Covenant Not to Compete Found to be Unenforceable | Business Transaction Newsletter
Fort Sanders Regional Medical Center and Park West Medical Center (the “Hospitals”) had a contract with American Anesthesiology of Tennessee, PC (“AATN”) to provide anesthesia services to the Hospitals. AATN had employment agreements with its Anesthesiologists (“Physicians”) and Certified Registered Nurse Anesthetists (“CRNAs”)(collectively the “Clinicians”). AATN requested a $14,000,000 per year subsidy from the Hospitals in consideration for the services it provided. The Hospital refused the payment of the subsidy, and AATN sent its Notice of Intent to cease providing anesthesia services at the Hospitals.
Under its contract with AATN, the Hospitals were prohibited from directly hiring the Physicians and CRNAs. However, the Hospitals parent company, Covenant Health (“Covenant”) sought to directly hire the Clinicians to avoid closure of the Hospitals.
The Hospitals along with two Clinicians filed a Petition for Declaratory Judgment in Knox County to declare the Covenants Not to Compete unenforceable. The Plaintiffs asserted that the Hospitals would be forced to shut down if anesthesia services were unavailable. The Trial Court ruled that the Covenants Not to Compete (“CNTC”) were unenforceable finding that AATN lacked a legitimate business interest in enforcing the CNTC, and that enforcing the CNTC would impose a hardship on the Clinicians and a risk to the public.
The Court of Appeals discussed the enforceability of Covenants Not to Compete and set forth several propositions:
- Covenants Not to Compete are generally disfavored in Tennessee and are construed in favor of the Employee.
- If there is a legitimate business interest to be protected and the time and territorial limitations are reasonable, then non-compete agreements can be enforceable.
- Factors the Court considers are consideration supporting the covenant, the threatened danger to the Employer in the absence of the covenant, the economic hardship imposed on Employee, and whether the covenant is inimical to the public interest.
One of the critical points of analysis by the Court is whether the Employer had a legitimate business interest to protect dependent upon special facts present and above ordinary competition. The Court said the factors that should be considered are: (1) whether the Employer provided the Employee with specialized training; (2) whether the Employee is given access to trade or business secrets or other confidential information; and (3) whether the Employer’s customers tend to associate the Employer’s business with the Employee due to the Employee’s repeated contacts with customers on behalf of the Employer.
The Court in the Fort Sanders case determined that Clinicians had all of their training before they were employed by AATN, and had not received trade secrets, and that the Clinicians were not in a position where customers would associate them with the business.
MY OBSERVATION: Covenants Not to Compete are frequent areas of litigation in Tennessee. The facts of every case are different, and the determination is very fact specific in an analysis by the Court. The Fort Sanders case sets out a good checklist of factors Courts consider in analyzing Covenants Not to Compete.
Yours very truly,
RAINEY, KIZER, REVIERE & BELL, P.L.C.
William C. Bell, Jr., Attorney at Law
This letter is intended to provide you with ideas for consideration in commercial transactions. It is not intended to give a general solution applicable to all apparently similar individual problems, since slight changes in facts may require variance in legal advice. Please contact legal counsel with specific questions.