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Indiana Court of Appeals Refuses to Enforce Terms of Non-Compete Agreement

A recent decision of the Indiana Court of Appeals could drive a stake through the heart of many employer’s non-compete agreements. The case, Clark’s Sales and Service, Inc. v. Smith and Ferguson Enterprises, involved a long-time salesman for an appliance retailer. Mid-way through his 14-year employment tenure (and after a key colleague went to go work for one of the company’s competitors), his employer required him to sign a non-compete agreement. The key provisions of the non-compete should be familiar to most Indiana employers:

For two years after the employee’s termination from employment, he was prohibited from, in any capacity:

  • soliciting or providing services competitive to those offered by his employer to any business account or customer who was a business account or customer at any point in time during his employment;

  • working in a competitive capacity with a named competitor of the employer in the state of Indiana, in any city or state in which the competitor conducts business, or to work for any business that provides services similar or competitive to those offered by the employer during the term of his employment, including but not limited to within the state of Indiana, Marion County, the counties surrounding Marion County, or within a 50 mile radius of his principal office with the employer.

After the employee resigned and went to go work for one of its competitors, the employer filed suit to enforce the non-compete and sought injunctive relief. The trial court, however, rejected the employer’s claims and struck down the non-compete as overly broad and unreasonable. The decision was affirmed by the Indiana Court of Appeals.

The Court of Appeals took issue with several parts of the agreement. First, the Court felt that the restriction on soliciting or providing services to customers was overbroad because it prohibited the employee from servicing anyone who had been a customer at any point in time during his employment – including customers with whom he may not have had any contact.

Second, the Court viewed the scope of activities as too broad because it went beyond the sales job he had with his employer and prohibited him from engaging in any service that the company offered but which he personally never performed during his employment (i.e. performing maintenance or repair). The Court felt that restricting the employee from competing with portions of the business in which he never was associated was invalid.

Third, the Court viewed the geographic restriction as unreasonable. While the Court felt that a 50 mile radius might be reasonable given the nature of the sales services he provided, the problem was that the way the provision was worded, it is was in addition to and not a limitation of the much more expansive geographic restrictions (the entire state and counties within the state) that preceded it.

Perhaps more troubling for employers is that the Court refused to apply the “blue pencil doctrine.” Where a covenant is clearly separated into parts, some of which are unreasonable and some which are not, the doctrine allows Indiana courts to strike out the offending provisions to salvage the agreement. Here, the Court felt that any such revisions would have to be extensive and elaborate – necessitating changes to the entire meaning of certain paragraphs. Since the Court could not easily redact the challenged language, the Court refused to enforce the non-compete agreement.

The case poses yet another stark reminder of the need for employers to carefully and narrowly craft the language of their restrictive covenants. We encourage all of our clients to review the terms of their existing agreements (and to prepare future agreements) to ensure that they are consistent with the terms of this decision.

© 2022 BARNES & THORNBURG LLPNational Law Review, Volume IV, Number 70
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About this Author

Janilyn Brouwer Daub Labor & Employment Attorney
Partner

Janilyn Daub defends employers in labor and employment litigation in federal and state courts, as well as before various governmental agencies, such as the OFCCP, EEOC and NLRB. She is dedicated to helping her clients with the legal issues that arise when managing a workforce, navigating them through the challenges they face while seeking to mitigate future problems and liability.

With a practice that is national in scope, Janilyn frequently advises clients on issues related to affirmative action plans, including plan preparation and defense of Office of Federal Contract Compliance...

574-237-1139
Roy A. Ginsburg, Labor and Employment Attorney, Barnes Thornburg, Law Firm
Partner

Roy A. Ginsburg is a partner in Barnes & Thornburg LLP’s Minneapolis, Minnesota, office and a member of the firm’s Labor & Employment Law Department.

Mr. Ginsburg has represented private and public companies for more than 30 years in employment and commercial litigation within his national practice. He has litigation experience in various employment law disputes, including trade secret misappropriation, usurpation of corporate opportunity, corporate raiding, breach of fiduciary duty, and breach of employment-related contracts, such as restrictive covenants and non-competes....

612-367-8758
Teresa Jakubowski, Barnes Thornburg Law Firm, Washington DC, Labor and Employment  and Ltitgation Law Attorney
Partner

Teresa L. Jakubowski is a partner in Barnes & Thornburg LLP's Washington, D.C. office where she practices labor and employment law and is a member of the firm’s Disability Law Practice. Her practice includes providing legal counsel and representing clients in litigation and administrative proceedings in the areas of employment law, particularly discrimination/equal employment matters; the Employee Retirement Income Security Act of 1974 (ERISA); the Family and Medical Leave Act of 1993 (FMLA); wrongful discharge; state employment laws; fair housing; and accessibility for individuals...

202-371-6366
Mark Kittaka, Barnes Thornburg Law Firm, Fort Wayne and Columbus, Labor and Employment Law Attorney
Partner

Mark S. Kittaka is a partner and the administrator of the Labor and Employment Law Department of Barnes & Thornburg LLP’s Fort Wayne, Indiana office. Mr. Kittaka’s practice covers all areas of labor and employment law including federal and state litigation concerning discriminatory practices and retaliation claims, including, but not limited to: Title VII race, sex, color, and religious discrimination claims; the Americans with Disabilities Act (ADA) (disability discrimination, reasonable accommodation, interactive process); Age Discrimination in Employment Act (ADEA); the Family and...

260-425-4616
Peter A. Morse, Jr., Barnes Thornburg Law firm, Indianapolis and Washington DC, Labor and Employment Law Attorney
Partner

Pete Morse is a partner and the administrator of the Labor & Employment Department in Indianapolis, the firm’s largest office. He also co-chairs the firm’s Global Services Practice Group, serves on the firm's Management Committee, and most recently was appointed to serve as Honorary Consul to the country of Japan.

Cited in The Best Lawyers in America as a "Lawyer of the Year" on multiple occasions, Pete represents employers in virtually all aspects of labor and employment law for a broad client base, including private and public...

317-231-7794
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