Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Indiana

Indiana courts have determined that restrictive covenants are enforceable if they are to protect trade secrets, confidential information and good will.  However, customer lists that are readily available to the public or general practices that could be observed by anyone are not protectable business interests.  The terms must be reasonable and necessary in terms of the interests sought to be protected.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Indiana courts have determined that the offer of initial or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement using what is known as the “blue pencil rule” if the offending terms of the agreement can be deleted without affecting the remainder.

Examples of non-compete agreements that Indiana courts have found to be reasonable include:

• A 12-month restriction against a radio personality from being employed by specified radio stations which were in direct competition with the former employer.  The court “blue penciled” the phrase “engage in activities” which were in competition for being too broad.
• A 2-year, 10-mile radius restriction against a hair stylist from competing with her former employer.
• A 1-year, 7-county restriction against a former corporate officer from participating in financial services competitive with the former employer because one year was a reasonable time frame for the former employer to reestablish its customers’ confidence.

The courts have found the following restrictive covenants unreasonable:

• A 5-year, nationwide restriction against a former environmental consultant where the services he had rendered were limited to Indiana and several surrounding states.
• A 5-year restriction with no geographic limit against a former management employee from “directly or indirectly” competing with a magnet products distributor.
• A 1-year, 100-mile radius restriction was overbroad because it forbid the former employee from owning, managing, operating or controlling any business similar to the former employer.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.