Together Forever or Nothing Left to Lose?
The Court of Appeals Broadly Construes "Good Will"
in Non-Compete Agreement

Broadening the coverage and extent of non-compete agreements is risky business. Courts reviewing challenges to non-compete agreements will determine whether the agreement that restricts a former employee from competing with his or her former employer is broader than necessary, mindful of the legitimate interests of the employer and the effect on the former employee, as well as the public interest. In a recent case, the risk paid off for the former employer. The Indiana Court of Appeals upheld the non-compete agreement even though the former employee subject to the agreement did nothing to solicit his former clients' business, and they moved their business to him of their own accord.

The non-compete agreement at issue in the case restricted employees at an accounting firm from performing services during the two-year period following termination of employment for any current client of the accounting firm or any clients who stopped utilizing the accounting firm up to two years before the date of termination. The agreement also included a clause requiring the breaching former employee to pay liquidated damages of three times the most recent 12 month's billings the accounting firm billed to the former client.

The relationship between the employee and the accounting firm broke down, and the employee left the firm. Thereafter, 17 clients severed ties with the firm and then approached the former employee to ask him to do their accounting work. Each testified at trial that they chose to leave the accounting firm and that they sought out the former employee. The former employee argued that under these circumstances, it was unreasonable to enforce the agreement because the accounting firm had no protectable interest in clients who had left the accounting firm with no intention of ever using it again. The trial court disagreed.

The Court of Appeals affirmed the trial court. The court found that the relationship between the clients and the former employee amounted to goodwill that was a protectable interest of the accounting firm. This remained so even though the clients left the accounting firm on their own, never to return. The accounting firm fostered one-on-one contact between its employees and clients in order to build goodwill, trust, and loyalty between them. The court held that the agreement properly sought to protect against the loss of that goodwill in the event that employees left the firm.

One judge dissented from the majority opinion because he felt that any goodwill between the clients and the firm ceased to exist when the clients left. He also felt that the firm had not suffered any damages because the clients had left on their own. The majority, on the other hand, affirmed the trial court's decision to award the accounting firm an amount roughly equal to the profits the firm earned from the 17 clients during the last year of the former employee's employment. Though it rejected the agreement's liquidated damages clause (because it penalized nonperformance rather than compensated the non-breaching party for the breach), the majority held that the damage award was proper because it fairly reflected the lost profits the accounting firm actually suffered as a result of the former employee's breach of the agreement.

This case dealt with just a few of the many aspects courts examine when determining the enforceability of non-compete agreements. Employers will be best served by seeking assistance of counsel in drafting and/or reviewing non-compete agreements to ensure that they are both effective and enforceable. The lawyers in Ice Miller LLP's Labor and Employment Practice Group can help employers with this process.

As a member of Ice Miller's Labor and Employment Practice Group, Germaine Winnick Willett focuses on employment discrimination, wage and hour, contract, and other employment-related litigation.

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.