United States: Extensive Training Of Ex-Employee By Former Employer Not Enough For Injunction Against Competition

Last Updated: March 30 2016
Article by Paul E. Freehling

Although an employer spent many hours assisting an employee to obtain a real estate appraiser's license, the Tennessee Court of Appeals held recently that the employee's restrictive covenants were unenforceable.  Davis v. Johnstone Group, Inc., No. W2015-01884-COA-R3-CV (Mar. 9, 2016).

Summary of the case.  The ex-employee, Davis, had no prior real estate appraisal experience in 1998 when he started work at Johnstone Group, Inc. (JGI), a Tennessee appraisal firm.  In order to become licensed as a Certified General Real Estate Appraiser, he was required to complete 180 hours of classroom instruction.  He did so at his own expense.  In addition, he had to have 3,000 hours of supervised appraisal practice.  Mr. Johnstone, the owner of JGI, provided that supervision.  Davis signed restrictive covenants when he became employed by JGI and again in 2005, after satisfying his classroom and supervised appraisal requirements, and receiving his license.

According to the Court of Appeals, at trial JGI failed to prove that it provided secret or unique training to Davis or that he possessed confidential business data.  Accordingly, both the trial and appellate tribunals held that a ruling for JGI would restrain ordinary competition.

Background facts. The two sets of restrictive covenants were similar.  Both stated that Davis would not, for two years after termination, provide real estate appraisal, consulting or comparable services within 150 miles of JGI, would not assist any of its customers or solicit any of its employees, and would not divulge any of the company's proprietary information.  In 2015, Davis resigned from JGI and shortly thereafter went to work for a competitor.

The litigation. Upon receipt of a threat from JGI that the company would take legal action to enforce the covenants, Davis filed a preemptive lawsuit in a Tennessee chancery court.  He alleged that the non-compete was unenforceable because the company had not given him any specialized training or access to confidential information.  JGI answered and counterclaimed, asserting that the covenants were "reasonable and necessary to protect [its] legitimate business interests."  It asked for injunctive relief and damages.

Decisions below and on appeal.  The trial court granted the declaratory judgment Davis sought and denied the relief requested by JGI.  The company appealed.  According to the Court of Appeals, under Tennessee law an employer seeking to enforce a restrictive covenant must demonstrate "special facts" which give the ex-employee "an unfair competitive advantage."  Here, however:

  • There was no evidence that Davis took with him JGI's confidential client information, business records, or secret bidding or pricing data that could be used by a competitor.
  • The knowledge and skill provided to Davis during his training was not unique but, rather, was similar to that which anyone interested in becoming a licensed real estate appraiser would receive.
  • JGI did not have a secret method of appraising.
  • With only a few exceptions, Davis did not have a "special relationship" with JGI's customers, and the company knew about all of his relationships because Mr. Johnstone signed off on all of Davis's appraisals.

Takeaways.  JGI had an uphill battle to reverse the trial court and obtain the relief the company sought.  First, lately courts seem to be denying enforcement of non-compete clauses except in extraordinary cases.  Second, the Court of Appeals mentioned twice in its opinion that no transcript or summary of the evidence was included in the record on appeal.  The court said that therefore, under applicable law, it "must presume that there was sufficient evidence before the trial court to support its judgment" and could "only conclude that JGI has failed to prove any facts . . . that would warrant enforcement of the non-competition" covenant.

Third, judicial decisions are not uniform on the subject of what facts must be proved to warrant injunctive relief for an employer.  The appellate opinion reminds us, however, that extensive training of an employee is not adequate by itself to justify enforcement of a non-compete.  Here, although some facts supported the case for injunctive relief, some did not.  The impact on the Court of Appeals' decision of the hole in the record cannot be determined.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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