Indiana Supreme Court Reaffirms That the Blue Pencil Doctrine Is an ‘Eraser’ for Overbroad Restrictive Covenant Language
On December 3, 2019, in Heraeus Medical, LLC v. Zimmer, Inc., the Indiana Supreme Court reaffirmed the “blue pencil doctrine,” likening the doctrine to an eraser and stating that Indiana courts may only delete language from overbroad restrictive covenants; they cannot reform or add to such agreements. The decision wipes out part of an Indiana Court of Appeals ruling, discussed in detail here, that had relied on a reformation clause in a restrictive covenant to add language to an employee nonsolicitation provision to make it reasonable.
The Indiana Supreme Court went on to affirm the Indiana Court of Appeals’ determination that nonsolicitation provisions can apply to prospective customers, provided that the limitations contain reasonable restrictions and relate to legitimate, protectable interests.
Zimmer held the exclusive distribution rights for Heraeus’s bone cements. When the deal conferring those rights ended, several Zimmer employees joined Heraeus to work in sales. One former Zimmer employee, Robert Kolbe, had a restrictive covenant with Zimmer that included the following employee nonsolicitation provision:
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 agreement also included the following provision prohibiting the solicitation of customers or active prospects, among other restrictive covenants: “[e]mployee will not, directly or indirectly, (i) provide, sell or market; (ii) assist in the provision, selling or marketing of; or (iii) attempt to provide, sell or market any Competing Products to any of Company’s Customers or Active Prospects in the Restricted Territory.”
A key facet of the definition of “active prospect” in the agreement was that it meant a person or entity “to whom, at any time during the six (6) months immediately preceding the termination of Employee’s employment with Company, Employee had (i) any marketing or sales contact on behalf of Company and/or ii) access to, or gained knowledge of, any Confidential Information concerning Company’s business prospects with such Active Prospect.”
The period of restriction was 18 months.
In addition, the Kolbe agreement stated the following: “The parties agree that any court interpreting the provisions of this Agreement shall have the authority, if necessary, to reform any such provision to make it enforceable under applicable law.”
The trial court issued a preliminary injunction against Kolbe, enjoining him from, among other things:
soliciting anyone working for Zimmer as of November 3, 2017, or enticing them to leave their jobs with Zimmer to work for Heraeus; and
selling to or contacting any Zimmer customers Kolbe had sold to in his final two years of employment or any active prospects to whom he had marketed Zimmer products in his last six months of employment.
On appeal, the Indiana Court of Appeals concluded that the nonsolicitation covenant had been overbroad and unenforceable as written. However, based on the reformation provision contained in the Kolbe agreement, the court revised the nonsolicitation covenant to make it reasonable. This was accomplished by adding language limiting the covenant’s scope to only “those employees in which [Zimmer] has a legitimate protectable interest.”
Heraeus Medical petitioned for transfer, which the Indiana Supreme Court granted. Arguments were heard on September 26, 2019, and the court issued its decision on December 3, 2019.
The Blue Pencil Doctrine
The Indiana Supreme Court recounted the history and purpose of the blue pencil doctrine, stating, “we find appeal in its predictability” and noting that Indiana courts had applied it “strictly.”
The doctrine allows a court only to excise unreasonable terms, but not to rewrite provisions or add, change, or rearrange terms. This approach allows for reasonable and enforceable agreements, and it discourages obviously overbroad restrictive covenants. To allow reformation beyond the blue pencil, the court reasoned, would encourage employers to draft “overbroad restrictive covenants and to then rely on courts to narrow them just enough to be reasonable.” In short, it would frustrate the parties’ reasonable expectations about their agreements.
The court went on to find that the employee nonsolicitation provision that had applied to “any person employed” by the company at the time of the employee’s separation was unreasonably broad, going beyond those persons with access to or possessing knowledge that would give a competitor an unfair advantage. That provision could not be blue-penciled since there was no language to excise that would render the scope reasonable. As a result, the Court declared the nonsolicitation provision to be void and unenforceable.
Prospective Customers and Reasonable Nonsolicitation Provisions
The Indiana Supreme Court summarily affirmed the rest of the Indiana Court of Appeals’ decision, including the ruling that customer nonsolicitation provisions can apply to prospective customers if legitimate protectable interests apply. As a result, employers can continue to have greater confidence in prospective customer nonsolicitation provisions if (1) an employee had contact with or knew confidential information about the prospects and (2) the time periods were reasonable.