Covenants Not to Compete - The Attacks Continue!

Recently, Ice Miller LLP reported on the continued viability of employment contract covenants not to compete. Employees who rely on the false claim that post-employment covenants not to compete lack enforceability (“aren’t worth the paper they are printed on”) ignore the reality of enforceability under Indiana law. Yet, this tells only half the story. Employers wanting to protect their customers and confidential information with a covenant not to compete must recognize the continued disfavored status of covenants with many judges, and re-double their efforts at possessing enforceable agreements. Recent cases highlight this equally important reality.

The case of MacGill v. Reed, 850 N.E.2d 926 (Ind. App. 2006) provides an excellent recent example of an overbroad and unenforceable non-compete. In that case, the employee of a housekeeping service was prohibited from the ability to "own, manage, or materially participate in any business substantially similar to that of the [employer's] business within a 25-mile radius of [the employer's] principal business address." The court found such a provision to be unenforceable where the employee involved possessed no trade secret information and the restriction would prevent her from being employed in any capacity in another cleaning business, even if in a non-competing capacity. The restrictions extend beyond the scope of the employer's good-will interest of protecting its current customers and housekeepers. Consequently, the court ruled it overbroad and unenforceable.

The 2007 federal court decision of Dearborn v. Everitt J. Prescott, Inc., 486 F.Supp. 802 (S.D. Ind. 2007) presents another example of wayward non-compete drafting resulting in an unenforceable agreement.. The decision in this case comes from Judge Hamilton, a federal court judge known for healthy judicial skepticism towards enforcement of covenants not to compete. Here, the covenant possessed a 100 mile non-compete radius, as to any office of the employer. As Judge Hamilton saw it: "The geographic covenant not to compete by its terms would bar [employee] from working for a competitor within 100 miles of any [employer] office or facility, from Indiana all the way to Maine." Id. at 808. In finding the covenant overbroad and unreasonable, the court noted that in the absence of genuine trade secrets that would be useful far beyond the scope of the employee's own responsibilities, geographic and customer restrictions on departing salesmen must ordinarily be no broader than the scope of the employee's former responsibilities. Judge Hamilton pointed out that the limits of a restrictive covenant, whether in terms of geography or customers, must be reasonably congruent with the employer's protectable interests. See also Product Action Int'l., Inc. v. Mero, 277 F.Supp. 2d 919, 932, fn. 4; ("Numerous other courts have noted the in terrorem effects of overly broad covenants"):, Dicen v. New Sesco, Inc., 839 N.E.2d 684, 689 (Ind. 2005) (two year restriction on competing anywhere in the United States overbroad). Note, in both these cases, the court rejected “savings clauses” designed to allow the court to rewrite the covenant down to something less oppressive.

Likewise, one of the biggest wins for employers seeking to enforce non-competes Central Indiana Podiatry, P.C. v. Krueger, 859 N.E. 2d 686 (Ind. Ct. App. 2007) recently received transfer to the Indiana Supreme Court, thus vacating the favorable lower court decision in favor of a central Indiana podiatrist, and raising the prospect of possible reversal on grounds of over reaching. Consequently, continued care to the “diamond-cutting” of carefully crafting non-compete agreements. Failure to do so risks total unenforceability and the loss of valuable customers and/or proprietary business information.

David Carr is a Partner in the Labor & Employment Section of Ice Miller, focusing his practice in the areas of personnel policies, employment discrimination, sports law, and employment contracts involving trade secrets, confidential information and covenants against competition.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.