Hanger Prosthetics & Orthotics East, Inc. v. William C. Kitchens

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
April 23, 2008 Session
HANGER PROSTHETICS & ORTHOTICS EAST, INC. v.
WILLIAM C. KITCHENS, ET AL.
Appeal from the Chancery Court for Knox County
No. 162681-2 Daryl Fansler, Chancellor
No. E2007-01808-COA-R3-CV Filed June 23, 2008
This appeal involves the validity of a covenant not to compete. The employee, William C. Kitchens
(“Kitchens”), became a certified orthotist after entering into the covenant with his employer Hanger
Prosthetics & Orthotics East, Inc. (“Hanger”). After the employee quit his job and began providing
orthotic services for a competitor, Hanger filed suit. Following a trial, the Trial Court determined
that the covenant not to compete was enforceable and that Kitchens had breached the covenant. The
Trial Court also determined that Kitchens’ new employer, defendant Choice Medical, Inc. (“Choice
Medical”), had induced Kitchens to breach the contract in violation of Tenn. Code Ann. §47-50-109,
and that an award of treble damages was appropriate. Judgment was entered against Kitchens and
Choice Medical jointly for $240,182.00, and against Choice Medical for an additional $480,364.00.
Defendants appeal raising numerous issues. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the
Chancery Court Affirmed; Case Remanded
D. MICHAEL SWINEY , J., delivered the opinion of the court, in which HERSCHEL P. FRANKS, P.J., and
CHARLES D. SUSANO , JR., J., joined.
Bernard E. Bernstein, W. Tyler Chastain, and Margo J. Maxwell, Knoxville, Tennessee, for the
Appellants William C. Kitchens and Choice Medical, Inc.
Paul E. Prather, John W. Simmons, and R. Alex Boals, Memphis, Tennessee, and Richard L.
Hollow, Knoxville, Tennessee, for the Appellee Hanger Prosthetics & Orthotics East, Inc.
OPINION
Background
This litigation began when Hanger filed a verified complaint and motion for
restraining order. Among other things, Hanger sought to restrain one of its former employees,
Kitchens, from continuing to work for a competitor, Choice Medical. Hanger claimed that Kitchens’
new employment with Choice Medical was in violation of a covenant not to compete. Hanger sued
Kitchens and Choice Medical (“Defendants”). According to the Complaint, Hanger sought to:
restrain and enjoin Kitchens from performing the same activities he
performed for Hanger on behalf of himself and Choice, his new
employer, in competition with Hanger, to restrain and enjoin
Defendants from utilizing or disclosing Hanger’s confidential and
proprietary information and trade secrets, to restrain and enjoin
Kitchens from soliciting Hanger’s customers, to restrain and enjoin
Choice from interfering with Kitchens’ contractual relations with
Hanger, to restrain and enjoin Choice from interfering with Hanger’s
business relations with its customers, and to restrain and enjoin
Defendant from unfairly competing against Hanger. Hanger also
seeks to recover all damages it has suffered, including lost profits, as
a result of Defendants’ actions.
Hanger brought a claim for breach of contract against Kitchens, claims for
misappropriation of trade secrets, tortious interference, and conspiracy against both Kitchens and
Choice Medical, and claims for intentional interference with business relationships and inducement
to breach contract against Choice Medical.
The covenant not to compete is contained in an Employment Agreement that was
entered into in May of 1990. Kitchens’ employer at that time was Fillauer Orthopedic, a predecessor
in interest to Hanger.1 In relevant part, the Employment Agreement provides as follows:
Whereas, Employer is in the business of manufacturing, fitting, and
selling prosthetic, orthopedic, and surgical appliances and
garments….
Employer and Employee … [do] hereby agree as follows:
1
Fillauer Orthopedic was the trade name for Fillauer Orthotic and Prosthetic Services, Inc. The complaint
contains a detailed description of how Plaintiff claims the company Kitchens initially worked for was a predecessor in
interest to Hanger. The Trial Court ultimately agreed with this assertion and determined that Hanger had standing to
enforce the covenant not to compete, a finding not challenged by Defendants on appeal. Therefore, to the extent
possible, we omit from this Opinion information pertaining to this particular issue. In addition, we will refer to Hanger
as Kitchens’ employer as if Kitchens was employed by Hanger throughout the course of his employment.
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1. Employer hereby employs Employee as a prosthetist and or
orthotist for an unlimited period of time.
* * *
5. As a KEY employee, having had confidential information on
product development, company research, and marketing knowledge,
it is expressly agreed that it would be unfair for such an Employee to
work in the same area as a competitor.
6. Employee agrees that if their (sic) employment with Employer
is terminated for ANY reason, either by Employee, or by such
Employer, then for a period of two years following such termination,
Employee will not perform services as a prosthetist and or orthotist,
or perform any services related to the manufacture, fitting, or sales of
prosthetic, orthopedic, or surgical appliances or garments in an area
within a seventy five mile radius of the location at which employee
presently performs his/her services, or locations previously
worked….
A hearing was held on Hanger’s request for injunctive relief. Numerous witnesses
testified at the hearing, including Kitchens and representatives of both Hanger and Choice Medical.
Following the hearing, the Trial Court entered a Memorandum Opinion and Order on February 23,
2005. The Trial Court first determined that Hanger had standing to enforce the covenant not to
compete, one of the primary points of contention at that hearing. The Trial Court also found and
held:
Defendant Kitchens had no training or experience as a
prosthetist when he started work for Fillauer. He received extensive
training as a prosthetist and was virtually the only employee … in
area hospitals and thus was charged with and encouraged to develop
special relationships with the physicians in those hospitals. In effect,
Mr. Kitchens became the face of Fillauer[/Hanger] during his tenure
with the company.
Therefore, the Court finds that the employer has a protectable
interest in the relationships between defendant Kitchens and
plaintiff’s customers. Vantage Technology, LLC v. Cross, 17 S.W.3d
637 (Tenn. App. 1999).
The Court has previously found that consideration was paid
for the agreement in that defendant Kitchens was promised and did
receive a raise as a result of entering into the employment agreement
in May 1990. Plaintiff has proved the existence of a danger to its
business in the absence of this agreement.…
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At the hearing defendant admitted that a market exists for his services
as a prosthetist in areas outside the territorial restrictions imposed by
the employee agreement. The length of the temporal restrictions, as
well as the range of the territorial restrictions contained in the
agreement are reasonable. There is nothing to suggest that
enforcement of this agreement would be inimical to the public
interest especially since plaintiff has other employees who could
perform prosthetic services in area hospitals but for the special
relationship existing between defendant and plaintiff’s customers,
which was developed during defendant’s employment and at
plaintiff’s expense.…
The Court finds that this agreement is enforceable and that
this is an appropriate case for injunctive relief.…
Accordingly, defendant Kitchens is enjoined during the
pendency of this action, or for a period of two years from September
1, 2004, from performing services as a prosthetist or any services
related to the manufacture, fitting or sales of prosthetic appliances
within a seventy-five mile radius of Hanger/Fillauer on Baum Drive
in Knoxville, Tennessee.
Defendant Choice is enjoined from employing defendant
Kitchens in any capacity that would allow him to perform the
aforementioned services or assisting him in engaging in such
activities.
After entering the temporary injunction, the Trial Court entered a pre-trial order
indicating that the trial would be bifurcated. The first part of the trial would involve liability issues
and would include any remaining issues surrounding whether the covenant not to compete was
enforceable and whether a permanent injunction was warranted. If either or both defendants were
found liable to Hanger, then a second hearing would be held to determine the amount of monetary
damages.
Following the first phase of the trial, a memorandum opinion was entered by the Trial
Court in November of 2005. The Trial Court found, consistent with its previous order, that Hanger
had standing to enforce the covenant not to compete and that it had a protectable interest. The Trial
Court also stated:
Defendant Kitchens asserts that in light of the Supreme Court
holding in Murfreesboro Medical Center, P.A. v. Udom, 166 S.W.3d
674 (Tenn. 2005), this non-compete agreement is void as against
public policy. The holding in Murfreesboro in essence was that
except for statutory exceptions covenants not to compete restricting
physicians in their practice are void as against public policy.
-4-
Kitchens argues that he is an “allied health professional” and as such,
the Murfreesboro holding should apply equally to individuals
employed as orthotists.
* * *
Unlike the American Medical Association and the American
Bar Association, the [American Board for Certification in Orthotics
and Prosthetics, Inc.] has not specifically addressed restrictive
covenants in employment agreements. Indeed, … they are
widespread in the [orthotics] industry.
Furthermore, unlike doctors and attorneys, patients rarely, if
ever, choose the orthotist. The orthotist is prescribed by the doctor
and instructed to perform certain functions or obtain certain goals, the
method of which is left to the orthotist, generally speaking. One
might describe this much as a doctor prescribing medication. The
patient might be free to shop at different pharmacies but the
prescription remains the same.
Additionally, the court in Murfreesboro focused heavily upon
the fiduciary duties of doctors and lawyers and the confidential
relationships existing between them and their patients or clients. The
Court does not find the relationship between orthotist and patient to
rise to the same level as that fiduciary relationship created by
attorney-client or doctor-patient relationship. Indeed, the orthotist
role is more akin to providing goods and services.
Accordingly, the Court does not find this non-compete
agreement inimical to the public interest.…
Defendant’s non-compete agreement was for a period of two
years prohibiting him from practicing orthotics within a seventy-five
mile radius of Knoxville.… Kitchens argues that it is unreasonable
to hold him to a two year/seventy five mile time and territorial
limit.…
It is well settled that courts in this state will enforce covenants
not to compete to the extent that they are reasonably necessary to
protect the employer’s interests without imposing undue hardship on
the employee. Central Adjustment Bureau v. Ingram, 678 S.W.2d 28
(Tenn. 1984). Applying this rule of reasonableness to the
circumstances at hand the Court finds that the agreement between
Kitchens and his employer requires a covenant of no more than one
-5-
year duration from the date of termination to reasonably protect the
employer’s interests.
* * *
It is inescapable from the testimony of the principals of
Choice Medical and defendant Kitchens that Kitchens’ non-compete
agreement was made known to defendant Choice well before
Kitchens gave notice of his intent to leave Hanger. In fact, the
agreement was submitted to Choice’s counsel for review.
The evidence is overwhelming that Choice was not engaged
in the orthotics and prosthetics business in the Knoxville area and that
the hiring of defendant Kitchens gave them access to a ready market
based upon the long standing physician relationships developed by
Kitchens as an agent of Hanger. The proof is overwhelming that it
was the business plan of Choice to have Kitchens contact these
physicians with whom he had long standing relationships, notify them
that he was no longer working at Hanger and induce them to continue
to use Kitchens as an agent of Choice rather than continuing their
relationships with Hanger.
Throughout the hearings in this case, Choice has continued to
argue the invalidity of the non-compete agreement. While Choice has
not admitted that it is guilty of tortuous (sic) interference with
contract and with business relationships, it has never argued seriously
that the criteria for both claims asserted by Hanger have not been met.
Indeed, in the post trial brief counsel continues to attack the validity
of the agreement and makes no mention whatsoever of Hanger’s
claims for interference with contract and business relationships.
The Court is satisfied that the elements of both claims have
been met and accordingly, Hanger may submit proof, if any, of
damages incurred as a result.
The Court finds that there is insufficient evidence to establish
that Choice misappropriated plaintiff’s trade secrets or that it
conspired to misappropriate Hanger’s confidential information.…
Following entry of the above-quoted memorandum opinion, the Trial Court
proceeded with the second phase of the trial and conducted a hearing on issues related to damages.
At this damages hearing, Defendants requested the Trial Court to reconsider its previous ruling that
Defendants had tortiously interfered with Hanger’s business relationships and that Choice Medical
had induced Kitchens to breach his contract with Hanger. In February of 2007, the Trial Court
issued a memorandum opinion addressing the issues related to damages and Defendants’ request for
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reconsideration on the liability issues. In this opinion, the Trial Court reconsidered its previous
ruling and determined that Choice Medical was not liable for tortious interference with business
relationships. However, with regard to Hanger’s claim for inducement to breach of contract, the
Trial Court stated:
The Court is convinced that Choice induced Kitchens to breach his
non-compete agreement for the sole purpose of providing Choice a
ready access to the Knoxville market thereby furthering its own
economic interests. The Court is convinced that Choice was
operating for this purpose and for no other…. Choice has argued
strongly and vehemently that Hanger is a nationwide company and
that Choice operating in the Knoxville market could do little, if any,
damage to Hanger’s business relationships.…
Defendants concede that Hanger sustained damages as a result
of Choice’s inducement and Kitchens’ breach of the non-compete
agreement. The issues before the Court involve first, the time period
within which the damages are to be calculated and second, the
method by which the damages may be calculated.…
Following a hearing on plaintiff’s motion for a temporary
injunction this Court issued an opinion on February 23, 2005,
enjoining Kitchens from engaging in any orthotics and/or prosthetics
business on behalf of his employer Choice or any other entity within
a seventy-five mile radius of Knoxville. There is no proof in the
record that Kitchens violated this temporary injunction and therefore
defendants argue that plaintiff’s damages should be confined to the
period from September 1, 2004, through February 23, 2005.…
[I]t is undisputed that Kitchens did not violate the injunction issued
in February 2005. It is further undisputed that Kitchens did not
procure or obtain any contracts for Choice for orthotics work that
would have continued after the date of the injunction or for any set
period of time.
* * *
The Court concludes that once Kitchens was enjoined from
utilizing his special relationships with physicians within the seventy-
five mile radius Hanger was restored to status quo.… Therefore, the
Court is of the opinion that Hanger has proven actual damages only
through February 23, 2005, proximately caused by the defendants’
breach or procurement of the breach of the non-compete agreement.
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As to damages, the Trial Court noted that the parties were in agreement that the
correct measure of damages is the expected net profits which were to be calculated by determining
the gross amount of lost revenue minus the cost of the goods and expenses fairly attributable to the
sale of those goods. The Trial Court discussed the conflicting proof offered at trial. Plaintiff called
Ronald Justus (“Justus”) as an expert witness. In rendering his opinion on the amount of damages,
Justus relied on a Knoxville Market Analysis Report from September 4, 2004, through August 5,
2005. The Defendants’ expert, Perry Hall (“Hall”), relied on Hanger’s 10-Q filing with the
Securities and Exchange Commission. The 10-Q report sets forth, among other things, Hanger’s
overall nationwide sales and cost and profit margin, etc. According to the Trial Court:
[Hall] acknowledged that he did not base his calculations
upon [the Knoxville Market Analysis Report]. He is of the opinion
that while that information would have been beneficial he
nevertheless would have relied upon the 10-Q filing to support his
opinion.
On the other hand, [Justus] testified that he focused only on
the Baum Drive “division” [in Knoxville]. He stated that the 10-Q,
in the absence of [the Knoxville Market Analysis Report], would be
considered but that [the Knoxville Market Analysis Report] would be
the most appropriate information to determine the actual net lost
profits incurred as [the] result of defendants’ breach.
Because Justus’s opinion as to the overall lost profits encompassed a time period from
September 4, 2004, through August 5, 2005, and because the Trial Court had ruled that the actual
time period for measuring damages was from September 4, 2004 through February 23, 2005, the
Trial Court instructed the parties to determine the damages incurred during the relevant period using
the Knoxville Market Analysis Report.2 The parties were able to agree that, using the Knoxville
Market Analysis Report and using the relevant time frame as instructed by the Trial Court, Hanger’s
net lost profits were $240,182.00.3 In reliance on this information, the Trial Court then entered a
judgment as follows:
In accord with the directions of the Court, the opinion of Mr.
Justus has been obtained. This opinion is contained in a two-page
letter to counsel for Plaintiff.… The damages therein computed for
2
The record is somewhat unclear as to exactly when Kitchens left Hanger’s employment and when the period
for calculating dam ages began to run. September 1, 2004, and September 4, 2004, are used interchangeably for
Kitchens’ last date of employment. It appears that September 1, 2004, was the last day Kitchens actually worked, but
September 4, 2004, is when his employment actually was terminated.
3
While Defendants agreed to the amount of dam ages if the Knoxville Market Analysis was utilized for the
relevant tim e frame, the Defendants did not agree that the Knoxville Market Analysis should have been used or that
damages should have been awarded.
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lost profits in the amount of $240,182.00 have, upon review, been
agreed to by counsel for the Defendants.…
It is, accordingly, ordered, adjudged and decreed as follows:
1. That lost profits of the Plaintiff having been
determined in the amount of $240,182.00 in accord with the Court’s
Memorandum Opinion of the 14th day of February, 2007, the same
are hereby trebled pursuant to the provisions of Tenn. Code Ann. §
47-50-109. Treble damages are assessed only against the Defendant,
Choice Medical, Inc.
2. That the Plaintiff have and recover of the Defendants
the sum of $720,546.00 which represents lost profits computed and
agreed in the amount of $240,182.00 trebled in accordance with the
provisions of Tenn. Code Ann. § 47-50-109.… The damages thus
determined shall be assessed against the Defendants, jointly and
severally, in the amount of $240,182.00. The remaining damages in
the amount of $480,364.00 shall be assessed against the Defendant,
Choice Medical, Inc.
Defendants filed a motion to alter or amend the judgment and to make additional
findings of fact. Following denial of this motion, Defendants appealed to this Court and raise
numerous issues. Initially, Defendants claim that the Trial Court erred when it concluded the
covenant not to compete was enforceable. Specifically, Defendants claim the covenant not to
compete was unenforceable because: (1) it was not valid on the date it was executed in May 1990;
(2) Hanger did not have a legitimate business interest in enforcing the covenant; and (3) enforcement
of the covenant was not reasonable in light of Hanger’s business practices. Next, Defendants claim
the Trial Court erred when it adopted Hanger’s expert’s opinion when calculating the amount of
damages. Choice Medical also asserts that the Trial Court erred when it trebled the amount of
damages awarded against it. The final issue is Defendants’ claim that the Trial Court erred when
it failed to alter or amend its judgment and to make additional findings of fact.
Discussion
The factual findings of the Trial Court are accorded a presumption of correctness, and
we will not overturn those factual findings unless the evidence preponderates against them. See
Tenn. R. App. P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727 (Tenn. 2001). With respect to legal
issues, our review is conducted “under a pure de novo standard of review, according no deference
to the conclusions of law made by the lower courts.” Southern Constructors, Inc. v. Loudon County
Bd. Of Educ., 58 S.W.3d 706, 710 (Tenn. 2001).
It is important to acknowledge that as this case proceeded in the Trial Court, there
were several lengthy hearings at which extensive testimony was provided to the Trial Court. Not
surprisingly, much of that testimony was conflicting, requiring the Trial Court to make credibility
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determinations to resolve the conflict. In Wells v. Tennessee Bd. of Regents, our Supreme Court
observed:
Unlike appellate courts, trial courts are able to observe
witnesses as they testify and to assess their demeanor, which best
situates trial judges to evaluate witness credibility. See State v.
Pruett, 788 S.W.2d 559, 561 (Tenn. 1990); Bowman v. Bowman, 836
S.W.2d 563, 566 (Tenn. Ct. App. 1991). Thus, trial courts are in the
most favorable position to resolve factual disputes hinging on
credibility determinations. See Tenn-Tex Properties v. Brownell-
Electro, Inc., 778 S.W.2d 423, 425-26 (Tenn. 1989); Mitchell v.
Archibald, 971 S.W.2d 25, 29 (Tenn. Ct. App. 1998). Accordingly,
appellate courts will not re-evaluate a trial judge's assessment of
witness credibility absent clear and convincing evidence to the
contrary. See Humphrey v. David Witherspoon, Inc., 734 S.W.2d
315, 315-16 (Tenn. 1987); Bingham v. Dyersburg Fabrics Co., Inc.,
567 S.W.2d 169, 170 (Tenn. 1978).
Wells v. Tennessee Bd. of Regents, 9 S.W.3d 779, 783 (Tenn. 1999).
Defendants’ primary argument on appeal surrounding the validity of the covenant not
to compete is their assertion that the Trial Court failed to ascertain whether the employer had a
protectable interest as of the exact moment the covenant was entered into. In other words,
Defendants argue that the Trial Court was required to determine whether the covenant was valid as
of May 4, 1990, and anything that happened after that date is irrelevant. Defendants rely on Allright
Auto Parks, Inc. v. Berry, 409 S.W.2d 361 (Tenn. 1966), where the Supreme Court noted that when
construing a covenant not to compete, as with other types of contracts, it was “the duty of this Court
to construe contracts as of the date of their making. Our exegesis of such agreements cannot be
based upon events occurring subsequent to their execution.” Id. at 364.
We agree in general terms that it is necessary to examine the validity of the covenant
not to compete as of the date that it was entered into. However, that does not mean that future events
are not or cannot be within the contemplation of the parties to the agreement when it is signed. For
example, an employer may intend on investing substantial time and resources into training an
employee to provide a particular and unique service. This intent may exist at the time the covenant
is entered into even though the employee does not have the particular skills when he or she signs on
the dotted line. If the employee is then provided that training, the employer may well have a
protectable interest once the training is completed, even though that protectable interest technically
may not have existed at the exact moment of the covenant’s inception. Accordingly, we conclude
that what an employer and employee intend on accomplishing in the future is a proper consideration
when ascertaining the validity of a covenant at the time the agreement was entered into.
Defendants acknowledge in their brief that when Kitchens signed the covenant not
to compete in 1990, Kitchens “had just started in the [orthotics] business … [and] it was undisputed
that Kitchens had little knowledge of the business and was not a certified orthotic.” Even though
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Kitchens had no orthotic experience, he was nevertheless employed “as a prosthetist and or orthotist”
by the plain language in the Employment Agreement. It necessarily follows that if Kitchens had no
experience as an orthotist, but was hired to be an orthotist, then the employer at some point was
going to provide training. Defendants further acknowledge that this training was provided and in
1997, Kitchens was certified by the Board of Certification of Orthotists and Prosthetists and, in 2004,
he was certified by the more prestigious American Board of Certification for Orthotists and
Prosthetists. Additionally, a new employee cannot be associated by the employer’s customers with
the employer before the employee is hired. It is only through the new employee’s later contacts with
the employer’s customers that those customers may come to associate the employee with the
employer. Clearly such a relationship arises after the date the employee is hired, and as found by
the Trial Court that is exactly what happened here. The evidence is entirely consistent with the Trial
Court’s findings set forth previously to the effect that:
Defendant Kitchens had no training or experience as a
prosthetist when he started work for Fillauer[/Hanger]. He received
extensive training as a prosthetist and was virtually the only
employee … in area hospitals and thus was charged with and
encouraged to develop special relationships with the physicians in
those hospitals. In effect, Mr. Kitchens became the face of
Fillauer[/Hanger] during his tenure with the company.
In light of the foregoing, we reject Defendants’ invitation to broadly hold that events
occurring after the inception of a covenant not to compete never can be relevant to a determination
of whether a covenant is valid. We conclude that the evidence does not preponderate against the
Trial Court’s findings and resulting conclusion that the covenant not to compete was valid on the
date of inception and thereafter.
Defendants’ second issue is their claim that the Trial Court erred when it determined
that Hanger had a legitimate business interest in enforcing the covenant not to compete against
Kitchens. As with the first issue, Defendants essentially argue that the Trial Court should have
looked only to whether there was a legitimate protectable business interest at the very moment the
covenant not to compete was entered into. We reject this argument for the same reasons stated in
our resolution of Defendants’ first issue. Even if Fillauer/Hanger may not initially have had a
protectable business interest in Kitchens’ abilities as an orthotist, which essentially were nonexistent
when the covenant was signed, the contemplation of the parties was such that Kitchens would be and
indeed was trained as a skilled orthotist who was to become the contact with Hanger’s customers.
Hanger thus obtained a protectable interest in Kitchens’ continued employment.
In Vantage Technology, LLC v. Cross, 17 S.W.3d 637 (Tenn. Ct. App. 1999), this
Court acknowledged that an employer does not have a protectable business interest in general
knowledge of an employee. However, we went on to explain that:
[A]n 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
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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 employee unfair.
* * *
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.…
Vantage, 17 S.W.3d at 645.
The Trial Court relied on Vantage when concluding that Hanger had a legitimate
business interest. Specifically, the Trial Court found:
Defendant Kitchens had no training or experience as a
prosthetist when he started work for Fillauer[/Hanger]. He received
extensive training as a prosthetist and was virtually the only
employee … in area hospitals and thus was charged with and
encouraged to develop special relationships with the physicians in
those hospitals. In effect, Mr. Kitchens became the face of Fillauer
during his tenure with the company.
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Therefore, the Court finds that the employer has a protectable
interest in the relationships between defendant Kitchens and
plaintiff’s customers. Vantage Technology, LLC v. Cross, 17 S.W.3d
637 (Tenn. App. 1999).
We agree with the Trial Court’s application of Vantage to the facts of this case as
found by the Trial Court. The evidence does not preponderate against the Trial Court’s findings and
resulting conclusion that Hanger had a legitimate business interest that was protectable by a covenant
not to compete with Kitchens.
Defendants’ next argument is their claim that Hanger waived any right to enforce
Kitchens’ covenant not to compete because it did not require some of its other employees to sign
similar covenants.4 Defendants rely on Cherry, Bekaert & Holland v. Childree, No.
01A01-9410-CH-00498, 1995 WL 316257 (Tenn. Ct. App. May 26, 1995), no appl. perm. appeal
filed. In Cherry, this Court affirmed the trial court’s conclusion that the employer had waived its
right to enforce a covenant not to compete because: (1) the employer did not mention the covenant
for fifteen years, (2) the employer sent the employee to one of its biggest customers to seek
employment, in direct violation of the covenant, (3) the employer did not comply with the provisions
of the employment contract concerning termination; and (4) the employer did not seek to enforce
the provisions of non-compete agreements against departing partners. Id., at *5. This Court also
affirmed the trial court’s conclusion that the employee was not privy to any trade or business secrets
and the employer had no protectable business interest once it closed the location where the employee
worked. Id.
Unlike Cherry, the case before us does not involve an employer who has refused to
enforce covenants not to compete against other similarly situated employees. Also unlike Cherry,
this case involves an employer who has a protectable business interest. Several of the other
orthotists whom Defendants claim did not have covenants not to compete were requested to sign
covenants by Hanger, but they refused. Hanger nevertheless hired these employees.
The fact that Hanger requested these other orthotists sign covenants weighs against
a conclusion that Hanger waived its right to enforce Kitchens’ covenant or a conclusion that Hanger
did not believe it had a protectable business interest. We do not think that Hanger was required not
to employ these other orthotists who refused to sign a covenant in order to be able to enforce the
covenants against those who did sign them. The Cherry Court explained that “[i]n order to
constitute a waiver, a party’s conduct must reasonably manifest an intention not to claim the right
at issue.” Id., at *5 (citing W.F. Holt Company v. A & E Electric Company, 665 S.W.2d 722, 733
(Tenn. Ct. App.1983)). We are unable to find such an intent on the part of Hanger to waive its right
to enforce the agreement based on these facts. In addition, we note that the employees who refused
to sign covenants may not have been provided with consideration that they would have received had
they signed the agreements. Hanger and each of these other employees negotiated a contract
4
As with Kitchens, some of Hanger’s other orthotists did sign covenants not to compete with predecessor
employers.
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satisfactory to that employee and Hanger. Hanger and Kitchens did exactly the same in negotiating
their contract. As mentioned previously, the Trial Court specifically found that “Kitchens was
promised and did receive a raise as a result of entering into the employment agreement in May
1990.” Specifically, Kitchens received an 18% raise.
Cherry in no way compels a conclusion that Hanger waived its right to enforce
Kitchens’ covenant not to compete. We affirm the judgment of the Trial Court on this issue.
The next two issues involve damages. Defendants’ first issue is their claim that the
Trial Court erred in relying on the testimony of Ronald Justus because his opinion was based on the
Knoxville Market Analysis Report. Defendants assert that the Knoxville Market Analysis Report
was unreliable and the Trial Court instead should have relied on the testimony of Defendants’ expert,
Perry Hall.
As mentioned previously, the parties agreed that if Hanger did incur any damages,
the proper measure was lost profits and the lost profits were to be calculated by determining lost
gross revenue and subtracting the cost of goods sold. Along this line, the Trial Court noted that:
Through the excellent co-operation of counsel utilizing
information obtained through purposeful discovery the parties were
able to identify with a great deal of precision orthotics work that
would have gone to Hanger but for Kitchens utilizing the special
relationship with the physicians to procure business for Choice during
the period in question.
Through the cooperation referenced by the Trial Court, the parties were in agreement
that Hanger’s gross lost revenue was $377,502.00. The primary disagreement as to the amount of
damages incurred by Hanger involves whether this gross amount should be reduced by the costs as
set forth in the Knoxville Market Analysis Report or as in the 10-Q Report filed with the SEC.
Defendants’ argue on appeal that the Knoxville Market Analysis Report was not trustworthy and
therefore could not properly form the basis for an expert opinion on damages.
Tenn. R. Evid. 703 provides as follows:
Bases of opinion testimony by experts. – The facts or data in the
particular case upon which an expert bases an opinion or inference
may be those perceived by or made known to the expert at or before
the hearing. If of a type reasonably relied upon by experts in the
particular field in forming opinions or inferences upon the subject, the
facts or data need not be admissible in evidence. The court shall
disallow testimony in the form of an opinion or inference if the
underlying facts or data indicate lack of trustworthiness.
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In Heaton v. Sentry Ins. Co., No. M2006-02104-COA-R3-CV, 2008 WL 110106
(Tenn. Ct. App. Jan. 9, 2008), perm. app. pending, this Court discussed the standard of review when
reviewing a trial court’s admission of expert testimony. We stated:
In general, questions regarding the admissibility,
qualifications, relevancy and competency of expert testimony are left
to the discretion of the trial court. State v. Ballard, 855 S.W.2d 557,
562 (Tenn. 1993). The trial court’s ruling in this regard may only be
overturned if the discretion is arbitrarily exercised or abused. Id.
Heaton, 2008 WL 110106, at *1 (quoting McDaniel v. CSX Transp., Inc., 955 S.W.2d 257, 263-64
(Tenn. 1997)).
The Heaton Court also discussed the standard to apply when a challenge is made to
an expert opinion based on untrustworthiness pursuant to Tenn. R. Evid. 703. Heaton explained:
When an expert’s opinion is challenged, the court is to determine
whether the opinion is based on creditable facts or data sufficient to
provide some basis for the opinion. McDaniel v. CSX Transp., Inc.,
955 S.W.2d 257, 265 (Tenn. 1997). Our task is not to determine the
expert’s credibility or the weight to be given the evidence, but rather
to review the challenged opinion and determine if it has some
legally-acceptable basis from which the expert’s conclusion could be
rationally drawn. Church, 39 S.W.3d 149, 166 (citing DeVore v.
Deloitte & Touche, No. 01A01-9602-CH-00073, 1998 WL 68985, at
*9-10 (Tenn. Ct. App. Feb. 20, 1998)).
Heaton, 2008 WL 110106, at *2 (quoting Wilson v. Patterson, 73 S.W.3d 95, 104 (Tenn. Ct. App.
2001)).
At trial, Justus testified that the Knoxville Market Analysis Report was the type of
document reasonably relied upon by accountants in the Knoxville area in computing lost net profits.
In fact, Defendants’ own expert testified that the Knoxville Market Analysis Report is something
“that would have been very helpful in our dealing of our initial report” had it been available when
the initial report was made. (emphasis added)
Interestingly, it was Defendants who introduced the Knoxville Market Report into
evidence at trial. Defendants also state in their brief that:
This is not a situation in which Hanger’s expert witness was not
qualified to render an opinion or in which an objection to the
testimony of Hanger’s expert was made or was even proper. Rather,
Kitchens and Choice assert that based on applicable law the adoption
by the Trial Court of Hanger’s expert’s testimony was based on
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information and date that was not as reliable as that relied upon by
their expert.5 (emphasis added)
Given that Defendants were responsible for having the Knoxville Market Analysis
Report admitted into evidence and the fact that they admittedly made no objection to Justus’
testimony at trial, we conclude that Defendants have waived any objection to the report or Justus’
testimony. Having said that, even if there was no waiver, we would have no basis based on the
record to conclude that the Trial Court erred when it credited the testimony and calculations of Justus
over that of Hall.
The next issue regarding damages is Choice’s claim that the Trial Court erred when
it trebled the damage award pursuant to Tenn. Code Ann. § 47-50-109. Defendants make two
arguments here. First, they ask this Court to declare that Tennessee public policy prohibits applying
the statutory provision authorizing treble damages to an employment setting involving a covenant
not to compete. Not finding any Tennessee authority to support this position, Defendants rely on
an unreported opinion from the Massachusetts Superior Court interpreting a Massachusetts statute
in the manner suggested. See Intertek Testing Services NA, Inc. v. Curtis-Strauss LLC, 2000 WL
1473126 (Mass. Super. Aug 8, 2000).
Our Supreme Court interpreted Tennessee’s statute differently in Emmco Ins. Co. v.
Beacon Mut. Indem. Co., 322 S.W.2d 226 (Tenn. 1959). In Emmco, the Supreme Court was
interpreting Tenn. Code Ann. § 47-1706, which is currently codified at Tenn. Code Ann. § 47-50-
109. When discussing the applicable statute, the Court stated:
Considering the intention of the Legislature in passing the
statute relied on (T.C.A. § 47-1706), we think it was designed as a
protection against wilful wrongs, such as inducing employees to
break their contract with their employer which would result in injury
and damage to the latter’s business interest. The statute is
declaratory of the common law except as to the amount of damages
that may be recovered against a wrongdoer.…
Id. at 231. (emphasis added) We also note that Tenn. Code Ann. § 47-50-109 recently was applied
in an employment/business setting in B & L Corp. v. Thomas Thorngren, Inc., 162 S.W.3d 189
(Tenn. Ct. App. 2004).
We reject Defendants’ argument that Tennessee public policy does or should prohibit
application of the treble damages provision in Tenn. Code Ann. § 47-50-109 from being applied in
an employment setting involving a covenant not to compete. Prohibiting application of the treble
damages provision in an employment situation as argued by Defendants is certainly within the power
5
This language would certainly seem to suggest that Defendants agree that the Knoxville Market Analysis
Report was reliable, just not “as reliable as” the 10-Q report.
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of our General Assembly if it determines public policy mandates such an exclusion. The statute,
however, as currently enacted by the General Assembly does not provide for such an exclusion.
Defendants next argue that there was insufficient evidence to support a treble damage
award under Tenn. Code Ann. § 47-50-109. In Myers v. Pickering Firm, Inc., 959 S.W.2d 152
(Tenn. Ct. App. 1997), this Court discussed Tenn. Code Ann. § 47-50-109 as follows:
The elements of a cause of action for procurement of the
breach of a contract are: 1) there must be a legal contract; 2) the
wrongdoer must have knowledge of the existence of the contract; 3)
there must be an intention to induce its breach; 4) the wrongdoer must
have acted maliciously; 5) there must be a breach of the contract; 6)
the act complained of must be the proximate cause of the breach of
the contract; and, 7) there must have been damages resulting from the
breach of the contract. New Life Corp., 932 S.W.2d at 926 (citing
Campbell v. Matlock, 749 S.W.2d 748, 751 (Tenn. App. 1987);
Dynamic Motel Management, Inc. v. Erwin, 528 S.W.2d 819, 822
(Tenn. App. 1975)).
Id. at 158. The Myers Court also noted that the treble damages provision was a severe penalty “and
should not be enforced except upon a clear showing.” Id. (quoting Emmco Ins. Co. v. Beacon Mut.
Indem. Co., 322 S.W.2d 226, 230-231 (Tenn. 1959)).
Choice Medical argues that there was not a “clear” showing of either that it intended
to induce a breach of contract or of malicious intent. In support of this argument, Choice Medical
points out that prior to hiring Kitchens, Choice Medical had its attorneys review the covenant not
to compete. However, Choice Medical fails to cite us to any evidence showing what its attorneys
advised Choice with respect to the validity of the agreement. The testimony at trial was that Choice
submitted the covenant not to compete to its attorneys for review. However, when Choice’s
representative was questioned as to the advice Choice Medical received from the attorneys, a hearsay
objection was sustained. No offer of proof was made.6 The attorneys who reviewed the covenant
were not called as witnesses at trial. We assume this was to protect the attorney-client privilege.
Regardless, we do not think a lack of intent or malice can be established simply because the
covenant was reviewed by attorneys. For all this Court knows, Choice Medical’s attorneys could
have informed Choice that they believed the covenant was valid and they should not hire Kitchens
and Choice proceeded against this recommendation. The point being, based on the record before us
and without knowing more, we cannot draw a favorable inference on Choice Medical’s behalf
simply because it had its attorney review the covenant not to compete before hiring Kitchens.
6
Defendants do not raise as an issue on appeal the propriety of the Trial Court’s ruling that the legal advice
Choice Medical received from its attorneys was inadmissible hearsay. While the record does contain correspondence
between counsel for Plaintiff and Defendants, these letters were exchanged after Kitchens had already begun working
for Choice Medical and do little as far as establishing Choice Medical’s intent prior to hiring Kitchens.
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The facts as found at trial establish that: (1) Kitchens entered into a valid and
enforceable covenant not to compete; (2) Hanger had a legitimate and protectable business interest;
(3) when the covenant was entered into, Kitchens had no experience as an orthotic; (4) Hanger
subsequently supplied the necessary training and Kitchens became a skilled and certified orthotic;
(5) Choice hired Kitchens away from Hanger with full knowledge of the existence of the covenant;
(6) Kitchens breached the covenant not to compete; (7) Choice hired Kitchens with the intent of
having a ready market available and taking advantage of the relationships Kitchens had established
with area physicians; and (8) Choice’s intent was fully and successfully realized when $377,502.00
in gross revenue was diverted from Hanger to Choice as a result of Kitchens’ change in employment.
In light of these factual findings by the Trial Court, which are fully supported by the record, we
cannot conclude that the Trial Court committed any error when it trebled the damage award against
Choice consistent with Tenn. Code Ann. § 47-50-109.
The final issue is Defendants’ claim that the Trial Court erred when it denied their
motion to alter or amend the judgment and to make additional findings of fact. In their brief,
Defendants acknowledge that the success of this issue is directly tied to their success on the other
issues. The reason for this is that all of the reasons for which Defendants sought a new trial are
asserted as issues on appeal. Because we have affirmed the Trial Court’s judgment in all respects,
it necessarily follows that the Trial Court did not abuse its discretion when denying Defendants’ post
trial motion.
We have carefully considered all of the issue raised by Defendants on this appeal.
After doing so, we find no error with the Trial Court’s judgment and affirm that judgment in all
respects.
Conclusion
The judgment of the Trial Court is affirmed and this cause is remanded to the Trial
Court for collection of the costs below. Costs on appeal are taxed to the Appellants, William C.
Kitchens and Choice Medical, Inc., and their surety.
___________________________________
D. MICHAEL SWINEY, JUDGE
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