Employment Law Communiqué
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What Every Employee and Employer Needs to Know About Non-Competition Agreements What Every Employee and Employer Needs to Know About Non-Competition Agreements In recent years, more employers are requiring current and new employees to sign non-competition agreements as a condition of employment. These agreements are meant to prevent employees and former employees from directly competing with the employer after the employment relationship ends. Whether these agreements are enforceable depends on many factors. The First Obstacle - Protectible Business Interest The first obstacle that an employer faces in enforcing a non-competition agreement is whether or not the employer had a "protectible business interest." Reasons such as protecting the employer's good will, customers, and trade secrets have been upheld as protectible business interests. If an employer fails to prove that it has a protectible business interest, the court will look no further and find the non-compete agreement unenforceable. The employee will be able to compete against the employer with no restrictions. The Second Obstacle - The Reasonableness of the Covenant Not to Compete If an employer successfully proves to the court that it has a protectible business interest, the court will then look at the language of the non-compete restriction to determine whether or not the non-compete restriction is reasonable in terms of time, geography, and type of activity prohibited. If any of these terms are deemed by the court to be unreasonable, the entire non-compete restriction may be held unenforceable. It is important to note that in Indiana, the courts sometimes use what is known as a "blue pencil" to strike out unreasonable portions of a non-compete restriction in an effort to make it enforceable. What the courts will not do, however, is re-write any portion of a non-compete provision. For example, a non-compete provision that states: "Dr. Jones will not practice ophthalmology or perform any type of surgery, including LASIK surgery and cataract surgery, in the State of Indiana," would prevent Dr. Jones from performing all types of surgery, even surgeries that had nothing to do with a patient's vision. This would be deemed unreasonable. To make the provision reasonable, a court could "blue pencil," or strike, the words "any type of surgery, including" leaving "Dr. Jones will not practice ophthalmology or perform LASIK surgery and cataract surgery in the State of Indiana." As rewritten, the court could find this a reasonable restriction and uphold it, but it does not have to do so. Furthermore, the court is unlikely to rewrite the restriction to state, for example, "Dr. Jones will not practice ophthalmologic surgery" as it is changing the word "ophthalmology." It is important to try to include only reasonable restrictions to ensure the non-compete restriction is what both the employee and the employer bargained for and that it will be enforced as written. Length of Time The reasonableness of the length of time term is the most objective and clear-cut factor to consider. In general, a non-compete provision with a time restriction of two years or less will be upheld as reasonable. The courts will look at a non-compete provision that is longer than two years very closely, and anything over two years may not be deemed reasonable. It depends on the facts of the specific situation. However, it is important to note that the courts will not change the length of time set forth in the non-compete agreement. Geographic Restriction Indiana courts will also look at the geographic region the non-compete provision restricts. In other words, exactly where is the employee prevented from working? In general, if an employer can prove that it has a protectible business interest in a certain geographic area, that geographic area will be considered reasonable. If the employer goes outside that reasonable geographic area, it is likely that the court will strike the entire non-compete restriction as unreasonable, unless certain geographic areas can be blue-penciled. For example, a common geographic region found in non-compete agreements is the county in which the business is located and all counties contiguous to that county. This type of geographic region has been found to be reasonable. However, if the non-compete provision restricts the employee from working anywhere in the United States, and the company only has extensive contact within a few states, it is unlikely that the court would enforce this term. Determine exactly where the employer has a protectible business interest and list that geographic region. The non-compete restriction should reflect what both the employee and the employer agreed upon and what is permitted by law. Scope of Activities Restricted The last factor the courts will look at is the reasonableness of the scope of activities the non-compete provision restricts. If the non-compete provision encompasses activities that are outside the duties the employee performed for the employer, the non-compete provision will not be enforced. The enforceability of any given non-compete agreement must be analyzed on a case-by-case basis. If you have any questions or concerns about your non-compete agreement, please contact Mallor Clendening Grodner & Bohrer LLP’s Labor and Employment Practice Group. 812-336-0200 www.mcgb.com |
