Covenants not to compete, between employers and employees, are not enforceable merely because they are signed by both parties. Non-compete agreements are generally disfavored by Indiana courts, but will be enforced if they are reasonable. Courts will consider whether the employer has a legitimate protectible business interest, the geographic and time limits of the agreement, and the types of activities sought to be prohibited.
Legitimate protectible interest. To be enforceable, an employer must show some reason why it would be unfair to allow the employee to compete with the former employer. Courts have upheld agreements to protect goodwill and secret or confidential information, such as customer lists, customer requirements, and customer contacts. However, courts will generally not enforce an agreement if the sole purpose is to prevent the employee from using his or her general skills acquired while performing the employee’s job. The employer must show some adverse or irreparable injury.
Geographic and time limits. A covenant not to compete must generally be limited in terms of geography and/or customers. Consider a medical supply distributor that requires its salespeople to sign non-compete agreements. The agreement may be enforceable if it prohibits a salesperson from competing in his old territory and for his old customers. But the agreement would likely be unenforceable if it prohibited the employee from sales jobs in a new territory seeking new customers. Indiana Courts have enforced non-compete agreements for periods of one year and greater.
Types of activities. A covenant not to compete must not be wider than is necessary to protect some legitimate interest of the employer. For example, a covenant may be too broad if it prevents a salesperson from working for a competitor in the finance department. The covenant is more likely to be enforced if it is limited to the scope of the employee’s current activities.
Employers should consider… Covenants not to compete can be an effective tool for employers to protect their customer relationships, trade secrets, and investment in employees. However, the protection exists only with a properly drafted agreement. To be enforceable, covenants not to compete must be drafted narrowly and tailored to the specific employee’s role and the industry. One agreement may be enforceable for an executive, but not a salesperson. Continued employment has been upheld as adequate consideration for modification of a non-compete agreement.
Employees should consider… Employees may become stuck in an undesirable job by an unreasonably broad covenant. It is not advisable to sign a non-compete agreement until one understands the specific restrictions, including the type of work and geographic scope, and has considered the consequences. The costs of failing to get proper legal advice before entering into such an agreement can be high and stifle future employment opportunities and career advancement.
Recent Court cases have provided guidance on the enforceability of covenants not to compete, including for medical and industrial salespeople and distributors, hair salons and stylists, and on-air personalities and radio stations.
Contact Brett Gibson: bg@bbgibson.com |
