It has almost become standard practice for companies to require new employees to sign boilerplate noncompete agreements before beginning their employment. However, such agreements are often considered difficult to enforce. Indiana is one of many states that have expressed a disfavor of agreements that restrict a person’s future employment opportunity. See Cent. Ind. Podiatry, P. C. v. Krueger, 882 N.E.2d 723, 728-29 (Ind. 2008) (“This Court has long held that noncompetition covenants in employment contracts are in restraint of trade and disfavored by the law.”).
Another reason courts take a negative view of noncompete agreements is the notion that they are written by and heavily favor employers. See Guinn v. Applied Composites Engineering, Inc. 994 N.E.2d 1256, 1272 (Ind. Ct. App. 2013) (Invalidating a noncompete when employer prepared the terms and required all employees to sign it).
This does not mean that companies need to abandon use of this important business tool. When used effectively, noncompetes can be an effective way to protect your competitive advantage, if a deliberate and focused approach is taken when drafting these agreements. In order to be enforced, noncompetes must be reasonable. Businesses can achieve reasonableness by articulating a legitimate business interest and ensuring the non-compete is narrowly tailored to ensure protection of that interest. Krueger, 822 N.E.2d at 729. See also Press-A-Dent, Inc. v. Weigel, 849 N.E.2d 661, 668-69 (Ind. Ct. App. 2006), trans. denied. Every case, and every employee, will be different. Accordingly, an employee’s noncompete should be individualized and thoughtful.
Below are four tips to effectively draft noncompete agreements that are more likely to withstand a challenge in the courts.
- Articulate the business interest that you are attempting to protect. It is not enough to forbid a former employee from operating a similar business. More care must be taken to specify a legitimate business interest to protect. A protectable interest is “an advantage possessed by an employer, the use of which by the employee after the end of the employment relationship would make it unfair to allow the employee to compete with the former employer.” Coates v. Heat Wagons, Inc., 942 N.E.2d 905, 913 (Ind. Ct. App. 2011). Such interests could include goodwill, secret or confidential information, and personal contact with customers. In its simplest form, this refers to information that the employee gained from the employment.
- Shorten the duration. Courts will not restrict the activity of a former employee for an extended period of time. Reducing a noncompete agreement’s longevity might increase its enforceability. Showing why the duration used is necessary to preserve a competitive advantage. It is helpful to articulate the unfairness that would result from a former employee’s ability to use the information gathered from their employment and how a “cooling off” period will diminish the impact. In general, the shorter a non-compete agreement, the more defensible it will be. Non-compete agreements can be a means to “get a head start” on solidifying important business and customer relationships after an employee leaves, not to indefinitely reduce competition.
- Narrow the geographic area. Proper geographic scope “depends on the interest of the employer that the restriction serves.”Slisz v. Munzenreider Corp., 411 N.E.2d 700, 707-09 (Ind. Ct. App. 1980). A company’s protected interest must extend to the geographical areas that it intends to protect. If a business does not operate in an area – it is unlikely that a court will restrict a former employee from operating in that same area. Regardless of where a company operates, companies will have difficulty enforcing non-compete agreements that restrict a former employee from working at all. As with duration, the more narrow the geographical restriction, the more enforceable it will be.
- Specify the activity prohibited. Perhaps the most important aspect of maintaining reasonableness is clearly identifying the activity to be prohibited. Attempting to restrict an employee from “being connected in any way with any business that competes” with the former employer is not advisable. Focusing on specific and detailed activities, such as restricting “the recruitment of executives within the field of information technology,” is a better approach. Courts will not enforce non-compete agreements when the scope of activity prohibited could essentially “apply to the entire world.” Vukovich v. Coleman, 789 N.E.2d 520, 526 (Ind. Ct. App. 2003).
With noncompete agreements – less is often more. Courts are more likely to find these agreements reasonable when they are prepared with care and restraint. When used properly, non-compete agreements can be a powerful insulation from the wayward activities of former employees. The difficulties with such agreements generally do not arise from their use, but from the general lack of care and precision with which they are often drafted.