Do Non-Compete Agreements Hold Up?

Non-compete agreements can be valuable tools for employers looking to protect their business interests, but whether they hold up in court depends on how they are written and enforced. Each state has different standards, and in Tennessee, courts scrutinize these agreements carefully to ensure they are fair and reasonable.

Below, we break down key factors that affect the enforceability of non-compete agreements.

What Is a Non-Compete Agreement?

A non-compete agreement is a legal contract where an employee agrees not to enter into competition with their employer after the employment relationship ends. These agreements typically restrict the employee from working with a competitor, starting a competing business, or soliciting former clients for a set period and within a certain geographic area.

In Tennessee, non-compete agreements are enforceable but carefully scrutinized. Courts will only uphold them if they are reasonable, clear, and protect legitimate business interests.

Why Some Non-Compete Agreements Fail in Court

Non-compete agreements often fail for one of the following reasons:

• Overly Broad or Restrictive Terms: Courts generally will not uphold agreements that place unreasonable restrictions on a former employee’s ability to work. This includes agreements that are too long in duration, too wide in geographic scope, or too vague in their restrictions.
• Ambiguous or Poorly Written Language: If the language in a non-compete agreement is unclear, contradictory, or open to interpretation, courts will often side with the employee. Clarity is essential in legal documents.
• Violation of State Law: Some states place strict limits on or even prohibit non-compete agreements altogether. Employers must be aware of the laws in the states where they operate. Attempting to enforce a non-compete in a state where it is invalid can expose an employer to legal liability.

Time and Geographic Limits Matter

The most common reasons non-compete agreements are deemed unenforceable involve unreasonable timeframes and geographic restrictions.

• Timeframe: Agreements that restrict an employee from working for one to two years are typically considered reasonable. Anything longer, especially three to five years may be viewed as excessive and likely won’t hold up in court.
• Geographic Scope: Courts often reject agreements that prevent someone from working in an overly broad area, such as an entire state or country, especially if the employer only operates in a small region. The restriction must align with the actual business footprint of the employer.

Enforceability Depends on State Law

Whether a non-compete agreement holds up also depends heavily on state-specific laws. In some states, such as California, non-competes are largely unenforceable. In others, like Tennessee, they are allowed but subject to strict scrutiny.

Employers must ensure their agreements comply with the legal standards in the states where they operate. Failing to do so can result in legal challenges and even claims of unfair business practices. If a court determines the agreement is void, the employer could be liable for damages, including attorney’s fees.

Clarity and Precision Are Crucial

Legal documents must be written in clear and precise language. If a non-compete agreement contains vague, confusing, or conflicting terms, it’s likely a court will rule against the employer. Courts will interpret any ambiguity in favor of the employee.

Employers should take care when drafting these agreements. Better yet, consult an experienced employment attorney who can ensure that the terms are legally sound, reasonable, and enforceable.

Best Practices for Drafting a Valid Non-Compete

To improve the chances that a non-compete agreement will be upheld in court, consider these best practices:

• Define a reasonable timeframe (typically one to two years).
• Limit the geographic scope to areas where the business actually operates.
• Ensure the restrictions are specific to the employee’s role and industry.
• Write in clear, unambiguous language.
• Make sure the agreement complies with state laws where your business and employees operate.

What Makes a Non-Compete Agreement Enforceable in Tennessee?

Tennessee law allows non-compete agreements but imposes strict conditions to ensure they are fair to both parties. For a non-compete agreement to be enforceable in the state, it must meet the following criteria:

• Legitimate Business Interest: The employer must have a real, protectable interest such as trade secrets, proprietary processes, or close customer relationships.
• Reasonable in Scope: The restrictions on time, geography, and the type of work must be reasonable and not overly broad.
• Supported by Consideration: There must be something of value provided in exchange for the agreement. For new employees, the job offer may be enough. For existing employees, something additional such as a raise or bonus may be required.
• Not Harmful to the Public: Courts will consider whether enforcing the agreement would negatively impact the public for example, by limiting access to healthcare providers.
  

Reasonableness: Time, Geography, and Scope

Courts in Tennessee assess the reasonableness of a non-compete agreement by looking at three key factors:

• Time: Restrictions of one to two years are often seen as reasonable, although this can vary based on industry and position.
• Geography: The restricted area should relate to where the employer does business. A nationwide restriction for a local job is unlikely to hold up.
• Scope of Work: The employee should only be restricted from doing work that directly competes with their former role.

Overly broad or vague agreements are likely to be struck down or modified by a judge.

Can a Court Modify an Overbroad Non-Compete Agreement?

Yes. Tennessee follows the “blue pencil doctrine,” which means that courts may revise or remove unreasonable portions of a non-compete agreement instead of voiding the entire contract. For example, a court could reduce the duration of the restriction from three years to one year or limit an overly broad geographic scope.

Special Considerations for Healthcare Providers

Tennessee has specific statutory rules for non-compete agreements involving doctors and other healthcare professionals. These contracts are typically enforceable if:

• The time limit does not exceed two years.
• The geographic restriction is limited to a 10-mile radius from the location where the provider practiced or the county in which they worked.

These rules aim to protect patient access to medical care while still allowing healthcare practices to protect their interests.

How Recent Legal Developments Could Impact Non-Compete Agreements

While Tennessee law governs most non-compete agreements in the state, there have been national developments worth noting. In 2024, the Federal Trade Commission proposed a nationwide ban on non-compete clauses, arguing that they limit worker mobility and suppress wages. However, a federal court ruling temporarily blocked this rule from taking effect, meaning non-compete agreements are still valid in Tennessee if they meet state requirements.

Employers and employees should keep an eye on these ongoing legal debates, as future rulings could significantly alter the landscape for non-compete enforcement.

What Employees Should Do Before Signing a Non-Compete Agreement

If you’re asked to sign a non-compete agreement whether at the start of your job or later consider the following:

• Read It Carefully: Understand the duration, geographic area, and the type of work you’re restricted from doing.
• Don’t Be Afraid to Negotiate: You can ask for adjustments to unreasonable terms before signing.
• Seek Legal Advice: A knowledgeable employment lawyer can review the agreement and explain your rights and risks.

Signing a non-compete without fully understanding its implications could limit your future job opportunities.

What Employers Should Know When Drafting Non-Competes

For employers, a well-crafted non-compete agreement can protect trade secrets and customer relationships. However, it must be written with care:

• Tailor the terms to specific job roles and business needs.
• Avoid vague or excessively broad language.
• Ensure the employee receives something valuable in exchange for signing.

Poorly drafted or overly aggressive agreements may be thrown out by the courts or worse, land the employer in legal trouble.

Understanding Your Rights and Obligations

Non-compete agreements are enforceable in Tennessee but only when they are fair, specific, and tied to legitimate business needs. Whether you’re an employer looking to protect your company or an employee safeguarding your career future, understanding how these contracts work under state law is essential.

If you’re facing a dispute or need help understanding your non-compete, consulting an employment attorney can help you navigate your rights and responsibilities with confidence.