Nearly every case Indiana court decision concerning non-compete agreements, or non solicitation agreements, notes that such agreements are disfavored … “covenants not to compete are in restraint of trade and are not favored by the law.”
Nevertheless, such agreements are regularly enforced when an employer can demonstrate that the restriction is reasonable. The reasonableness of a restriction is measured in two steps: 1) Whether the employer has a legitimate protectable interest, and 2) whether the covenants are reasonable in scope as to the time, geography and activity restricted.
Is the employer protecting a “legitimate interest”?
Generally, a business claims that the non-compete is the only way to protect the company’s trade secrets or goodwill, including “names and addresses of customers and the advantage acquired through representative contact.” Indiana law agrees that a business may restrict its former employees from enticing away the employer’s old customers and thereby protect its client relationships and income stream.
In JAK Productions, Inc. v. Wiza, 986 F.2d 1080 (7th Cir. 1993), the United States Court of Appeals for the Seventh Circuit held that there is a “presumption under Indiana law that a covenant cannot restrain employees from doing business with their ex-employer’s past customers” and that a covenant which seeks to restrain business with customers that were not customers at the time of the employee’s termination, is overly broad.
Is the restriction reasonable in scope?
Courts have typically found that non-competition agreements of one to two years are reasonable. In cases where a non-competition agreement is entered into in conjunction with the sale of a business, courts have regularly upheld five year non-competition agreements for the selling party.
Whether the geographic restriction in a non-compete is reasonable is dependent on the facts of the case. Considering a physician’s non-compete which prevented him from practicing in the same or contiguous counties, the Indiana Supreme Court upheld the restriction for the counties where the physician practiced, but struck down the contiguous-county provision. Conversely, in a sales context, non-competition agreements have been reasonable when applied to any state in which an employee served customers. No bright-line rule exists regarding geographic reasonableness. Rather, the court will consider the facts of the case, including the type of work performed and the interests the employer seeks to protect.
Importantly, Indiana law permits courts to modify an otherwise overly broad agreement by striking out the overly broad provisions. Known as the “blue pencil doctrine,” the court cannot add words, but may strike out words in the agreement if doing so would render the contract enforceable-“unreasonable restraints are rendered reasonable by scratching out any offensive clauses to give effect to the parties’ intention.”
Broadly stated, Indiana courts have traditionally required the prohibited activity to be that activity which the employee conducted for the former employer. An employer may not prevent an employee from competing with portions of the business with which he was never associated.
This goes back to the point that the employee may only protect its legitimate business interests. A non-compete may not be used to punish a former employee or to prevent the employee from earning a living. Using a non-compete to prevent an employee “from working within portions of the business with which the employee was never associated [is] unreasonable because such restrictions extend beyond the scope of the employer’s legitimate interest.”
Both businesses and employees need to keep these guidelines in mind when negotiating non-competition agreements and when considering the enforceability of a non-competition agreement after the termination of employment. If you have any questions about your non-competition agreement, or any other contract disputes, don’t hesitate to contact our office. Contact me Steven E. Runyan