive the same training in order to be licensed. There was nothing unique or proprietary about that training. The same is true of JCI’s method of appraising. No evidence was presented that JCI’s method of appraising was unique or secret such that others did not use the same method. Because JCI failed to establish that it had a protectable business interest in preventing Mr. Davis from working for ASG, the Court did not reach the issue of whether the temporal (two-year) and geographic (150 mile radius from JCI’s office in Jackson, TN) restrictions were reasonable.

The second reason that JCI lost is that it failed to provide the Court of Appeals with a transcript or statement of the evidence. That meant that the Court was forced to presume that there was sufficient evidence to support the trial court’s judgment. It's tough to win when the Court must presume that you lost for good reason.

What are the lessons for employers? Well, if it’s worth appealing it’s worth doing right. If there is a transcript of the hearing, include it in the record on appeal so there’s no presumption in favor of the trial court’s ruling against your client. Employers also need to keep in mind that training, no matter how extensive or expensive, will not demonstrate a protectable business interest if it is not unique. If every appraiser is required to obtain it, then it isn’t unique to the employer for whom the employee worked when obtaining it. It’s just the general knowledge and skill of the employee, which does not create unfair competition: “[G]eneral knowledge and skill appertain exclusively to the employee, even if acquired with expensive training, and thus does not constitute a protectable interest of the employer.” Davis v. Johnstone Grp., Inc., No. W201501884COAR3CV, 2016 WL 908902, at *4 (Tenn. Ct. App. Mar. 9, 2016) (citing Hasty v. Rent–A–Driver, Inc., 671 S.W.2d 471, 473 (Tenn.1984)).

What are the lessons for the employee? Don’t be afraid to call the employer’s bluff if you believe its non-competition agreement is unreasonable. JCI tried to bluff Mr. Davis into compliance by threatening him and his new employer. Mr. Davis didn’t blink. He filed his declaratory judgment action and after just over two months of litigation (excluding the resulting appeal), he had his freedom. This goes to show that some jobs are worth fighting for. It is also worth pointing out that there was no indication of wrongdoing by Mr. Davis. If JCI had been able to show that he stole company data on the way out the door, I suspect the result would have been different. 

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