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Successfully Protecting Your Business Interests

It has almost become standard practice for companies to require new employees to sign boilerplate non-compete agreements prior to beginning their employment. However, such agreements are often considered difficult to enforce. Indiana is one of many states that have expressed a disfavor for agreements that restrict a person’s future employment opportunity. See Cent. Ind. Podiatry, P. C. v. Krueger, 882 N.E.2d 723, 728-29 (Ind. 2008) (“This Court has long held that noncompetition covenants in employment contracts are in restraint of trade and disfavored by the law.”). Another reason courts take a negative view of non-compete agreements is the notion that they are written by, and heavily favor, employers. See Guinn v. Applied Composites Engineering, Inc. 994 N.E.2d 1256, 1272 (Ind. Ct. App. 2013) (invalidating a non-compete when employer prepared the terms and required all employees to sign it).

This does not mean that companies should abandon this important business tool. When used effectively, non-competes can be an effective tool to shield your competitive advantage. Companies must avoid the use of standard forms and take a more deliberate and focused approach to the drafting of these agreements. In order to be enforced, non-competes must be reasonable. Businesses can achieve reasonableness by articulating a legitimate business interest and ensuring the non-compete is narrowly tailored to ensure protection of that interest. Krueger, 822 N.E.2d at 729. See alsoPress-A-Dent, Inc. v. Weigel, 849 N.E.2d 661, 668-69 (Ind. Ct. App. 2006), trans. denied. Every case, and every employee, will be different. Accordingly, an employee’s non-compete should be individualized and thoughtful.

Below are four tips to effectively draft non-compete agreements that are more likely to a challenge in the courts.

  1. Articulate the business interest that you are attempting to protect. It is not enough to forbid a former employee from operating a similar business. More care must be taken to specify a legitimate business interest to protect. A protectable interest is “an advantage possessed by an employer, the use of which by the employee after the end of the employment relationship would make it unfair to allow the employee to compete with the former employer.” Coates v. Heat Wagons, Inc., 942 N.E.2d 905, 913 (Ind. Ct. App. 2011). Such interests could included goodwill, secret or confidential information, and personal contact with customers. In its simplest form, this refers to information that the employee gained from the employment.
  2. Shorten the duration. Courts will not restrict the activity of a former employee for an extended period of time. Companies should sacrifice a non-compete agreement’s longevity to increase its enforceability. Employers must express why the duration used is necessary to preserve a competitive advantage. Particular focus should be given to articulating the unfairness that would result from a former employee’s ability to use the information gathered from their employment and how a “cooling off” period will diminish the impact. The shorter a non-compete agreement, the more defensible it will be. Companies should view non-compete agreements as a means to “get a head start” on solidifying important business and customer relationships after an employee leaves, not to indefinitely reduce competition.
  3. Narrow the geographic area. Proper geographic scope “depends on the interest of the employer that the restriction serves.” Slisz v. Munzenreider Corp., 411 N.E.2d 700, 707-09 (Ind. Ct. App. 1980). A company’s protected interest must extend to the geographical areas that it intends to protect. If a business does not operate in an area – it is unlikely that a court will restrict a former employee from operating in that same area. Regardless of where a company operates, companies will have difficulty enforcing non-compete agreements that restrict a former employee from working at all. Companies should stay away from attempts to restrict a former employee from conducting business “anywhere in the continental United States.” As with duration, the more narrow the geographical restriction, the more enforceable it will be.
  4. Specify the activity prohibited. Perhaps the most important aspect of maintaining reasonableness is clearly identifying the activity to be prohibited. Attempting to restrict an employee from “being connected in any way with any business that competes” with the former employer is not advisable. Instead, a company should select specific and detailed activities, such as restricting “the recruitment of executives within the field of information technology.” Courts will not enforce non-compete agreements when the scope of activity prohibited could essentially “apply to the entire world.” Vukovich v. Coleman, 789 N.E.2d 520, 526 (Ind. Ct. App. 2003).

With non-compete agreements – less is often more. Courts are more likely to find these agreements reasonable when they are prepared with care and restraint. When used properly, non-compete agreements can be a powerful insulation from the wayward activities of former employees. The difficulties with such agreements generally do not arise from their use, but from the general lack of care and precision with which they are often drafted.