Non-compete agreements, or restrictive covenants, are contractual provisions which may or may not be enforceable, depending upon state law. Very few states have codified their policies on non-competes; most of the law is judge-made. California prohibits most restrictive covenants outright. Maine, Massachussetts, Illinois and Arizona expressly forbid, by statute, the use of non-competes in the broadcast industry. Other states have tried and failed to pass such legislation. Accordingly, courts conduct case-by-case tests of the “reasonableness” of these provisions.
Click here to read my blog entry on the status of this issue in Tennessee, specifically.
Courts adjudicating disputes over such contract provisions generally follow some version of the Restatement test.
The Restatement (Second) of the Law of Contracts § 188 (1981) suggests that:
(1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if
(a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or
(b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.
(2) Promises imposing restraints that are ancillary to a valid transaction or relationship include the following:
(a) a promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold;
(b) a promise by an employee or other agent not to compete with his employer or other principal;
(c) a promise by a partner not to compete with the partnership.
Tennessee Courts, for example, interpret restrictive covenants pursuant to the following version of this test:
In general, covenants not to compete are disfavored in Tennessee. See Hasty v. Rent–A–Driver, Inc., 671 S.W.2d 471, 472 (Tenn.1984). These covenants are viewed as a restraint of trade, and as such, are construed strictly in favor of the employee. Id. However, if there is a legitimate business interest to be protected and the time and territorial limitations are reasonable then non-compete agreements are enforceable. Id. at 473. Factors relevant to whether a covenant is reasonable include: (1) the consideration supporting the covenant; (2) the threatened danger to the employer in the absence of the covenant; (3) the economic hardship imposed on the employee by the covenant; and (4) whether the covenant is inimical to the public interest. Id. at 472–73 (citing Allright Auto Parks, Inc. v. Berry, 219 Tenn. 280, 409 S.W.2d 361, 363 (1966)). Also, the time and territorial limits must be no greater than necessary to protect the business interest of the employer. Allright Auto Parks, 409 S.W.2d at 363. *679 8 Covenants not to compete that implicate important public policy issues are even more strictly construed. See Spiegel v. Thomas, Mann & Smith, P.C., 811 S.W.2d 528, 529–30 (Tenn.1991); Allright Auto Parks, 409 S.W.2d at 364; Med. Educ. Assistance Corp. v. State, 19 S.W.3d 803, 813 (Tenn.Ct.App.1999).
Murfreesboro Med. Clinic, P.A. v. Udom, 166 S.W.3d 674, 678-79 (Tenn. 2005).