In 2014, Indiana courts considered a handful of cases that concerned non-compete and non-solicitation agreements between employees and employers. Indiana courts continued the trend and showed a reluctance to enforce non-compete and non-solicitation agreements. Courts found that many of the non-compete and non-solicitation agreements were overly broad, unreasonable, and burdensome on the former employee. Highlighted below are short summaries of the cases examined by Indiana courts and suggestions on how employers can strengthen their non-compete and non-solicitation agreements.
A. Clark’s Sales and Serv., Inc. v. John D. Smith and Ferguson Enter., 4 N.E.3d 772 (Ind. Ct. App. 2014).
Clark’s Sales and Service, Inc. (“Clarks”) sought a preliminary injunction to enforce a restrictive covenant/noncompetition provision between former Clark’s employee, John D. Smith (“Smith”), and his new employer, Ferguson Enterprises Inc. (“Ferguson”). In its examination of the facts, the Court of Appeals noted that Clark’s had a legitimate protectable interest in protecting the goodwill with its business accounts and referral network, and that advantage was not available to the public. However, the Court determined that the restrictive covenant was not reasonable as to its scope of activities and geographic area restricted. The Court noted that the covenant was unreasonable when it covered all Clark’s customer during Smith’s entire fourteen (14) year employment. The covenant also included customers who Smith had no contact, minimal contact, or harmless contact. While the Court found the fifty (50) mile geographic restriction reasonable in light of Clark’s prominence in the high-end appliance business, the geographic restrictions as written contained unreasonable geographic restrictions of any state H.H. Gregg does business, the entirety of Indiana, and any county in which Clark’s has at least one customer. Clark’s requested the Court consider the blue pencil doctrine in its review the restrictive covenant. The Court noted the portions Clark’s wished it to consider under the blue pencil doctrine were written as an indiscrete whole with no clear separation of terms or clauses.
B. Zimmer, Inc. v. David Masters and Andrew Masters, No. 3:14-CV-312-RLM (N.D. Ind., March 31, 2014).
David Masters and Andrew Masters (collectively, “Team Masters”) signed non-competition/non-solicitation agreements with Zimmer, Inc. (“Zimmer”). David Masters resigned from Zimmer and notified Zimmer he intended to join a competitor named Medacta. David also informed Zimmer that Andrew Masters would be joining him. Zimmer believed David provided Medacta with confidential information while still employed by Zimmer. Zimmer sought a temporary restraining order and preliminary injunction against Team Masters. Reviewing the non-competition/non-solicitation agreement, District Judge Robert Miller took issue with the phrase “Customers or Active Prospects in the Restricted Geographic Area.” Judge Miller noted the non-solicitation covenant is unenforceable because of its failure to define a definite geographic area or a definite class of people and institutions Team Masters could not contact. Judge Miller noted while the balance of harms slightly favors Zimmer, the likelihood of success on the merits was negligible at best, and the imbalance did not support a preliminary injunction.
C. Distrib. Serv., Inc. v. Rusty J. Stevenson and Rugby IPD Corp., d/b/a Rugby Architectural Bldg. Prod., 16 F.Supp.3d 964 (S.D. Ind. 2014).
In 2009, Rusty Stevenson (“Stevenson”) signed a non-competition/non-solicitation agreement with Distributor Service, Inc. (“DSI”). In 2013, Stevenson resigned from DSI and took a position with Rugby IDP Corp., d/b/a Rugby Architectural Building Products (“Rugby”), a direct competitor to DSI. The DSI court concluded that the goodwill DSI built through Stevenson was a legitimate protectable interest. However, when examining the non-compete provision, the Court determined it was overbroad and unenforceable as it covered positions with a competitor that were not directly related to Stevenson’s position with DSI (i.e., it covered a position in sales, but also work as a janitor, or landscaping). Simply put, the Court found the non-compete provision was unenforceable because it was overbroad in the scope of the activities it covered. On the non-solicitation provision, the Court found the plain language overbroad, lacked a time constraint and applied to prospective customers that never became DSI customers.
D. In re: Karl N. Truman, 7 N.E.3d 260 (Ind. 2014).
Respondent Karl N. Truman (“Truman”) hired an associate (“Associate”) to work at his law firm. As a condition of employment, the Associate signed a Confidentiality/Non-Disclosure/Separation Agreement (“Agreement”). The Agreement stipulated that upon leaving the firm, only Truman would notify clients the Associate was leaving and prohibited the Associate from soliciting and contacting clients after he left. When the Associate left the firm six (6) years later, Truman insisted on enforcing the Agreement. Some of the notices Truman sent to clients failed to provide the Associate’s contact information and explain that clients could continue to be represented by Associate if they chose. Moreover, non-compete agreements cannot be used with attorneys as “ [a]n agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer.” Id. at 261. Truman received a public reprimand.
E. Nightingale Home Healthcare, Inc. v. Carey Helmuth and Physiocare Home Healthcare, LLC, 15 N.E.3d 1080 (Ind. Ct. App. 2014).
Carey Helmuth (“Helmuth”) and Nightingale Home Healthcare, Inc. (“Nightingale”) signed a Limited Non-Competition and Non-Disclosure Agreement (the “Agreement”). Nightingale terminated Helmuth employment for “substandard work” and “violation of company policies.” Ten (10) days later, Nightingale rehired Helmuth, but failed to have him sign a new Agreement. Almost immediately after Helmuth’s employment with Nightingale ended, he accepted employment with Physiocare Home Healthcare (“Physiocare”). The Court determined when Nightingale terminated Helmuth’s employment, it triggered the two (2) year provision in the Agreement. As such, Helmuth fulfilled the two (2) year provision in the Agreement and could work for Physiocare with no restrictions or conditions on his employment, and Nightingale’s non-compete was unenforceable.
F. Pinnacle Healthcare, LLC, and Patrick J. Sheets, M.D., Inc., v. Patrick J. Sheets, 17 N.E.3d 947 (Ind. Ct. App. 2014).
Pinnacle Healthcare, LLC (“Pinnacle”) purchased Patrick J. Sheet, M.D.’s (“Dr. Sheets”) health practice in 2011. As part of the purchase, Dr. Sheets signed a two-year non-competition, non-solicitation, and non-disparagement agreement (the “Agreement”). The Agreement also contained a liquidated damages clause whereby Dr. Sheets paid Pinnacle a certain amount if he chooses to practice medicine within the twenty-five (25) miles restricted territory outlined in the Agreement. Two (2) years later, Dr. Sheets left Pinnacle and set up a practice in the same building. The trial court denied Pinnacle’s motion for a preliminary injunction, but the Court of Appeals disagreed and reversed. Examining the facts, the Court noted liquidated damages provisions do not prevent an employer from enjoining a former employee’s conduct. The Court also disagreed with Dr. Sheets’s argument that public policy allowed him to continue to practice medicine in an area underserved by doctors. The Court noted that non-compete agreements with respect to physicians are not per se unreasonable on these grounds.
G. What employers can learn from these cases.
The takeaway from these cases is that Indiana courts place the burden on employers on whether non-competition and non-solicitation agreements are enforceable. While courts are willing to recognize an employer’s goodwill with its customers and any business practices, non-competition and non-solicitation agreements need to be narrowly tailored to specific employees and for the specific job responsibilities. Moreover, liquidated damages provisions can be incorporated into agreements.
Employers should make sure to narrow the definition of customers. For instance, define the term to where it includes customers who the employee comes into significant contact with and has a relationship. Also, make sure non-competition and non-solicitation agreements include the scope of an employee’s activities, meaning their job duties and responsibilities. As for geographic boundaries, consider the geographic impact of your business and limit using those parameters. If you are unsure of the geographic scope, do not be afraid to use subparagraphs, but remember that the geographic scope section must make logical sense. Finally, when rehiring employees, employers should have the employee sign all documents as if they are a new hire.
The structure, grammar, and style of your business’s non-competition and non-solicitation agreements are imperative. When structuring non-competition and non-solicitation agreements, refraining from using whole paragraphs. Instead, select subparagraphs that list multiple options to where a court can apply the blue pencil doctrine to the subparagraphs it finds unreasonable. Consider shorter paragraphs and do not be afraid to break larger paragraph up by using subparagraphs or multiple paragraphs. Make sure that each phrase and definition is clear and succinct. Employers should also be cautious of how the use simple phrases like “and” or “or.”
Regarding specific business areas, employers should remember their rights when notified by a law firm that the attorney who handled their matter is leaving their current firm. Employers should be aware they have a right to their attorney’s contact information and the employer has a right to follow their attorney to the attorney’s next place of employment. Employers should remember that a non-compete agreement will not be per se invalid, if working with physicians or medical personnel in a remote area or with a highly specialized practice.
