What Triggers the Beginning of a Non-Compete?

hagenow2In a recent case decided by the Indiana Court of Appeals, the judges unanimously agreed that a 10 day break in employment with a prior employer started the running of the non-compete agreement between that employer and its employee, despite the fact that same employee was rehired by that same employer 10 days later.

     At the time of the employee’s original hire, he was asked to sign a non-compete agreement, which he did.  He was subsequently fired.  Ten days later his employer offered to revoke the termination and allow him to return to his prior position.  The employee returned to his position but the employer did not ask the employee to sign a new non-compete agreement.  Approximately 2 ½ years later, the employee left that employment and immediately began working for his former’s employer’s competitor.

     The employer filed a lawsuit seeking to enforce the non-compete agreement that the employee signed at the time of his original hire.  The employer argued that because the termination was “revoked”, and the employee rehired, the non-compete agreement signed when the employee was originally hired should still remain in full force and effect.

     The Indiana Court of Appeals rejected the employer’s argument and ruled in favor of the employee.  The Court noted certain principles related to non-compete provisions, which we have previously discussed here.  Included among these are the fact that covenants not to compete are in restraint of trade and are not favored by the law; they are strictly construed against employers and are enforced only if reasonable; and those covenants must be reasonable with respect to legitimate protectable interest of the employer.

     The Court of Appeals held:

Mindful that non-compete agreements are disfavored by law and strictly construed against the employer, we conclude there is no issue of material fact [Employee] was indeed separated from [Employer] on October 16, 2009, which marked the starting point of the two year restrictive period of the non-compete agreement.  Absent the execution of a new non-compete agreement on October 26, 2009 or a written extension of the prior non-compete agreement, the employee’s restrictive period ended on or about October 16, 2011.  Therefore, at the time of entering into an employment relationship with [Competitor] in May of 2012, [Employee] was no longer bound by the provisions of the non-compete agreement.

     The obvious lesson here for employers is that a re-hired employee needs to sign a new non-compete agreement, or at least some sort of document acknowledging that the previous non-compete agreement has been extended to fill any gap in employment.  Indiana courts will enforce contracts according to their plain, ordinary, and clear terms.  Therefore, it is a worthwhile exercise to put together written contracts, signed by all necessary parties, to accurately document what the parties’ intent is with respect to their agreements, including non-compete and other types of agreements.

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