In Southern Fire Analysis v. Rambo, No. M2008-00056-COA-R3-CV, 2009 WL 161088 (Tenn. Ct. App. Jan. 22, 2009), the Tennessee Court of Appeals reversed a trial court’s dismissal of a complaint alleging violations of three non-compete agreements. The facts are as follows:
Plaintiff Southern Fire Analysis is in the business of investigating fires on behalf of insurance company clients. Southern Fire Analysis employed James Jennings and Glenn Johnson as fire investigators. Jennings and Johnson signed “Corporate Resolution” documents in 1996 and 1997, respectively, that stated the following:
WHEREAS, in the opinion of this Board, it is for the best interests of this Corporation to adopt a No-Compete Agreement, be it
RESOLVED, That a No-Compete Agreement shall remain in effect for a period of Six (6) Months from the date of Termination with the Corporation by James D. Jennings, and shall cover an area of up to and including a One Hundred & Fifty (150) Mile radius from Nashville, Tennessee.
In 2004, Jennings and Johnson changed from being employees to being independent contractors. The Independent Contractor Agreements that Jennings and Johnson executed with Southern Fire Analysis stated that “[t]he Independent Contractor must have and maintain and must provide [Southern Fire] with documents of”... a “Valid Non-Compete Agreement effective for six (6) month time period.” Southern Fire Analysis also hired David Edge in 2005. Edge signed an independent contractor agreement, but Southern Fire Analysis was unable to locate a non-compete agreement attached to or part of the independent contractor agreement.
On July 2, 2007, Jennings, Johnson, and Edge resigned from Southern Fire Analysis, along with Southern Fire Analysis’s Nashville office manager, Michael Rambo. The four individuals started working for Southern Fire, Unified Investigations and Science, a competitor of Southern Fire Analysis. One month later, on August 3, 2007, Southern Fire Analysis initiated an action against Rambo, Jennings, Johnson and Edge. Southern Fire Analysis alleged that Edge, Jennings and Johnson were working in violation of their respective non-compete agreements. Southern Fire Analysis attached copies of the Corporate Resolutions and Independent Contractor Agreements for Jennings and Johnson. It further alleged, upon information and belief, that Rambo removed Edge’s Independent Contractor Agreement and Non-Compete Agreement from Southern Fire Analysis’s files. The Complaint also included a breach of the duty of loyalty claim against Rambo and civil conspiracy claims against all four defendants.
On September 18, 2007, all four defendants moved to dismiss, arguing that the non-compete agreements were invalid. Specifically, defendants argued that Southern Fire Analysis had not pled a protectable business interest, the non-compete agreements were overbroad in their scope, and if valid, the non-compete provisions had expired six months after the Independent Contractor Agreements were signed. Additionally, Edge moved to dismiss the breach of contract claim on the ground there was no evidence that he had entered into a non-compete agreement. The trial court granted the Motion to Dismiss, finding that “the documents relied upon by Plaintiff and attached to the Petition as non-compete agreements between it and Defendants Edge, Jennings, and Johnson are unenforceable and fail to support the claims alleged in the Complaint.” It is unclear from the Court of Appeals’s decision whether the trial court provided any further reasoning in reaching its decision.
The Tennessee Court of Appeals reversed the trial court’s finding, reciting the Tennessee standard that: “Covenants not to compete are enforceable if an employee or independent contractor would otherwise be able ‘to exercise an unfair advantage in future competition with his employer, and if they are no broader in duration or as to the territory they embrace than is reasonably necessary to secure the protection of the business or good will of the employer.’” The Court of Appeals pointed out that:
- Southern Fire Analysis attached to its Complaint copies of the alleged non-compete agreements with Jennings and Johnson.
- Southern Fire Analysis alleged upon information and belief that Edge had signed a non-compete agreement and an independent contractor agreement identical to those of Jennings and Johnson, but they could not be produced because Rambo, had removed the signed documents from the company’s files.
- Southern Fire Analysis alleged that the non-compete agreements were signed by the defendants in exchange for specialized training.
- Finally, Southern Fire Analysis alleged that defendants were competing within 150 miles of its Nashville office, the same geographic area in which they worked as fire investigators for Southern Fire Analysis.
Thus, the Court of Appeals found that Southern Fire Analysis had made a sufficient showing under Tennessee law to survive a motion to dismiss. The Court of Appeals did not explain why the trial court was wrong. Instead, it described the allegations made by Southern Fire Analysis in its Complaint and then concluded that the allegations were sufficient to set forth a claim for breach of contract. It is not clear if the Court of Appeals held that the trial court applied the wrong standard or erred in applying the right standard, possibly because the trial court likely did not set forth its reasoning.