Non-Compete/Non-Solicitation Agreements and the Blue Pencil Doctrine

To be enforceable under Indiana law, non-compete and non-solicitation agreements must be reasonable. The employer typically must show how a violation subjects it to unfair competition. An unreasonably broad agreement will not be enforced. In an effort to reduce risk, some employers insert language into their non-compete and non-solicitation agreements that authorizes courts to redraft overbroad provisions to make them reasonable. That approach works in some states but does not work under Indiana law.

Indiana follows the “blue-pencil” doctrine. This means that courts may make unreasonably overbroad non-compete/non-solicitation agreements reasonable by deleting language. Of course, for this to be an option, the agreement must be clearly divisible into parts. Moreover, the deletion must result in a reasonable restriction. An example follows:

During the term of this Contract and for a period of two (2) years after the termination or non-renewal of this Contract, Employee shall not engage, directly or indirectly, in the practice of podiatry or podiatric surgery within the counties of Marion, Boone, Hamilton, Hancock, Shelby, Johnson, Morgan, Hendricks, Howard, Tippecanoe, Grant, Tipton, Vigo and Madison, or in any other county where Corporation maintained an office during the term of this Contract or in any county adjacent to any of the foregoing counties, either as an employee, agent, partner, proprietor or independent contractor, without the prior consent of Corporation.

Court Refuses to Rewrite Non-Solicitation Agreement

Heraeus Medical, LLC v. Zimmer, Inc. involved claims that a former employee breached a restrictive covenant by soliciting his former employer’s employees to a competitor (nothing in this post is intended to suggest whether such allegations are true). The restrictive covenant stated:

Employee will not employ, solicit for employment, or advise any other person or entity to employ or solicit for employment, any individual employed by Company at the time of Employee’s separation from Company employment, or otherwise induce or entice any such employee to leave his/her employment with Company to work for, consult with, provide services to, or lend assistance to any Competing Organization.

The Court found the restriction too broad. It was not limited to solicitation of employees with access to knowledge that would give a competitor an unfair advantage.

The agreement authorized courts to modify unreasonable provisions to make them enforceable. Consequently, the Indiana Court of Appeals narrowed the scope of the agreement to apply only to employees in which the employer had a legitimate protectable interest. By contrast, the Indiana Supreme Court ruled that courts may not save overbroad restrictive covenants by adding terms, even if the agreement gives the court the authority to do so.

What Concerned the Indiana Supreme Court?

The Indiana Supreme Court explained the value of the blue pencil doctrine. It discourages the employer from overreaching. Moreover, it does not subject the parties to an agreement that they did not make. The court wrote:

To reason otherwise would spell the end of Indiana’s blue pencil doctrine by encouraging employers to draft obviously overbroad restrictive covenants and to then rely on courts to narrow them just enough to be reasonable….This would frustrate the parties’ reasonable expectations, since courts cannot, after the fact, assume what the parties intended when they entered into the agreement.

The Non-Solicitation Agreement is Unenforceable

The Indiana Supreme Court ultimately had to determine whether it could save the overbroad non-solicitation agreement through blue-penciling, or whether it had to strike the entire agreement. In this case, the agreement not to solicit “any individual employed” by the employer could not be blue-penciled. There was no language that could be taken out to make this restriction reasonable. The Court ruled that the covenant was void and unenforceable.

Bottom line: Under Indiana law, courts may delete, but not add, language to save an overbroad restrictive covenant. This assumes, of course, that the covenant is divisible and that a reasonable restriction would remain after language is deleted. In the words of the Indiana Supreme Court, the blue-pencil doctrine is an eraser.

Consult an Indiana Employment Lawyer About Your Non-Compete Agreements

For Indiana businesses, your best bet is to consult with an experienced Indiana employment lawyer who can help you prepare employment-related restrictive covenants. This recent Indiana Supreme Court case is a good example of the need to be thoughtful when drafting employment agreements. A non-compete or non-solicitation agreement that is enforceable in one context might not be in another. Employers who overreach might find they have no protection at all.

The employment attorneys of Wooden McLaughlin LLP can assist with these and all of your employment law needs. Call us at 888-639-6151 or visit our offices in Indianapolis, Evansville, or Bloomington to schedule a consultation.

(This post is not legal advice. Consider consulting with a lawyer about specific situations.)