The case involves Hanger Prosthetics and Orthotics East, Inc. suing former employee William C. Kitchens and his new employer, Choice Medical, Inc., for breaching a covenant not to compete. After Kitchens, a certified orthotist, left Hanger to work for Choice Medical, Hanger sought legal action to prevent him from performing similar work and to protect its confidential information and trade secrets. The trial court found the covenant enforceable, ruled that Kitchens breached it, and concluded that Choice Medical had induced this breach, warranting treble damages under Tennessee law. The court awarded Hanger $240,182 against both defendants and an additional $480,364 against Choice Medical alone. The defendants appealed, but the appellate court affirmed the trial court's decision. Hanger's claims included breach of contract, misappropriation of trade secrets, tortious interference, and conspiracy, all stemming from the Employment Agreement entered into in May 1990, which explicitly outlined the employee's responsibilities and the implications of having access to confidential information.
Employee is prohibited from working as a prosthetist or engaging in related services within a 75-mile radius of their current and former work locations for two years following termination, regardless of the reason for termination. A hearing was held on Hanger’s request for injunctive relief, where witnesses, including Employee Kitchens and representatives from Hanger and Choice Medical, testified. The Trial Court concluded that Hanger had standing to enforce the non-compete clause and established that Kitchens lacked initial training as a prosthetist but gained considerable experience and developed significant relationships with local physicians while at Fillauer, which granted Hanger a protectable interest. The Court acknowledged that consideration was provided for the agreement, as Kitchens received a raise upon signing it. Evidence indicated that without the agreement, Hanger faced a business risk. The Court deemed both the duration and geographic scope of the restrictions reasonable and found no public interest issues with enforcing the agreement, given the unique relationships Kitchens built during his employment. Consequently, Kitchens was temporarily enjoined from providing relevant services, and Choice Medical was barred from employing him in any related capacity. The trial was bifurcated to first address liability and the enforceability of the non-compete agreement, followed by potential monetary damages if liability was established. In November 2005, the Court reaffirmed its earlier findings regarding Hanger's standing and protectable interests, while Kitchens argued that the non-compete could be voided under public policy as established in a Supreme Court case.
Covenants not to compete that restrict physicians in their practice are generally void as against public policy, except for statutory exceptions, as established by the Murfreesboro case. Kitchens contends that as an "allied health professional," this ruling should extend to orthotists. The American Board for Certification in Orthotics and Prosthetics has not specifically addressed restrictive covenants, which are prevalent in the orthotics field. Unlike in the fields of medicine and law, patients typically do not select their orthotists; they are prescribed by doctors, who guide the orthotists' practices. The court noted that the relationship between an orthotist and a patient does not create the same fiduciary duty present in doctor-patient or attorney-client relationships, viewing the orthotist's role more as a provider of goods and services.
Kitchens' non-compete agreement, which prohibits him from practicing orthotics within a 75-mile radius of Knoxville for two years, was challenged as unreasonable. The court reiterated that such agreements are enforceable if they are reasonably necessary to protect the employer’s interests without causing undue hardship to the employee. Ultimately, the court determined that a one-year duration for the non-compete covenant would suffice to protect the employer's interests.
Evidence demonstrated that Kitchens' non-compete agreement was known to Choice Medical before he announced his departure from Hanger. Choice intended to leverage Kitchens’ existing physician relationships, aiming to redirect business from Hanger to themselves. Although Choice has argued against the validity of the non-compete agreement, they have not adequately contested Hanger’s claims of tortious interference with contract and business relationships, which the court found to be substantiated. Hanger is permitted to present evidence of damages resulting from these claims.
The Court determined that there was insufficient evidence to conclude that Choice misappropriated Hanger’s trade secrets or conspired to do so. After a memorandum opinion was issued, a damages hearing was held where Defendants sought reconsideration of the ruling regarding tortious interference with Hanger’s business relationships and the alleged inducement of Kitchens to breach his contract with Hanger. In a February 2007 memorandum opinion, the Trial Court found that Choice was not liable for tortious interference, but concluded that Choice did induce Kitchens to breach his non-compete agreement to gain access to the Knoxville market for its own economic benefit. Although Choice argued that its operations would not significantly impact Hanger, it was acknowledged that Hanger suffered damages due to the inducement and breach.
The Court addressed two main issues: the time period for calculating damages and the method of calculation. Following a temporary injunction against Kitchens from engaging in orthotics or prosthetics business within a seventy-five-mile radius of Knoxville, it was confirmed that Kitchens did not violate this injunction. Consequently, damages were considered only from September 1, 2004, to February 23, 2005. The Court concluded that Hanger had proven actual damages only up to the date of the injunction.
Regarding the calculation of damages, the Trial Court stated that expected net profits should be calculated by subtracting the costs of goods and expenses from the gross lost revenue. Conflicting expert testimonies were presented regarding the damages. Hanger's expert, Ronald Justus, used a Knoxville Market Analysis Report, while the Defendants' expert, Perry Hall, relied on Hanger's 10-Q filing, acknowledging that the Knoxville report, although beneficial, was not used for his calculations.
Justus provided testimony focusing solely on the Baum Drive division in Knoxville, asserting that the Knoxville Market Analysis Report was essential for accurately assessing net lost profits due to the defendants' breach, despite the availability of a 10-Q. The Trial Court determined that the damages period was from September 4, 2004, to February 23, 2005, and instructed the parties to calculate damages using the Knoxville Market Analysis Report. The parties agreed that Hanger's net lost profits amounted to $240,182.00 based on this report.
Consequently, the Trial Court issued a judgment stating that these lost profits were to be trebled under Tenn. Code Ann. § 47-50-109, resulting in a total recovery of $720,546.00 from the defendants, with specific assessments of $240,182.00 against all defendants and an additional $480,364.00 solely against Choice Medical, Inc. The defendants filed a motion to alter or amend the judgment, which was denied, leading to their appeal. They contended that the Trial Court erred in upholding the enforceability of the covenant not to compete, claiming it was invalid at execution, that Hanger lacked a legitimate business interest, and that enforcement was unreasonable. The defendants also challenged the adoption of Hanger's expert's damages calculation and the decision to treble the damages.
The appellate review affirms the Trial Court's factual findings with a presumption of correctness unless contradicted by evidence, while legal conclusions are reviewed de novo without deference to the lower court's judgments. The case included extensive hearings with considerable testimony presented to the Trial Court.
Conflicting testimony necessitated credibility determinations by the Trial Court. The Supreme Court in Wells v. Tennessee Bd. of Regents emphasized that trial courts, due to their ability to observe witness demeanor, are best equipped to assess credibility. Consequently, appellate courts typically refrain from reevaluating a trial judge's credibility assessments unless clear evidence suggests otherwise.
Defendants’ appeal centered on the argument that the Trial Court did not verify if the employer had a protectable interest at the time the covenant not to compete was established on May 4, 1990. They cited Allright Auto Parks, Inc. v. Berry, which stated that contractual validity is assessed at the time of signing without regard for subsequent events. The court agreed that validity should be evaluated as of the covenant's inception but noted that future intentions could still be relevant. For instance, an employer might plan to invest in training an employee, creating a protectable interest even if it was not present at the covenant's signing.
Defendants acknowledged that Kitchens, who signed the covenant, had minimal experience in the orthotics field at the time, but the employer's engagement of Kitchens indicated an intention to provide necessary training. Eventually, Kitchens was certified in orthotics after receiving training, demonstrating that the employer's interest in his development could establish a protectable interest post-signing. Additionally, customers would only associate a new employee with the employer through subsequent interactions, further illustrating the evolving nature of the employer-employee relationship.
A relationship between an employee and an employer can develop after the employee is hired, as established by the Trial Court in this case. Defendant Kitchens lacked initial training or experience as a prosthetist upon starting at Fillauer/Hanger but received extensive training, becoming the primary representative for the company in local hospitals. The court upheld that events after the covenant not to compete was signed are relevant to its validity. The Trial Court concluded that the covenant was valid both at inception and thereafter. The defendants argued that Hanger lacked a legitimate business interest in enforcing the covenant against Kitchens, claiming that only the moment the covenant was signed should be considered. This argument was rejected; although Kitchens initially had no protectable skills, he was expected to develop into a skilled orthotist and contact point for customers, creating a protectable interest for Hanger. Citing previous cases, the court noted that while general employee knowledge is not protectable, unique skills acquired through employer training may be, especially when combined with special customer relationships. The employee's role as an agent for the employer, along with the goodwill associated with those relationships, grants the employer a legitimate interest in preventing the employee from exploiting this connection for personal gain.
The Trial Court determined that Hanger had a legitimate business interest in the relationships between defendant Kitchens and its customers, supported by the case Vantage, which emphasizes the importance of special relationships along with confidential information and specialized training. Kitchens, lacking initial training as a prosthetist, received extensive training and became the primary representative of Fillauer in local hospitals, fostering significant connections with physicians.
The Court found that Hanger's interest was protectable by a covenant not to compete, rejecting the defendants' argument that Hanger waived its rights to enforce this covenant by not requiring similar agreements from other employees. The Court distinguished this case from Cherry, where the employer was deemed to have waived its rights due to inaction over many years and violations of the covenant. In contrast, Hanger had actively sought covenants from other orthotists, and the refusal of some to sign did not negate Hanger's protectable interest or its right to enforce Kitchens' non-compete agreement. The Court concluded that Hanger's conduct did not indicate a waiver of its rights, particularly since those who declined to sign covenants may not have received equivalent consideration. Additionally, Kitchens was promised a raise upon entering his employment agreement, further supporting Hanger's enforceable interest.
Kitchens received an 18% raise, and it was determined that Hanger did not waive its right to enforce Kitchens' non-compete agreement. The Trial Court's judgment on this matter was affirmed. The subsequent issues focus on damages, with the Defendants claiming the Trial Court improperly relied on Ronald Justus's testimony, which was based on the Knoxville Market Analysis Report, deemed unreliable by the Defendants. They argued that the Trial Court should have favored their expert, Perry Hall. The parties had previously agreed that if Hanger sustained damages, they would be measured by lost profits, calculated as lost gross revenue minus the cost of goods sold. The Trial Court established that through effective cooperation and discovery, Hanger's gross lost revenue was determined to be $377,502. The primary dispute was whether this amount should be adjusted based on the Knoxville Market Analysis Report or the SEC's 10-Q Report. The Defendants contested the trustworthiness of the Knoxville Market Analysis Report on appeal. Tennessee Rule of Evidence 703 allows experts to base their opinions on facts not necessarily admissible in evidence, provided they are generally relied upon in their field. The admissibility and credibility of expert testimony are typically at the trial court's discretion, with appellate review limited to instances of arbitrary or abusive discretion. The Heaton case clarified that when an expert's opinion is challenged, the court must assess whether it is founded on credible facts or data sufficient to support the opinion.
The primary focus is on the standard for assessing an expert's opinion in legal proceedings, emphasizing that the court's role is not to evaluate credibility or weight but to ascertain if the expert's conclusion has a legally acceptable basis. The Knoxville Market Analysis Report was deemed a valid resource by both Justus, who testified about its reliance by local accountants for calculating lost profits, and by the Defendants' own expert, who acknowledged its potential usefulness. Notably, the Defendants introduced this report into evidence and did not challenge Justus's testimony during the trial, resulting in a waiver of any objections. Even absent this waiver, the court found no error in crediting Justus's testimony over Hall's. Additionally, the Defendants contested the trial court's decision to treble damages under Tenn. Code Ann. § 47-50-109, arguing that Tennessee public policy prohibits such application in employment contexts involving non-compete covenants. However, they failed to cite relevant Tennessee authority and instead referenced a Massachusetts case. The court noted that prior Tennessee Supreme Court interpretations support the application of the statute in protecting against wrongful acts that harm business interests, as established in Emmco Ins. Co. v. Beacon Mut. Indem. Co. and further supported by B. L Corp. v. Thomas Thorngren, Inc.
The court rejects the defendants' claim that Tennessee public policy should exclude the application of treble damages under Tenn. Code Ann. § 47-50-109 in employment cases involving non-compete agreements. It notes that while the General Assembly has the authority to enact such an exclusion, the current statute does not provide for it. The court also addresses the defendants' argument regarding insufficient evidence to support a treble damages award, citing the elements required for a cause of action related to the procurement of breach of contract as established in Myers v. Pickering Firm, Inc.
The court emphasizes that treble damages are a severe penalty that requires clear evidence of intent to induce a breach and malicious intent. Choice Medical contends there was no clear evidence of such intent, pointing out that it had its attorneys review the non-compete agreement before hiring an employee. However, the court finds that Choice Medical did not present evidence of the legal advice received from its attorneys, as their testimony was not included due to hearsay objections, and no offer of proof was made. The absence of this evidence prevents the court from inferring a lack of malicious intent or improper conduct solely based on the attorney review of the covenant. Additionally, correspondence between the parties after the hiring does not establish Choice Medical's intent at that time. Overall, the court maintains that the facts presented do not support the defendants' claims regarding intent and malice.
Kitchens entered into a valid covenant not to compete with Hanger, which had a legitimate business interest. At the time of the covenant, Kitchens lacked experience as an orthotic. Hanger provided training, enabling Kitchens to become a skilled and certified orthotic. Choice hired Kitchens, fully aware of the covenant, with the intention of leveraging the relationships he had built with local physicians, resulting in $377,502.00 in diverted gross revenue from Hanger to Choice. The Trial Court's factual findings support its decision to triple the damage award against Choice under Tenn. Code Ann. 47-50-109. The Court also denied Defendants' motion to alter the judgment, with Defendants acknowledging that their success on this issue depended on their success with other appeals. Since the Court affirmed the Trial Court’s judgment in all respects, it found no abuse of discretion in denying the post-trial motion. Consequently, the judgment is affirmed, and the case is remanded for the collection of costs, which are taxed to the Appellants, William C. Kitchens and Choice Medical, Inc., and their surety.
