On April 15, 2019, the Indiana Court of Appeals issued a ruling that significantly developed restrictive covenant law in two areas: whether courts may reform contracts (as opposed to blue-penciling them) and whether non-solicitation provisions can include prospective customers.

In Heraeus Medical, LLC, et al. v. Zimmer, Inc. et al., the court of appeals—apparently for the first time—reformed an overbroad restriction rather than merely blue-penciling it. The court also clarified that non-solicitation provisions may include prospective customers, a category that practitioners had long considered to be off-limits.

Background 

Zimmer had exclusive distribution rights for Heraeus’s bone cements. When that deal ended, Zimmer employee Robert Kolbe and others joined Heraeus to work in sales. Kolbe’s restrictive covenant with Zimmer included the following provision prohibiting the solicitation of customers or active prospects, among other restrictive covenants: “[e]mployee will not, directly or indirectly, (i) provide, sell or market; (ii) assist in the provision, selling or marketing of; or (iii) attempt to provide, sell or market any Competing Products to any of Company’s Customers or Active Prospects in the Restricted Territory.” A key phrase in the definition of “active prospect” was that it meant a person or entity “to whom, at any time during the six (6) months immediately preceding the termination of Employee’s employment with Company, Employee had (i) any marketing or sales contact on behalf of Company and/or ii) access to, or gained knowledge of, any Confidential Information concerning Company’s business prospects with such Active Prospect.”

The agreement also included the following employee non-solicitation provision:

Employee will not employ, solicit for employment, or advise any other person or entity to employ or solicit for employment, any individual employed by Company at the time of Employee’s separation from Company employment, or otherwise induce or entice any such employee to leave his/her employment with Company to work for, consult with, provide services to, or lend assistance to any Competing Organization.

The period of the restrictions was 18 months.

In addition, the Kolbe agreement contained the following provision: “The parties agree that any court interpreting the provisions of this Agreement shall have the authority, if necessary, to reform any such provision to make it enforceable under applicable law.”

The trial court issued a preliminary injunction against Kolbe, enjoining him from, among other things:

• soliciting anyone working for Zimmer as of November 3, 2017, or enticing them to leave their jobs with Zimmer to work for Heraeus; and
• selling to or contacting any Zimmer customers Kolbe had sold to in his final two years of employment or any active prospects to whom he had marketed Zimmer products in his last six months of employment.

The Court of Appeals addressed those two key issues, among others.

New Contract Reformation Approach

The issue of whether to blue-pencil or reform the contract arose with the covenant not to solicit Zimmer’s employees. The appeals court agreed with Heraeus that Zimmer “[had] not shown that it [had] a legitimate protectable interest in its entire workforce, which includes many employees who would not have access to or possess any knowledge that would give a competitor an unfair advantage.”

Rather than invalidate the entire employee non-solicitation provision, the court noted that the “parties specifically agreed that [the court had] the authority ‘to reform any [unreasonable] provision to make it enforceable under applicable law’” (quoting the agreement).

The court then remanded the case so the trial court could narrow the preliminary injunction on employee non-solicitation to “those employees in which the company has a legitimate protectable interest.&rdq