Earlier this spring, the Indiana Court of Appeals struck down and refused to enforce certain provisions in a restrictive covenant (i.e., a noncompete) contained in an employment agreement between a central Indiana employer and a former employee. The Court determined that the scope of activity restrictions and geographic limitations in the noncompete were overly broad and unreasonable. Notably, the Court declined to apply the “blue pencil” doctrine to the restrictive covenants. (Stated differently, the Court was unwilling to delete only those portions of the noncompete that the Court found to be overly broad and unenforceable.) While Indiana courts have historically applied the blue pencil doctrine to restrictive covenants by enforcingreasonable noncompete agreements and striking only unreasonable restrictions, here the Court refused to do so because the language in the noncompete was neither divisible nor clearly separated into parts or severable terms.
The legal dispute at issue in Clark’s Sales and Service, Inc. v. Smith arose from an employment agreement between an appliance company and its former employee. The employee had worked for the former employer (a high-end appliance builder-distributor) for 14 years before resigning and taking a new position with a new employer. (The new employer was a company principally engaged in the plumbing and lighting industries but was also involved in the high-end appliance business.)
When the employee worked for the former employer as a store manager, his duties included sales in the showroom but no visits or calls with customers. At the new employer, the employee’s position (appliance manager) didn’t involve direct sales, but rather included training of sales employees, coordinating with vendors and assisting with service, installation and delivery.
Eight years before resigning from his position with the former employer, the employee signed an employment agreement that contained a noncompete. The noncompete prohibited the employee, for two years after his employment ended, from, among other things:
- soliciting or providing services competitive to those offered by his employer to any business account or customer who was a business account or customer at any point in time during his employment; and
- working in a competitive capacity with a certain named competitor in the state of Indiana, in any city of the state in which the named competitor conducted business or for any business that provides services similar or competitive to those offered by the employer during the term of the employee’s employment, including but not limited to within the state of Indiana, Marion County, the counties surrounding Marion County or within a 50 mile radius of the employee’s principal office with the employer.
Former employer filed suit to enforce the noncompete when the employee went to work for the new employer. The Indiana Court of Appeals affirmed the lower court’s rejection of the restrictive covenant for being overly broad and unreasonable.
Issues with the Noncompete Agreement
The Court of Appeals struck down the noncompete because the scope of restrictions and geographic limitations were too broad. For example, the Court found unreasonable the clause that prohibited the employee from servicing anyone who had been a customer of the former employer during any point in the 14-year employment relationship, including customers with which the employee had no contact.
Similarly, the Court rejected the noncompete because it restricted the employee from competing with aspects of the business that he was never involved with during his sales job with the former employer. (In other words, the provision of the noncompete that prohibited the employee from performing any service that the former employer offered was overly broad.)
Additionally, the Court declined to apply the blue pencil doctrine to the “offending” provisions of the contract. While Indiana courts have historically applied the blue pencil doctrine when portions of noncompete agreements are found to be unreasonable, here the Court determined that, because of how the noncompete language was drafted and grammatically laid out in the contract (the agreement was not clearly separated into parts), such revisions would be too extensive and elaborate. Thus, the Court was unwilling to strike the “offending” language because it would result in changes to the entire meaning of the noncompete provisions.
This case is but another example illustrating that Indiana courts continue to view noncompete agreements with a heavy dose of skepticism and judicial scrutiny. In order to increase the likelihood of enforceability, consider reviewing and taking stock of your current noncompetes.
- Does your noncompete include restrictions that cover the employee’s entire employment history and tenure with the company?
- Does your language include restrictions that focus on all services offered by your company?
- Do your geographic restrictions apply to any and all locations of your company?
- Is your noncompete an extremely long, convoluted paragraph that’s broken up with just an occasional comma here and there?
- Do you have to call your attorney every time you need an interpretation of your company’s noncompete?
If the answer to any of the questions above is “yes,” then it’s probably time to update your noncompete agreements.
Janice Pascuzzi, Law Clerk