Noncompete agreements in Indiana: When are they legal?
Many Indiana employers wisely use noncompete agreements to protect their legitimate business interests in their customer base and trade secrets. But will those agreements stand up in court?
While some employers have successfully used noncompetes, others don’t believe they’re worth the paper they’re printed on. Depending on how the noncompete is drafted, either can be true.
Go easy on time, geographic limits
To be successful, noncompete agreements must be specific to time and geographic scope. Indiana courts have consistently ruled against agreements that unreasonably restrict the employee’s ability to work.
The agreement must have a definite ending date. Generally, a court will accept a time period of two years or less without much question. Further, the agreement can limit the employee’s right to work only in the employer’s current geographic territory, or restrict the employee’s ability to work with a limited number of former customers.
Two recent Indiana cases illustrate how well-crafted noncompete agreement can protect an employer’s rights:
Case in point 1: Central Indiana Podiatry (CIP) fired Dr. Kenneth Krueger. His noncompete with CIP barred him from competing against CIP for two years in the 12 counties in which CIP had offices and in several surrounding counties.
Within a few months, Krueger started working for Meridian Health Group, whose office was just 10 minutes away from one of CIP’s locations. CIP filed suit against both Krueger and Meridian and filed an injunction to prevent Krueger from working while the trial was pending. The court issued the injunction because it found the geographic and temporal scope to be reasonable. (Central Indiana Podiatry v. Krueger & Meridian Health Group, No. 29A05-0606-CV-313, Court of Appeals of Indiana, 2007)
Case in point 2: A different Indiana employer didn’t fare so well. Timothy Glenn left his marketing job at Dow Agrosciences to work for a competitor, Pioneer. Dow filed suit and sought an injunction.
The court ruled that Glenn had, in fact, violated his agreement by misappropriating trade secrets. But it said the agreement’s geographic area was too large because it prevented Glenn from working anywhere in the United States and Canada.
Good news: ‘Blue pencil’ rule
The good news for employers: Indiana courts do not throw out the baby with the bath water. The courts may (but are not required to) use their “blue pencil” doctrine to strike offending portions of noncompete agreements.
However, because the use of the blue pencil is soundly within the discretion of the trial court, don’t rely on the judge to rescue an otherwise overreaching agreement.
Get it right at the time you draft the agreement.
Also, courts can’t add to an agreement to make it legal, but only strike out offending portions.
Drafting noncompetes: 4 important tips
1. Have your attorney craft the noncompete. What goes into a specific agreement depends on the nature of the business and the amount of damage that departing employees can do.
2. Clearly define who is a “company client.” Employers always have the right to keep trade secrets confidential, and courts usually recognize employers’ rights to their clients’ lists. The noncompete agreement should clearly define who is a company client. For instance, is the employee contacted—but never sold anything—considered a “client”?
3. Consider what counts as “consideration.” Fortunately, Indiana law considers the offer of continued employment sufficient consideration to support an employee’s noncompete agreement. But this is not true for all states, and a multistate company would be wise to use its attorney to verify that its noncompete is valid for all purposes.
4. Make sure the noncompete doesn’t conflict with other agreements. Noncompete agreements are part of a larger contractual relationship with the employee. To protect yourself, look at all agreements with the employee to ensure there are no conflicts. Otherwise some unintended consequences may follow (see example in box below).
Wrong wording in severance can kill a noncompete
When he was hired as a sales manager, Michael Naimo signed an agreement not to compete with the company for at least 12 months after leaving. When he did depart, Naimo’s severance agreement included a clause stating that it “was the only and complete agreement” between the two, and that the severance agreement superseded “all previous agreements … including the Employment Agreement.”
Assuming that his noncompete was dead, Naimo promptly began calling on all his past clients to sell them goods from his new employer. His ex-employer sued to enforce the noncompete, but lost. In court, Naimo successfully pointed to the severance language, claiming it invalidated the noncompete. (Avery Dennison v. Naimo, N.D. Ill., No. 06 C 3390, 2006)
Tip: Overly broad language in severance packages (or any agreement, for that matter) is never a good idea. Broad restrictions usually turn courts off. In this case, the broad language gutted the employer’s own agreement.
