Indiana Non-competition Law

posted by Neil Klingshirn  |  Jan 22, 2010 1:04 PM [EST]  |  applies to Ohio

Indiana courts disfavor covenants not to compete, which they view as in restraint of trade.  Harvest Ins. Agency, Inc. v. Inter-Ocean Ins. Co.  492 N.E.2d 686 (Ind. 1986).  Indiana courts strictly construe them against the employer and enforce them only if reasonable. Donahue v. Permacel Tape Corp. (1955), 234 Ind.398, 127 N.E.2d 235.

Consideration

Indiana courts do not inquire into the adequacy of the consideration exchanged in a contract. Hence, an employer's promise to continue at-will employment is valid consideration for the employee's promise not to compete with the employer after his termination. Ackerman v. Kimball Int'l, 652 N.E.2d 507 (Ind. 1995)

Legitimate Employer Business Interests

Indiana courts have found protectible interests in:

However, an employer does not have an interest in protecting relationships with past customers who have left it. In addition, an employer does not have an interest in preventing its employees from soliciting the customers of its customers.

Reasonable Restrictions

Covenants not to compete are reasonable only where the restraint:

Courts determine reasonableness with reference to the employer’s legitimate interests, if any, and the time, space and types of activity proscribed.  In addition, reasonableness depends upon the entire contract and the situation to which it is related.

A non-compete agreement is reasonably necessary if an employer shows “the former employee has gained a unique competitive advantage or ability to harm the employer.” In other words, the employer must show some reason why it would be unfair to let the former employee compete with it. It is not unfair to the employer if the employee competes against it using:

Osler Inst., Inc. v. Forde, 333 F.3d 832, 838 (7th Cir. Ind. 2003).

Indiana non-competition agreements should have geographic restrictions, unless they are limited to protecting specific customers or trade secrets.  The geographic restriction should not go outside of the employee’s geographic work area unless, again, the restriction is necessary to protect trade secrets. In Donahue v. Permacel Tape Corp. (1955), 234 Ind. 398, 127 N.E.2d 235, the Indiana Supreme Court said that covenants that restrict the competitive employment of an employee beyond the area of his former employment are void, unless such subsequent employment involves the use or divulgence of trade secrets of the former employer that are related to the scope of the latter's business throughout the restricted area. In that case, the court must still consider whether the lack of geographic limitations, together with all the other provisions of the covenant satisfies the three part test for reasonableness (i.e., is reasonably necessary to protect the employer, is not unreasonably restrictive of the employee, and is not against public policy). Ackerman v. Kimball Int'l, 652 N.E.2d 507, 509-511 (Ind. 1995)

Physician Non-competition agreements

An employer has a protectible interest in restricting a former physician from contacting the employer’s patients.  If the non-competition agreement makes a physician’s specialty scarce or unavailable, the public’s interest in access to that medical specialty may convince a court not to enforce it.

Judicial Modifications of Indiana Non-competition Agreements

If a noncompetition agreement is unreasonably broad in its prohibitions, Indiana courts do not rewrite the agreement or enforce it to the extent that such enforcement would be reasonable. Instead, overly broad restrictions are not enforceable to any extent. Nevertheless, where an agreement contains distinct and readily severable provisions, and where some are valid while others are not, Indiana courts apply the so-called "blue pencil doctrine" to strike out the invalid provisions and enforce the valid provisions. Licocci v. Cardinal Associates, Inc., 492 N.E.2d 48, 52 (Ind. Ct. App. 1986). This blue pencil doctrine is fairly mechanical in application, so as to prevent courts from simply writing a new contract for the parties.  

Thus, under Indiana law, if an employer is trying to enforce an overly broad noncompetition agreement, the court may not try to fix the problem simply by writing an injunction the court thinks would be reasonable. Bridgestone/Firestone, Inc. v. Lockhart, 5 F. Supp. 2d 667, 683 (S.D. Ind. 1997).

Consequence of Breaching an Enforceable Non-Competition Agreement

Breach by the employee

If the employee breaches a non-competition agreement, the employer is entitled to a money damages award for lost profits.  Indiana courts will also enforce liquidated damages clauses, which is an amount of damages that the parties agree upon for each breach or day of breach, if otherwise reasonable and appropriate. In addition, if the violations could continue and the court finds that the future violations will cause irreparable harm, the court can issue an injunction. Robert's Hair Designers v. Pearson, 780 N.E.2d 858, 865-868 (Ind. Ct. App. 2002). However, if the employer can calculate the amount of money damages caused by past and future breaches, or if a liquidated damages clause fully compensates the employer for all such losses, then the court should not issue an injunction. Ed Bertholet & Assoc., Inc. v. Stefanko, 690 N.E.2d 361, 364 (Ind. Ct. App. 1998), and Mercho-Roushdi-Shoemaker-Dilley-Thoraco-Vascular Corp. v. Blatchford, 742 N.E.2d 519, 526 (Ind. Ct. App. 2001).

Breach by the employer

If the Indiana employer is the first to commit a material contract breach, it cannot enforce the contract against the employee, even if the employee subsequently breaches the contract as well Licocci v. Cardinal Associates, Inc., 492 N.E.2d 48, 52 (Ind. Ct. App. 1986) (employer could not enforce a non-competition provision in an employment agreement after it reduced a weekly draw by 20% and failed to pay a biannual draw).  Sallee v. Mason, 714 N.E.2d 757, 762 (Ind. Ct. App. 1999) (employer failed to provide performance evaluations or 30 day notice of termination).

Trade Secrets Act

In addition to enforcing agreements that restrict competition to protect trade secrets, Indiana's trade secrets statute, codified at Indiana Code 23-2-3, protects trade secrets.  Specifically, Indiana’s Trade Secrets Act prohibits the misappropriation of trade secrets, whether an employee has agreed to protect trade secrets or not.  However, a non-competition agreement could impose broader restrictions and allow greater damages than those in the Trade Secrets Act.

Assignment of Non-competition Agreements

Covenants not to compete are of “a personal nature.” As a general rule, personal service contracts are not assignable. Norlund v. Faust, 675 N.E.2d 1142, 1151 (Ind. Ct. App. 1997) (finding that employers may generally not assign covenants not to compete), However, if the employee consents to the assignment, Indiana courts will enforce the covenant in favor of the party to whom the employer assigned the contract right. SDL Enters. v. DeReamer, 683 N.E.2d 1347, 1349-1350 (Ind. Ct. App. 1997)

Key Cases

• Ackerman v. Kimball Int'l, 652 N.E.2d 507 (Ind. 1995)
• Harvest Ins. Agency, Inc. v. Inter-Ocean Ins. Co.  492 N.E.2d 686 (Ind. 1986)
• Donahue v. Permacel Tape Corp., 127 N.E.2d 235 (Ind. 1955)
• Licocci v. Cardinal Associates, Inc., 492 N.E.2d 48, 52 (Ind. Ct. App. 1986)
• Norlund v. Faust, 675 N.E.2d 1142, 1151 (Ind. Ct. App. 1997).

posted by Neil Klingshirn  |  Jan 22, 2010 1:04 PM [EST]  |  applies to Ohio