Understanding Indiana Non-Competes

What Is A Non-Compete Agreement?

As with most things, definitions are important when it comes to understanding the law. As such, let’s take a look at what "Non-compete agreement" means in Indiana. Simply defined, a non-compete agreement is a legal document where an employee agrees that they will not enter into competition with the employer after the relationship ends. These types of agreements are most often put in place to protect an employer’s business interests, such as trade secrets or client relationships. If an employee leaves, and then subsequently begins working for a competitor, the chances of damaging effects to the former employer can be considerable. As such, non-compete agreement(s) serve as a way for businesses to protect their assets and proprietary information from competitors by limiting competition.
A non-compete agreement is a type of restrictive covenant—a term that can apply to both non-competes and non-solicitations. Non-compete agreements restrict an individual from entering into competition with a person who has employed them. There can be a number of reasons for a non-compete to be set in place , one of the most common being to prevent the employee from using proprietary business knowledge or information to compete directly against the employer once they are no longer employed. A typical example could be if the employer has a customer list that is now in the hands of a former employee, who then goes to a competitor and uses the list to gather business from the old customers. Another example is if the employer has trade secrets or other proprietary knowledge that the former employee takes to a competitor. Both are valuable assets (whether tangible or intangible) to a business and are considered by many to be worth protecting from superfluous competition.

Indiana Law on Non-Competes

Indiana law allows for non-compete agreements that are designed to protect a party’s reasonable interests. Here, Indiana specific statutes and case law apply. For example, in one Indiana case, our firm represented a physician practicing in a small town in southern Indiana. After the physician left his hospital practice to join a larger medical school affiliated practice, his old employer sought to enforce a non-compete that would have done nothing more than shut him out of his market.
The Indiana trial court agreed that the non-compete should be enforced to prevent the physician from joining his new employer, but the Indiana Court of Appeals overturned that decision and prevented enforcement of the non-compete. While reasons for that decision are beyond the scope of this post, it is important to note that the Indiana courts have shown they are not afraid to turn down non-competes that are too broad in time or scope.
Section 24-2-1-1 et seq. of the Indiana Code contains Indiana’s non-compete provisions. The statutes strangely refer to non-compete agreements as "special restrictive covenants." Auster v. Rothenberg, 42 N.E.3d 857,862 (Ind.Ct.App.2015). These statutes provide guidance for interpreting covenants not to compete, but provide very little guidance on drafting non-competes.
Indiana case law defines non-competes as contracts that "prohibit an employee from engaging in certain future activities that would compete with the employer’s activities." Id. In other words, a non-compete restricts activities that the parties know or expect to occur in the future." Id. Continuing in its analysis, the Indiana Court of Appeals explained that "whether covenants not to compete are reasonable is determined on a case-by-case basis because the reasonableness of a particular restraint depends upon the circumstances of that case." Id. at *5 (citing Keneco Distrib., Inc. v. Frerk, 613 N.E.2d 1079, 1081 (Ind.Ct.App.1993), adopted as modified on transfer.
In addition to Indiana’s special restrictive covenants, which apply only to physicians, Section 24-3-2-9 specifies that the owners of a business have the right to protect their businesses against competition. See IC 24-3-2-9. In that statute, the Indiana legislature explained that: [S]tores, manufacturers, and other persons have a property right in their trade secrets, customers, and patrons, have a right to protect the reputation of their business, and have a right to gain an advantage in competing with those engaged in the same business . . . and may protect themselves against any unlawful appropriation of any such trade secrets, customers, or patrons. . . . Nothing in this section shall be construed as applying to any restraint upon employment unless a contract is entered into therefor between the persons so restrained and the employer, whereupon such contract may be enforced as herein provided.
Like most state statutes, Indiana laws regarding non-competes leave much to interpretation by attorneys and Courts, and like many other states, Indiana Courts look to prior cases to ascertain the reasonableness of an Indiana non-compete agreement.

Enforceability of Non-Competes In Indiana

Non-compete agreements in Indiana are generally enforceable as long as they satisfy certain conditions. These include a short enough duration of time, a sufficiently limited geographic area, and a reasonable scope of restriction. A reasonable period of restraint is understood to be anywhere from six months to two years. Only in exceptional circumstances may Indiana courts impose a restraint lasting three years or longer.
Non-competes that are too long in duration will usually be deemed unreasonable and declared invalid. The same is true for those that are not limited to a certain geographical area. In addition to satisfying the duration and geographic area criteria, a non-compete agreement must also be reasonable in its scope of restriction. If the restraint goes beyond merely preventing disloyalty by the employee, it may well be held unreasonable.
Indiana courts do have the authority to "blue pencil" unenforceable non-compete agreements in which the scope of restriction would otherwise be unreasonable. This means that the courts may re-write the agreement by revising the scope of restriction imposed on the employee. The revision may serve to fix the problem with the agreement, making it reasonable and therefore enforceable. Indiana courts will not re-write an agreement unless it is not obvious that the parties would not have entered into the agreement but for the questionable provision.
Enforceability of a non-compete agreement is only relevant if an employee or former employee violates the terms of the agreement. That is to say, in order for a non-compete agreement to be at the issue in a case, an employee or former employee must have already violated its terms. An agreement that is not reasonably likely to be enforced due the existence of a bona fide legal defense to its enforcement, or because a court will find it to be ineffective, is nothing more than a piece of paper. In other words, in order for a non-compete agreement to be the subject of litigation, the issue of enforceability must be joined.

Common Problems and Issues

Non-Compete Restrictions: Common Issues and Challenges in Indiana
Indiana law continually addresses the enforceability of non-compete agreements. This may be due, in part, to the relatively small number of non-compete cases filed in federal or state court. In Indiana, there is no court that specializes in contract law, let alone employer/employee contracts. For example, the Southern District of Indiana federal court and the Marion County Superior Court address virtually every issue from corporate law to commercial and consumer disputes. So, for the non-compete employer there is no shortcut to determine whether your non-compete restriction will achieve your goals. However, Indiana courts have produced some noteworthy examples of issues that can arise when attempting to enforce a non-compete restriction. Some common difficulties in attempting to enforce a non-compete restriction involve seeking a temporary restraining order against the former employee or the new employer. In a recent case involving a suit by one car dealer against another car dealer, the plaintiff car dealer attempted to obtain a temporary restraining order restraining the defendant car dealer from employing a former employee who agreed to not compete. Following a hearing, the trial court held that the non-compete restriction in the contract would not be enforced. On appeal, the Indiana Court of Appeals remanded the case back to the trial court to determine if the publicly filed court record constituted a violation of Indiana’s non-public court file provisions. In this case, the trial court entered a six-month temporary restraining order, but the mobilization of the new employer began during this time period. This poses a question for practitioners whether a non-compete restriction can be enforced prior to the contract start date. In an older case, the Indiana Court of Appeals determined a non-compete restriction was unenforceable as a matter of law for lack of consideration. In that case, the employer did not change the employee’s work conditions such as pay or job title. Conversely, some cases appear to require the employer to prove valuable consideration was provided to the employee in consideration for the non-compete restriction, thus limiting the effectiveness of a non-compete agreement in employment contracts that do not offer anything beyond continued employment. A further issue that can arise in non-compete restriction litigation is whether a vague challenge to the reasonableness of the restriction is sufficient to maintain discovery under Indiana Trial Rule 26(B)(1) and 26(B)(7). In some cases, specifically where the plaintiff claims a legitimate business interest, a vague denial triggers the obligation to produce.

What Do Indiana Courts Do?

Indiana courts have been involved in a number of important decisions regarding non-compete and other restrictive covenants. In fact, the 7th Circuit stated that "[t]he enforceability of covenants not to compete-that is, their enforceability according to Indiana law-is a question [of particular importance] because Indiana law applies to in all States" and therefore, no matter what State you reside in, what an Indiana court might say will be important (Shimadzu Instruments Sales Inc. v. Manesh, 430 F.3d 965 (2005)).
The case that stands out most in this field is the 1996 Haynes v. Indiana Gas Co., Inc. (655 N.E.2d 486 (1996) (Indiana Supreme Court). In Haynes, the Indiana Supreme Court made several important statements regarding how to review non-compete agreements. It explained that in looking at one, the courts must balance the employer’s need to protect its legitimate interests against the employee’s interests and the public’s interest. At the same time though, "[c]ourts must not attempt to rewrite contracts to meet their perception of the equality of the bargaining strengths of the two parties."
Indiana courts do not care if the contract is fundamental or not, i.e. if the agreement is part of an employment contract, independent contractor agreement, merger agreement, et cetera. Mergers have received a great deal of discussion regarding whether the merger should bind both the buyer and seller to a binding non-compete agreement. In the 1991 case of In re Dickson Industries, Inc., it was determined that a buyer was not liable for a seller’s failure to issue a non-compete clause "where [the buyer] did nothing to induce its owners to forgo their free will to sign such a covenant." Dickson Industries, cont to Howard S. Moyer, EA , 138 BR 413 (Bankr. E.D. Pa. 1992).
In addition, it has been held that "a non-competition agreement is overbroad with respect to geographic scope if it unduly restricts the former employee’s ability to compete." MPage, Inc. v. Aromatics, Inc., 146 F.Supp.2d 969 (N.D. Ill. 2001). However, a non-compete agreement will not be invalidated for overbroad geographic scope if "the territorial area at issue constitutes a national market" and "the covenant is limited to positions with companies having facilities or doing business in the national market." Id.
As noted, Indiana courts do not shy away from enforcing restrictive covenants. However, they will not enforce a non-compete that is too broad. They have explained that "[t]reatment of arbitration clauses in Indiana is consistent with our treatment of non-competition agreements. In the non-competition context, we have recognized such agreements as valid when they are ‘designed only to protect the legitimate interests of the employer.’" Roberts v. Triad Holding Corp., 876 N.E.2d 1175, 1183 (Ind. App. 2007).
As noted above, one point that is clear after looking at Indiana cases is that the geographical scope of the non-compete can be quite broad, even to the point that it only covers the United States. See The Post & The Courier, July 26, 2015.
Another important point is that, at least in the view of some, "[t]he apparent willingness of the courts in Indiana and Illinois to enforce non-compete agreements should give comfort to employers and their in-house counsel drafting these agreements. However, lawyers who have been forced to litigate non-compete cases in Indiana or Illinois would be well advised to be cautious and be fully aware of the scope and limitations of recent holdings in both states." Mark Arthur Perkins.

Alternatives to Non-Competes

Indiana businesses have a few alternatives that may satisfy their concerns, to some extent, while not being as strict and burdensome as a non-compete agreement. Two main ones are non-solicitation agreements and confidentiality agreements.
A non-solicitation agreement in Indiana can provide protection if the key concern is competition from former employees who may seek to contact customers that they worked with while employed with your company. A non-solicitation agreement can prevent an employee for a set period of time from soliciting employees or customers of your business for a competitor.
A confidentiality agreement can protect the confidential information that your employees may have access to during their employment. Confidential information includes things like business strategy, marketing plans, customer lists and customer information. These agreements will require an employee not to divulge any confidential information to a competitor.
Both of these types of agreements are less strict than a non-compete. With a non-compete, a business cannot hire any of your former employees for a certain period of time. A non-solicitation agreement will only prevent your former employees from directly contacting your customers.
Also, a confidentiality agreement will give you the ability to file an injunction in a court to prohibit your former employee from using or sharing that information during the specified period of time. A non-solicitation agreement will typically not prevent your former employee from directly competing now. It would just prevent your former employee from contacting your customers. So, alternatives may limit you in some respects.

How To Write A Non-Compete In Indiana

A non-compete agreement is only as good as the enforceability of its terms and the enforceability of a non-compete typically starts with its drafting. In that vein, Indiana is one of a minority of states where a covenant not to compete is void against public policy and fully unenforceable if the employer was the sole or primary cause of the employee’s loss of income or employment. However, Indiana non-compete agreements are still regularly found valid and enforceable even though they may involve a layoff, reduction in force, closed plant, relocation of the employer’s business or a merger or acquisition with another company. Indiana has now adopted the predominant minority rule and indicates that non-compete agreements may be enforceable despite the fact that the employee was the sole or primary cause of his/her loss of income/employment "if all the essential requirements of the covenant are otherwise satisfied and, taking all relevant circumstance into account, the court concludes that a significant purpose of the employer in employing the employee is to avoid the consequences of a premature judicial determination on enforceability." In the latter circumstance, the unemployment benefits are suspended until a final determination of "the employee’s right to them." This rule includes the right of an employer to draft a non-compete that is broad enough to restrain a terminated worker, but that is so vague as to avoid the possibility of triggering the policy behind the Employment Security Act. Another Indiana court recently stated that "[o]n carrying out the duty of making the covenant reasonable in geographic scope and duration without rendering the restriction ‘illusory’ requires the judge’s careful attention on reading the entire contract to its close. A jarring final phrasing should cause the reader to reanalyze the competing interests in relation to one another. A verbal jolt here should signal that the court cannot sanction a restraint that the drafter did not recognize as excessive." An Indiana appellate court also stated this past February that "[i]t is well settled that, although reviewing courts generally engage in a three-pronged analysis of restrictive covenants, including whether the restriction is reasonably necessary to protect the employer’s legitimate interests, the employer has the burden of proof as to all elements of that reasonableness." Therefore, employers wishing the Indiana courts to enforce their covenants must be aware of the burden they bear.

Get Legal Help

As with many areas of law, there are technical and complex legal arguments that can be made when determining the enforceability of a non-competition agreement. For that reason, it is in your best interest to contact an experienced employment lawyer prior to executing a non-compete agreement, even if you are terminating your employment. Further, and before an employer attempts to enforce such an agreement (e.g., by threatening or suing a former employee, or even telling a prospective employer that it will sue if the employee is not terminated) , an employer should seek legal advice as to whether the agreement is enforceable and, if so, what restrictions are reasonable for the particular employee and circumstances involved. The good news, however, is that, unlike most other types of contracts, the Indiana courts are willing to take an "idiot-proof" approach to the execution of non-compete agreements and, for employees, unsigned or poorly worded non-compete agreements will not be enforceable.