Vantage Technology, LLC ( 1999 )

FILED
October 19, 1999
Cecil Crowson, Jr.
Appellate Court Clerk
IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
VANTAGE TECHNOLOGY, LLC, ) C/A NO.
03A01-9810-CH-00333
)
Plaintiff-Appellant, )
)
)
)
)
v. ) APPEAL AS OF RIGHT FROM THE
) HAMBLEN COUNTY CHANCERY COURT
)
)
)
)
MARK CROSS, )
) HONORABLE THOMAS R. FRIERSON,
Page 1
II
Defendant-Appellee. ) CHANCELLOR
For Appellant For Appellee
J. FORD LITTLE H. SCOTT REAMS
MICHAEL J. KING Taylor, Reams,
Woolf, McClane, Bright, Tilson & Harrison
Allen & Carpenter, PLLC Morristown, Tennessee
Knoxville, Tennessee
OPINION
REVERSED IN PART
AFFIRMED IN PART
REMANDED Susano, J.
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Vantage Technology, LLC (“Vantage”) filed this suit
against its former employee, Mark Cross (“Cross”), seeking
injunctive relief and damages for breach of a non-competition
covenant. Following a bench trial, the Chancellor found that
the covenant was unreasonable and unenforceable. Vantage
appeals, raising the following issues for our consideration:
1. Did the trial court err in finding that the
non-competition covenant was unreasonable and unenforceable?
2. Did the trial court err in denying Vantage’s motion to
amend its pleadings to conform to the evidence?
Appellee Cross raises the additional issue of whether the
trial court erred in applying Tennessee law rather than
Illinois law.
I. Facts and Procedural History
A. Vantage’s Business
Vantage’s business involves the rendering of a
service to ophthalmologists in a hospital setting. To best
understand the facts of this case, it is necessary to have an
elementary grasp of cataract surgery logistics, especially as
it relates to the relationships of the parties involved. When
an ophthalmologist determines that a patient needs surgery to
remove cataracts, the physician must then choose, from among
the hospitals at which the doctor has privileges, the facility
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at which the surgery is to be performed. Because physicians
often prefer to perform surgery with certain equipment,
supplies, and instruments, the presence or absence of these
accouterments at a particular hospital is often the
determining factor in the surgeon’s choice of location. Thus,
hospitals, in competition with one another for facility usage
fees, often seek to attract surgeons by offering the tools
that surgeons prefer. While larger hospitals are generally
able to provide these tools in-house, rural hospitals must
often obtain them from third parties. These third parties,
sometimes referred to as “mobile service providers”, transport
the necessary equipment to the hospital when a surgeon is
scheduled to perform cataract surgery. These mobile service
providers are driven by the same incentives as are the
hospitals — to provide the equipment, supplies, instruments
and services that surgeons prefer.
Vantage, as one of these mobile service providers,
employs technicians to transport the required materials to
rural hospitals and to assist the physicians during surgery.
Cross is a former Vantage technician. For the reasons
outlined above, Vantage has an interest in initiating,
developing, and sustaining relationships not only with
hospitals, but also with the physicians performing cataract
surgery at the hospitals. To initiate such relationships,
Vantage utilizes direct-mailings or face-to-face
demonstrations to sell its services to hospitals. Vantage
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delegates to the technicians the ongoing task of developing
and sustaining these relationships because a technician is the
primary liaison between Vantage and the doctors and hospitals.
In furtherance of the goal of relationship-building, Vantage
encourages its technicians to use entertainment expense
accounts to purchase meals or gifts for physicians and other
surgical staff.
Another method that Vantage employs to build and
strengthen relationships is the collection and recordation of
surgeon preferences. These “doctor diaries” are used to
record surgeons’ preferences for machine settings, supplies,
and instruments. This information is initially gathered and
logged in by a Vantage salesperson. When a technician is
assigned to a particular surgeon, the technician refers to the
diary to determine what equipment to bring and how to set up
the machine, instruments and supplies. The doctor diaries
also include personal information about the doctor such as
hobbies and interests. Part of the technician’s
responsibility is to record in the doctor diaries any change
in surgeon preferences or problems encountered during surgery.
The technicians are also required to report growth
opportunities of which they become aware during the
performance of their duties.
The primary piece of equipment that Vantage provides
to hospitals is a phacoemulsification machine. This machine
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is used to break cataracts into pieces and remove the pieces
through irrigation and aspiration. Once the cataract is
removed, the surgeon implants an artificial lens into the eye.
Surgery with the machine enables the surgeon to utilize a much
smaller incision which, in turn, allows an easier and shorter
recuperation time for the patient. Additionally, the machines
allow surgeons to perform more cataract surgeries in less time.
In addition to providing the machine, Vantage also
provides supplies, instruments, and technician services. The
technician’s pre-surgery responsibilities include
transportation of the equipment, setting up the machine’s
parameters according to the surgeon’s preferences, tuning the
hand piece, “breaking out” the supplies and instruments, and
preparing the room for surgery. During surgery, the
technician stays by the machine and changes the machine’s
modes by pressing buttons according to the surgeon’s
instructions. The surgeon, not the technician, places the
machine tip to the eye and otherwise operates the machine
during surgery through the use of foot pedals.
No medical training or education is required for
technicians, nor do technicians need to be licensed. One can
be trained to operate the machine in a single day. A trained
technician can set up the parameter preferences in
approximately 15 seconds. A physician can perform surgery
without a technician in the room. Still, a technician’s
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responsibilities require a degree of familiarity with the
machine.
From October, 1994, to August, 1996, Vantage, with
15 to 18 employees, provided mobile services to 70 to 100
hospitals in eight states, including Tennessee. Four
hospitals in Tennessee are relevant to this case: Fort
Sanders-Loudon Medical Center (“Fort Sanders-Loudon”) in
Loudon; Lakeway Regional Hospital (“Lakeway”) in Morristown;
LaFollette Medical Center (“LaFollette”) in LaFollette; and
Fort Sanders-Sevierville Medical Center (“Fort
Sanders-Sevierville”) in Sevierville.
Vantage provided mobile services to Fort
Sanders-Loudon under an exclusive contract from August 15,
1995, to August 14, 1996. After termination of the contract,
Vantage provided services at least once more on September 4,
1996. The primary ophthalmologist performing cataract surgery
at Fort Sanders-Loudon was Dr. Subba Rao Gollamudi.
Vantage provided mobile services to Lakeway under a
one-year, non-exclusive contract beginning on October 1, 1995.
Dr. Gollamudi was also the primary ophthalmologist at Lakeway.
Vantage provided mobile services to LaFollette on
one occasion in 1994. Because LaFollette was, at that time,
satisfied with its own machine and because LaFollette and
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Vantage could not come to an agreement regarding price,
LaFollette did not become a Vantage customer.
Vantage first contacted Fort Sanders-Sevierville in
April, 1998, two months prior to trial.
B. Cross’ Employment with and Departure from Vantage
Cross began employment with Vantage as a technician
in October, 1994. His qualifications for the position
included a bachelor’s of science degree in administrative
management and experience from a variety of jobs. He had no
experience, training or education directly relevant to the
operation of phacoemulsification machines.
In January, 1995, Cross signed a covenant not to
compete, which provides as follows:
[d]uring the term hereof and for a period of three years
thereafter, the Employee shall not compete, directly or
indirectly, with the Company interfere with, disrupt or
attempt to disrupt the relationship, contractual or otherwise,
between the Company and any customer, client, supplier,
consultant or employees of the Company, including, without
limitation, employing or being an investor (representing more
than a 5% equity interest) in, or officer, director or
consultant to, any person or entity which employs any former
key or technical employee whose employment with the Company
was terminated after the date which is one year prior to the
date of termination of the Employee’s employment therewith.
An activity competitive with an activity engaged in by the
Company shall mean performing services (whether as an
employee, officer, consultant, director, partner or sole
proprietor) for any person or entity engaged in the business
then engaged in by the Company, within 50 miles of any Company
office or Company’s client location.
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The agreement also provides that:
[i]t is the desire and intent of the parties that the
provisions of this Section shall be enforced to the fullest
extent permissible under the laws and public policies applied
in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this Section shall
be adjudicated to be invalid or unenforceable, this Section
shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to
apply only with respect to the operation of this Section in
the particular jurisdiction in which such adjudication is made.
Vantage taught Cross how to perform his duties as a
phacoemulsification technician. Cross spent his first month
of employment with Vantage in 241.5 hours of training. This
training primarily consisted of observing a more senior
Vantage technician during approximately 70 cataract surgeries.
Cross also watched videos and read manuals. During the course
of his employment, Cross attended monthly meetings and also
went to one “wet lab” where he performed a cataract surgery on
a pig’s eye. Most of Cross’ training pertained to two models
of a machine manufactured by Alcon and one model manufactured
by Storz.
After Cross’ initial training, he began to provide
services to hospitals without the supervision of another
Vantage technician. Cross relied on the doctor diaries to
ascertain the preferences of the doctors with whom he worked.
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In addition to the doctor diaries, Cross received schedules
which included not only his own itinerary, but also the names
of the hospitals and doctors for whom his fellow technicians
would be working. Cross testified that, after referring to
the schedules to determine where and with whom he was to work,
he discarded the schedules without having ascertained the
identities of any other Vantage customers. Cross had limited
knowledge of Vantage’s pricing and other terms of Vantage’s
contracts with hospitals.
During his employment with Vantage, Cross serviced
49 hospitals in at least six states. Two of the hospitals
Cross serviced were Fort Sanders-Loudon and Lakeway. At
first, Vantage dispatched several different technicians to
service these two hospitals. By the summer of 1996, however,
Cross was the Vantage technician in the majority of the
surgeries performed at these two hospitals, and had developed
a strong relationship with Dr. Gollamudi.
In the summer of 1996, Vantage informed Cross that
it wanted him to service hospitals in Ohio rather Tennessee.
Cross and Dr. Gollamudi began to discuss the possibility of
Cross working as a technician for Dr. Gollamudi independent of
Vantage, using an Allergan Prestige machine which Dr.
Gollamudi preferred over the machines supplied by Vantage.
Vantage never trained Cross on an Allergan Prestige machine.
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Around this time, Cross learned from Dr. Gollamudi
that LaFollette was experiencing problems with its
phacoemulsification machine to the point of having to postpone
and cancel surgeries. The Operating Room Director at
LaFollette testified that Cross met her on August 13, 1996, to
discuss the providing of mobile services. Cross did not
mention that he was a Vantage employee. On August 15, 1996,
Cross gave Vantage his two weeks notice. Cross faxed a price
quote to LaFollette on August 16, 1996. On August 19, 1996,
Dr. Gollamudi secured $40,000 from a bank and then loaned the
money to Cross to finance the start-up of Cross’ business,
Southern Surgical Support. Cross used most of the money to
purchase a refurbished Allergan Prestige machine which he
ordered on August 29, 1996, his last day as a Vantage
employee. Cross received the machine on September 2, 1996,
and an Allergan representative, in one day, instructed him in
its operation.
Cross rendered his first service through his new
business on September 10, 1996, at LaFollette. With the help
of Dr. Gollamudi’s influence, Cross began servicing Lakeway
sometime within the next month and Fort Sanders-Loudon in
October, 1996. In November, Dr. Gollamudi introduced Cross to
a partner who performed surgery at Fort Sanders-Sevierville.
Cross began servicing Fort Sanders-Sevierville in January,
1997.
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Vantage filed suit on May 16, 1997, alleging that
Cross had breached a valid and enforceable covenant not to
compete. The trial court, finding the covenant unreasonable
and unenforceable, rendered judgment in favor of Cross.
Vantage then appealed.
II. Standard of Review
In this non-jury case, our review is de novo upon
the record, with a presumption of correctness as to the trial
court’s factual determinations, unless the evidence
preponderates otherwise. Rule 13(d), T.R.A.P.; Union Carbide
Corp. v. Huddleston, 854 S.W.2d 87, 91 (Tenn. 1993); Wright v.
City of Knoxville, 898 S.W.2d 177, 181 (Tenn. 1995). The
trial court’s conclusions of law, however, are accorded no
such presumption. Campbell v. Florida Steel Corp., 919 S.W.2d
26, 35 (Tenn. 1996); Presley v. Bennett, 860 S.W.2d 857, 859
(Tenn. 1993).
Our de novo review is subject to the
well-established principle that the trial court is in the best
position to assess the credibility of the witnesses;
accordingly, such determinations are entitled to great weight
on appeal. Massengale v. Massengale, 915 S.W.2d 818, 819
(Tenn.App. 1995); Bowman v. Bowman, 836 S.W.2d 563, 566
(Tenn.App. 1991).
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III. Analysis
A. Non-Competition Covenant
Covenants not to compete, because they are in
restraint of trade, are disfavored in Tennessee. Hasty v.
Rent-A-Driver, Inc., 671 S.W.2d 471, 472 (Tenn. 1984). As
such, they are construed strictly in favor of the employee. Id
. However, when the restrictions are reasonable under the
circumstances, such covenants are enforceable. Id. The
factors that are relevant in determining whether a covenant
not to compete is reasonable include “the consideration
supporting the agreements; the threatened danger to the
employer in the absence of such an agreement; the economic
hardship imposed on the employee by such a covenant; and
whether or not such a covenant should be inimical to public
interest.” Allright Auto Parks, Inc. v. Berry, 409 S.W.2d
361, 363 (Tenn. 1966).
The first factor, consideration, is not an issue on
appeal. In balancing the other three factors, a threshold
question is whether the employer has a legitimate business
interest, i.e., one that is properly protectable by a
non-competition covenant. See Hasty, 671 S.W.2d at 473.
Several principles guide the determination of
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whether an employer has a business interest properly
protectable by a non-competition covenant. Because an
employer may not restrain ordinary competition, it must show
the existence of special facts over and above ordinary
competition. Id. These facts must be such that without the
covenant, the employee would gain an unfair advantage in
future competition with the employer. Id. Considerations in
determining whether an employee would have such an unfair
advantage include (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 the
customers on behalf of the employer. Id. These
considerations may operate individually or in tandem to give
rise to a properly protectable business interest. See, e.g.,
AmeriGas Propane, Inc. v. Crook, 844 F. Supp. 379 (M.D. Tenn.
1993); Flying Colors of Nashville, Inc. v. Keyt, C/A No.
01A01-9103-CH-00088, 1991 WL 153198 (Tenn.App. M.S., filed
August 14, 1991).
1. Specialized Training
An employer does not have a protectable interest in
the general knowledge and skill of an employee. Hasty, 671
S.W.2d at 473. This is not only true of knowledge and skill
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brought into the employment relationship, but also true as to
that acquired during the employment relationship, even if the
employee obtained such general knowledge and skill through
expensive training. See Hasty, 671 S.W.2d at 473 (“general
knowledge and skill appertain exclusively to the employee,
even if acquired with expensive training and thus does not
constitute a protectible [sic] interest of the employer”).
In contrast, an employer may have a protectable
interest in the unique knowledge and skill that an employee
receives through special training by his employer, at least
when such training is present along with other factors tending
to show a protectable interest. Id; Selox, Inc. v. Ford, 675
S.W.2d 474, 476 (Tenn. 1984) (“A line must be drawn between
the general skills and knowledge of the trade and information
that is peculiar to the employer’s business.”) (quoting
Restatement (Second) of Contracts § 188 cmt. g (1981)). See
also Flying Colors of Nashville, 1991 WL 153198 at *5 (holding
that training in specialized techniques and processes of
paint-mixing, together with a special relationship with the
employer’s customers, gives rise to a properly protectable
interest).
Thus, whether an employer has a protectable interest
in its investment in training an employee depends on whether
the skill acquired as a result of that training is
sufficiently special as to make a competing use of it by the
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employee unfair.
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2. Trade Secrets and Confidential Information
An employer has a legitimate business interest in
keeping its former employees from using the former employer’s
trade or business secrets or other confidential information in
competition against the former employer. Hasty, 671 S.W.2d at
473. A trade secret is defined as any secret “formula,
process, pattern, device or compilation of information that is
used in one’s business and which gives him an opportunity to
obtain an advantage over competitors who do not use it.”
Hickory Specialties, Inc. v. B & L Labs., Inc., 592 S.W.2d
583, 586 (Tenn.App. 1979) (quoting Allis-Chalmers Mfg. Co. v.
Continental Aviation & Eng’g Corp., 255 F. Supp. 645, 653 (E.D.
Mich. 1966)). The subject matter of a trade secret must be
secret and not well known or easily ascertainable. Hickory
Specialties, 592 S.W.2d at 587.
What constitutes “confidential information” is
somewhat less clear. In Heyer-Jordan & Assocs., Inc. v. Jordan
, 801 S.W.2d 814 (Tenn.App. 1990), we held that the identities
of the employer’s customers did not amount to “confidential
business information” within the meaning of the employment
agreement because such information was generally available in
the trade. We reasoned that “confidential information” is
analogous to “trade secret” and that, because customer
identities are not secret, they cannot be considered
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confidential. See also Amarr Co. v. Depew, C/A No.
03A01-9511-CH-00412, 1996 WL 600330, *4-*5 (Tenn.App. W.S.,
filed October 16, 1996) (holding that customer lists, customer
credit information, pricing information, and profit and loss
statements did not constitute confidential information because
such information is easily available from sources other than
the employer).
3. Special Customer Relationships
An employer may also have a legitimate protectable
interest in the relationships between its employees and its
customers. See Hasty, 671 S.W.2d at 473. It is often the
case that the customer associates the employer’s business with
the employee due to the employee’s repeated contacts with the
customer. The employee in essence becomes “the face” of the
employer. This relationship is based on the employer’s
goodwill. The employee’s role in this relationship is merely
that of the employer’s agent. In this role, the employee is
made privy to certain information that is personal, if not
technically confidential. Because this relationship arises
out of the employer’s goodwill, the employer has a legitimate
interest in keeping the employee from using this relationship,
or the information that flows through it, for his own benefit.
This is especially true if this special relationship exists
along with the elements of confidential information and/or
specialized training. For illustrations of this principle,
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see AmeriGas Propane, Inc. v. Crook, 844 F. Supp. 379, 386
(M.D.Tenn. 1993); Ramsey v. Mutual Supply Co., 427 S.W.2d 849,
852 (Tenn.App. 1968); Federated Mut. Implement and Hardware
Ins. Co. v. Anderson, 351 S.W.2d 411, 415 (Tenn.App. 1961);
Arkansas Dailies, Inc. v. Dan, 260 S.W.2d 200, 204-05
(Tenn.App. 1953); Powell v. McDonnell Ins., Inc., C/A No.
02A01-9608-CH-00176, 1997 WL 589232, *5 (Tenn.App. W.S., filed
September 24, 1997); Flying Colors of Nashville, Inc. v. Keyt,
C/A No. 01A01-9103-CH-00088, 1991 WL 153198, *5 (Tenn.App.
M.S., filed August 14, 1991).
4. Application
Vantage argues on appeal that it has a legitimate
business interest in all of the above categories, i.e.,
specialized training, confidential information, and special
customer relationships. The trial court concluded that Cross’
training was “not so unique or specialized as to justify a
covenant not to compete for its protection....” It also held
that Vantage had no legitimate business interest in the
customer lists, pricing levels, and doctor diaries because
such information does not constitute confidential information.
Finally, the trial court found that Vantage does not have a
protectable interest in the relationship arising out of Cross’
direct and repeated contacts with Vantage’s customers because
the hospitals are primarily concerned with quality and price
rather than developing relationships.
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While the relevant factors mentioned above must each
be analyzed in isolation, they must also be analyzed in
tandem. When the facts of the instant case are analyzed in
the latter manner, we find and hold that Vantage has
established a legitimate business interest that can be
properly protected by a covenant not to compete.
Cross’ first month of employment was devoted to
training. His first 241.5 hours on the job were primarily
spent in observation of approximately 70 surgeries. After the
initial training period ended, he attended monthly meetings.
In addition to this training, the relationships between
Vantage and the hospitals and surgeons were initiated by
Vantage and were built on the foundation of Vantage’s
goodwill. Any contribution of Cross to the development and
sustenance of these relationships was accomplished in Cross’
role as an agent of Vantage. In performance of this role,
Cross was made privy to surgeon preferences. He had a degree
of knowledge of Vantage’s other customers and the prices it
charged for Cross’ services. Additionally, it was in this
role as Vantage technician that Cross’ relationship with Dr.
Gollamudi was initiated and developed. This relationship, as
well as the information that flowed through it, gives Cross an
unfair advantage in competition against his former employer
because it comes at the expense of his former employer. When
this special relationship is coupled with the training Cross
received from Vantage and the confidential information he
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received while in its employ, the totality of all of this
amounts to a legitimate business interest properly protectable
by a covenant not to compete. 0 To the extent the trial court
found otherwise, we find and hold that the evidence
preponderates against such a finding.
Finding that Vantage has established a protectable
interest, however, does not end our inquiry. According to the
Allright factors, the threatened danger to Vantage’s
protectable interest in the absence of a non-competition
covenant must be balanced against the economic hardship
imposed on Cross by such a covenant. The public interest must
also be considered. Allright Auto Parks, Inc. v. Berry, 409
S.W.2d 361, 363 (Tenn. 1966).
The trial court, apparently relying on its previous
findings of fact, found that “[t]he economic hardship imposed
upon Cross by such a covenant greatly outweighs the threatened
danger to Vantage in the absence of such an agreement.” For
the reasons articulated above, we disagree. If the covenant
is not enforced, Vantage stands to lose its investment in
training Cross and its investment in the development of
customer relationships as well as the effort expended in
gathering information concerning surgeon preferences. If the
covenant is enforced, Cross merely loses that which does not
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belong to him.
The relevant considerations bearing on the public
interest do not preclude enforcement of the non-competition
covenant. Any restraint on competition has the potential to
increase the cost of what are already expensive health care
services. On the other hand, not enforcing the covenant would
allow Cross to unfairly use the benefits bestowed upon him by
his employer and may result in a disincentive to Vantage to
properly train and inform its employees. Accordingly, we find
that the public interest considerations do not militate
against enforcement of the covenant. We conclude that the
threatened danger to Vantage in the absence of such
enforcement outweighs the economic hardship imposed upon Cross
by enforcement of the non-competition covenant.
To be enforceable, a covenant not to compete must
clear one final hurdle. The scope of a covenant not to
compete must be reasonable in that “the time and territorial
limits involved must be no greater than is necessary to
protect the business interests of the employer.” Allright
Auto Parks, 409 S.W.2d at 363. If the scope of the covenant
is reasonable as written, it will be enforced as written. If
the scope is unnecessarily burdensome to the employee,
however, it will be enforced only “to the extent that [it is]
reasonably necessary to protect the employer’s interest ‘
without imposing undue hardship on the employee when the
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public interest is not adversely affected.’” Central
Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28, 37 (Tenn.
1984) (quoting in part Ehlers v. Iowa Warehouse Co., 188
N.W.2d 368, 370 (Iowa 1971)). Hence, a court may modify an
unreasonable covenant so as to render it reasonable. To
protect against employers drafting overly broad language
secure in the knowledge that the sole sanction would be
modification to the maximum extent allowed, courts will hold
the entire covenant invalid if credible evidence supports a
finding that the covenant is deliberately unreasonable and
oppressive. Central Adjustment Bureau, 678 S.W.2d at 37.
With respect to territorial limitations, covenants that
embrace an area in which the employee never performed services
are unreasonable unless the employee possesses knowledge of
the employer’s trade secrets. Allright Auto Parks, 409 S.W.2d
at 364.
The covenant at issue in the instant case is rather
inartfully drawn. It essentially prohibits Cross from
competing with Vantage for three years “within 50 miles of any
Company office or Company’s client location.” Vantage’s
rationale for the 50-mile restriction is that surgeons often
serve numerous hospitals within 50 miles of each other, and,
because surgeons are so influential in the hospitals’ choice
of mobile service provider, a provider’s relationship with a
surgeon can translate into relationships with surrounding
hospitals.
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We find the 50-mile restriction to be a reasonable
geographical scope with respect to the locations of Vantage’s
customer-hospitals in which Cross served as technician for
Vantage. Vantage’s asserted rationale, however, does not
explain the need for protection of a 50-mile area surrounding
Vantage’s offices. Nor does it explain the need for
protection in areas near hospitals in which Cross never
performed services. The evidence does not suggest that
Vantage deliberately drafted the covenant to be unreasonable
or oppressive. Accordingly, we modify the covenant to
prohibit Cross from competing with Vantage within 50 miles of
any Vantage customer location in which Cross performed
services while a Vantage technician.
There are at least two other problems with the
subject covenant. First, it does not expressly state whether “
within 50 miles” is intended to refer to a radius or driving
distance. Second, the covenant does not state whether the “
Company’s client location” refers to hospitals which were at
one time clients or which were clients at the time of Cross’
termination. Because the agreement is ambiguous, and because
we are to construe covenants not to compete favorably to the
employee, we find and hold that the area of restriction is 50
miles as determined by the shortest driving distance.
Additionally, we hold that the covenant applies only to those
hospitals in which Vantage was regularly providing services at
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the time of Cross’ termination.
With respect to the period of restriction, we hold
that three years is reasonable. See Matthews v. Barnes, 293
S.W. 993, 993, 996 (Tenn. 1927) (five-year covenant held
reasonable); Ramsey v. Mutual Supply Co., 427 S.W.2d 849,
852-53 (Tenn.App. 1968) (five-year covenant held reasonable);
Arkansas Dailies, Inc. v. Dan, 260 S.W.2d 200, 205 (Tenn.App.
1953) (three-year covenant held reasonable); Mike Glynn & Son,
Inc. v. Schang, 1990 WL 7449, *1, *4 (Tenn.App. W.S., filed
February 5, 1990) (three-year covenant held reasonable).
In sum, we hold the following: (1) that Vantage has
established that it has a legitimate, protectable interest;
(2) that the threatened danger to this interest in the absence
of a non-competition covenant outweighs the economic hardship
imposed on Cross resulting from enforcement of the covenant;
(3) that the three-year time period for which Cross is
prohibited from competing with Vantage is reasonable; and (4)
that the geographical scope of the covenant is modified so
that Cross is prohibited from competing with Vantage within 50
miles, shortest driving distance, of any hospital in which
Vantage was regularly providing services at the time of Cross’
termination, but only with respect to those hospitals in which
Cross performed services while a Vantage technician.
On remand, the trial court must determine, according
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to the parameters we have outlined above, whether and to what
extent Cross has violated his non-competition covenant. If
Cross has violated his covenant, the trial court must
determine the extent of injunctive relief and/or damages to
which Vantage is entitled.
B. Motion to Amend to Conform to the Evidence
The second issue Vantage raises on appeal is whether
the trial court erred in denying Vantage’s motion to amend its
pleadings to conform to the evidence. On May 16, 1997,
Vantage filed suit alleging breach of the covenant not to
compete. Vantage did not assert breach of duty of loyalty as
a cause of action. On June 30, 1998, the parties proceeded to
the first day of trial. Vantage examined, and Cross
cross-examined, four witnesses. The court then adjourned
until July 13, 1998. On July 7, 1998, Vantage filed a motion
to amend the pleadings to conform to the evidence seeking to
add a breach of duty of loyalty cause of action. The court
heard the motion on July 13, 1998, and denied it, finding that
the issue had not been tried by express or implied consent and
that an amendment at that time would result in prejudice to
Cross.
In determining whether to grant or deny a motion to
amend the pleadings to conform to the evidence 2, “the most
important question is whether the new issues were tried by the
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parties’ express or implied consent and whether the defendant ‘
would be prejudiced by the implied amendment, i.e., whether he
had a fair opportunity to defend and whether he could offer
any additional evidence if the case were to be retried on a
different theory.’” Zack Cheek Builders, Inc. v. McLeod, 597
S.W.2d 888, 891 (Tenn. 1980) (quoting Browning Debenture
Holders’ Comm. v. Dasa Corp., 560 F.2d 1078, 1086 (2d Cir.
1977). Presentation of evidence that is relevant to both a
pled issue and a non-pled issue does not establish trial of
the non-pled issue by implied consent. Hiller v. Hailey, 915
S.W.2d 800, 805 (Tenn.App. 1995). Whether the issue has been
tried by implied consent is a decision resting within the
sound discretion of the trial court, and, as such, it cannot
be disturbed on appeal absent an abuse of discretion. Zack
Cheek Builders, 597 S.W.2d at 891.
Here, Vantage seeks to amend the pleadings to
include a breach of duty of loyalty claim based on certain
evidence elicited on the first day of trial. Vantage asserts
that it did not learn until the first day of trial that Cross
personally solicited LaFollette two days before giving his
notice of termination to Vantage. Vantage contends that this
evidence is relevant only to a breach of duty of loyalty
claim. It also asserts that this issue was tried by implied
consent because Cross’ attorney examined two witnesses
regarding the timing of Cross’ solicitation of LaFollette for
himself. Cross responds with the argument that the facts
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surrounding the timing of his personal solicitation of clients
is relevant to the breach of the non-competition covenant,
especially as it relates to the calculation of damages should
he be found to be in violation of the covenant. Thus, Cross
argues that he did not expressly or impliedly try the breach
of duty of loyalty claim, and that the amendment after
witnesses have been dismissed would be prejudicial to his case.
On the second day of trial, after denial of the
motion to amend, counsel for Vantage questioned Cross about
when Cross established his own business. In response to an
objection based on relevancy, i.e., that the question was
outside the scope of the pleadings, counsel for Vantage stated
that “[i]f the gentleman is out competing directly with his
employer during the actual employment with the employer, that’s
certainly relevant to the facts of this case.” We agree with
Cross and Vantage’s counsel that the evidence surrounding the
timing of Cross’ solicitation of LaFollette is relevant to the
alleged violation of the non-competition covenant. Moreover,
by the time the motion was filed, four witnesses had been
examined and dismissed. Granting the motion would have
resulted in Cross not being given fair notice or an
opportunity to present evidence relevant to a cause of action
alleging breach of duty of loyalty. Accordingly, we find that
the trial court did not abuse its discretion in denying Vantage
’s motion to amend its pleadings to conform to the evidence.
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C. Choice of Law
Cross raises as an issue on appeal whether the trial
court erred in applying Tennessee law rather than Illinois law
in determining the enforceability of the covenant not to
compete. The basis for the trial court’s decision regarding
choice of law is paragraph 2(b) of the agreement not to
compete signed by Cross. This paragraph provides as follows:
[i]t is the desire and intent of the parties that the
provisions of this Section shall be enforced to the fullest
extent permissible under the laws and public policies applied
in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this Section shall
be adjudicated to be invalid or unenforceable, this Section
shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to
apply only with respect to the operation of this Section in
the particular jurisdiction in which such adjudication is made.
The goal of contract interpretation is to ascertain
the intent of the parties according to the usual, natural, and
ordinary meaning of the words used by the parties. Guiliano
v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999). Any ambiguity
is to be construed against the drafter. Spiegel v. Thomas,
Mann & Smith, P.C., 811 S.W.2d 528, 531 (Tenn. 1991).
Contracts must be construed, as far as is reasonable, so as to
give effect to every term. Wilson v. Moore, 929 S.W.2d 367,
373 (Tenn.App. 1996). Interpretation of a contract, being a
matter of law, is subject to de novo review with no
presumption of correctness. Guiliano v. Cleo, 995 S.W.2d 88,
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95 (Tenn. 1999); Campbell v. Florida Steel Corp., 919 S.W.2d
26, 35 (Tenn. 1996); Presley v. Bennett, 860 S.W.2d 857, 859
(Tenn. 1993).
Tennessee follows the rule of lex loci contractus.
This rule provides that a contract is presumed to be governed
by the law of the jurisdiction in which it was executed absent
a contrary intent. Ohio Cas. Ins. Co. v. Travelers Indem. Co.,
493 S.W.2d 465, 467 (Tenn. 1973).
If the parties manifest an intent to instead apply
the laws of another jurisdiction, then that intent will be
honored provided certain requirements are met. The choice of
law provision must be executed in good faith. Goodwin Bros.
Leasing, Inc. v. H & B Inc., 597 S.W.2d 303, 306 (Tenn. 1980).
The jurisdiction whose law is chosen must bear a material
connection to the transaction. Id. The basis for the choice
of another jurisdiction’s law must be reasonable and not
merely a sham or subterfuge. Id. Finally, the parties’
choice of another jurisdiction’s law must not be “contrary to ‘
a fundamental policy’ of a state having [a] ‘materially
greater interest’ and whose law would otherwise govern.” Id,
n.2 (citing Restatement (Second) of Conflict of Laws § 187(2)
(1971)).
In a February 13, 1998, memorandum opinion relating
Page 30
to this issue, the trial court made the following findings of
fact: (1) both parties executed the agreement in good faith;
(2) Tennessee had a direct and relevant connection with the
transaction in question; (3) there was no evidence of sham or
subterfuge; and (4) there was no evidence that Illinois had a
materially greater interest. The trial court also concluded,
as a matter of law, that the provision was both a choice of
law clause and a separability clause and that the parties
intended to be governed by the laws of the State of Tennessee
in the event a party sought enforcement of the contract in
this state. Based on this conclusion and its findings of
fact, the trial court held that Tennessee law applied to the
analysis of the covenant not to compete.
Cross argues on appeal that the trial court erred in
applying Tennessee rather than Illinois law. He contends that
the provision is solely a separability provision because it
provides for modification in the event that any portion is
adjudicated invalid or unenforceable. Additionally, Cross
notes that the provision does not refer to a particular
foreign jurisdiction, but rather refers to the laws of “each
jurisdiction in which enforcement is sought.” In so doing, he
argues, the provision does not promote the goal of certainty,
predictability and uniformity because it necessarily mutates
according to the jurisdiction in which Vantage seeks to
enforce the agreement. Vantage responds that the first
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sentence of the provision is a choice of law clause and that
ignoring it would amount to a finding that it is meaningless,
a result that offends the established rule that contracts must
be construed, as far as is reasonable, so as to give effect to
every term.
We find that the trial court did not abuse its
discretion in finding that the contract was executed in good
faith, that Tennessee had a reasonable relation to the
transaction, and that there was no evidence of improper
purpose or that Illinois had a materially greater interest
than Tennessee. Moreover, we agree that the provision is both
a choice of law clause and a separability clause. To construe
the first sentence of paragraph 2(b) of the agreement as
anything other than a choice of law clause would be to ignore
the clear intent of the parties and thus render the sentence
meaningless. That the clause, in tandem with the separability
clause, might result in a different outcome depending on the
jurisdiction in which it is enforced is not an impediment to
our decision. This is so because our exercise of jurisdiction
over this matter is proper. Our decision is entitled to full
faith and credit even though it affects the rights and
obligations of the parties with respect to areas outside of
Tennessee. Hence, as between Vantage and Mark Cross, the
matter may not be re-litigated in another jurisdiction, and as
such, the choice of law provision does not offend the goal of
certainty, predictability and uniformity. We therefore hold
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that the provision is a valid choice of law provision and that
the trial court was correct in applying Tennessee, rather than
Illinois, law.
IV. Conclusion
The judgment of the trial court is reversed in part,
affirmed in part and remanded for further determinations
consistent with this opinion. Exercising our discretion, we
tax the costs on appeal half to each party.
_________________________
Charles D. Susano, Jr. J.
CONCUR:
_________________________
Houston M. Goddard, P.J.
(Not Participating)
William H. Inman, Sr.J.
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