Indiana Supreme Court Issues Decision Impacting Employment Agreements

The Indiana Supreme Court recently published a decision that may prompt employers to review their employment agreements to narrow the scope of restrictive covenants (such as non-competition and non-solicitation clauses) if they want those agreements to be enforceable. 

In Heraeus Medical, LLC v. Zimmer, Inc., 135 N.E.3d 150 (Ind. 2019), an employee signed an employment agreement that contained restrictive covenants.  The specific covenant that was at issue was a non-solicitation covenant which sought to prohibit the employee from soliciting employees to work for a competitor.  The employee left the employer, went to a competitor, and started to build a sales team in part by soliciting and hiring employees of the former employer. 

The trial court issued a preliminary injunction against the former employee from soliciting employees as prohibited by the agreement.  The Indiana Court of Appeals concluded that the non-solicitation covenant was overbroad and was unenforceable as written.  However, the Court of Appeals revised the non-solicitation provision by adding language limiting the covenant’s scope to only “those employees in which the employer has a legitimate protectable interest.” 

The Supreme Court agreed that the non-solicitation provision was too broad because it applied to all employees and not just those in which the company had a legitimate protectable interest.  The Court then analyzed what is known as the “blue pencil doctrine” which it determined allowed terms to be stricken from an agreement but did not allow a court to add terms.  The Court decided that the “blue pencil doctrine” should be treated more as an “eraser” that allowed a court to strike terms but did not allow a court to rewrite a non-competition agreement by adding, changing, or rearranging terms.

The Court was unpersuaded by the “magic phrase” included in the agreement that attempted to give a court the ability to modify the terms of the agreement. 

The Court determined that the non-solicitation provision was unreasonably broad because it extended to “any individual employed” by the employer without limiting it to those who “have access to or possess any knowledge that would give a competitor an unfair advantage.”  The Court then ruled that the covenant could not be made “lawful” by the court adding to its terms.   

This Supreme Court decision may have significant implications with regard to current litigation and impacts how employers should draft their employment agreements with restrictive covenants. 

If your employment agreements are considered “overbroad” by a court, they may not be enforceable.  As a result, we recommend a review of those agreements and revising them if necessary to make them consistent with the current state of the law in Indiana. 

Don Smith and Kathleen Hart draft, defend, and seek enforcement of restrictive covenants and employment agreements and remain ready and willing to assist you in that process.  Please contact them for further information.  

Donald S. Smith

Donald S. Smith

Partner

Author Donald S. Smith

Don Smith limits his practice to representing employers and executives in labor and employment matters. He defends employers in cases pending before state and federal courts, the National Labor Relations Board, Equal Employment Opportunity Commission, Indiana Civil Rights Commission, U. S. Dept. of Labor, OSHA, IOSHA, Indiana Dept. of Workforce Development, and Indiana Worker’s Compensation Board. Don advises employers concerning various employment issues such as employee handbooks, employment agreements, severance agreements, covenants not to compete, restrictive covenants, wrongful termination, collective bargaining, labor arbitration, unions, discrimination, harassment, wage and hour matters, unemployment compensation and worker’s compensation.

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Posted on February 3, 2020 by Donald S. Smith