DTCI: Key questions on enforceability of noncompete agreements

villa-elizabeth-trachtman-dtciIn addition to the standard family and criminal law questions, most attorneys have been approached by a friend or family member requesting advice on their noncompetition agreement and, more importantly, whether they really must comply with the terms of the agreement. The answer is typically “yes,” but considering the following questions will provide guidance for this assessment.

What is the employee’s role with her current employer and what is her anticipated new role?

While not to overshadow the importance of reviewing the contract language, asking the individual what she was doing for her former employer and what she plans to do next is a necessary preliminary question to determine whether an employer will be able to enforce the restrictive covenant. In general, Indiana courts look at whether the former employee “has gained a unique competitive advantage or ability to harm the employer before such employer is entitled to the protection of a noncompetition covenant.” Hahn v. Drees, Perugini & Co., 580 N.E.2d 457, 459 (Ind. Ct. App. 1991). Two important considerations in conducting this analysis are: (i) whether the employee interfaced with customers/clients and (ii) the location where the employee’s activities were conducted. In Indiana, the good will generated between a customer and a business is a protectable interest through a covenant not to compete. Licocci v. Cardinal Assoc., Inc., 445 N.E.2d 556, 561 (Ind. 1983). If an employee’s role placed them in a position to build relationships (i.e., generate “good will”), the former employer will likely be able to establish a legitimate business interest that warrants protection. A restrictive covenant typically cannot restrict a former employee from working in any capacity for a competitor, but can prohibit an employee from working in the same or similar capacity in the same location if a protectable interest is at stake. If an employee refrains from the activities she previously performed, an employer is less likely to successfully enjoin the former employee from working in this new capacity.

What is the breadth of the restriction?

Restrictive covenants in Indiana are viewed as restraints on trade and are carefully examined by the courts. The breadth of the restriction is particularly important in Indiana where, under the blue-pencil doctrine, the scope of a noncompete covenant may be narrowed by deleting words. However, courts will not rewrite a covenant to render it enforceable. Clark’s Sales and Services Inc. v. Smith, 4 N.E. 3d 772, 785-86 (Ind. Ct. App. 2014). To withstand scrutiny, the restrictive covenant must be no broader than reasonably necessary to protect the employer’s business. Under Indiana law, a covenant not to compete is generally unenforceable if it does not contain durational and geographical restrictions or limit the restriction to a select group of accounts or customers. Vukovich v. Coleman, 789 N.E.2d 520, 525 (Ind. Ct. App. 2003). While there is no set standard for what is considered a reasonable geographic scope and/or restricted time period, covenants for terms of one to two years following the termination of employment are generally permissible. As to geographical limitations, Indiana courts look at the area in which the employee worked, not where the employer conducts business. Commonly, employers who seek to enforce covenants fail to recognize this distinction. See e.g. Coates v. Heat Wagons, Inc., 942 N.E.2d 905, 915 (Ind. Ct. App. 2011) (upholding trial court’s application of the blue-pencil doctrine to limit the scope of the restrictive covenant to states where the employee had customer contact). Absent special circumstances, a restrictive covenant that attempts to restrict an employee beyond the employee’s geographical area of work risks being declared overly broad.

Is confidential information at issue?

Indiana courts permit employers to include valid covenants prohibiting the use or disclosure of trade secrets or confidential information. In an age in which information can be easily transmitted, former employees must be aware that employers may review company devices to ensure that confidential information has not been sent to an employee’s personal device prior to their resignation. While various types of information, such as customer lists, marketing strategy and pricing information have been found to constitute confidential information or trade secrets, courts generally consider whether such information is available to the public and provides the employer a competitive advantage. Even without a nondisclosure/confidentiality provision, disclosure of trade secrets or confidential information to the detriment of the former employer may amount to a violation of Indiana’s Uniform Trade Secrets Act (Ind. Code. § 24-2-3-1), so any transfer of this information must be carefully reviewed. Finally, taking information lends credence to an employer’s argument that a former employee has or intends to unfairly compete against their former employer in their new role — at times, the optics of this activity alone may draw a lawsuit and should not be underestimated.

As always, the devil is in the details. Whether a noncompete is enforceable is a case-by-case analysis, but understanding these considerations will provide a little guidance when confronted with a request to assess the enforceability of a covenant not to compete.•

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Elizabeth A. Trachtman Villa is an attorney at Quarles & Brady LLP. Opinions expressed are those of the author.
 

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