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Non-Competes/Non-Solicitations: What is reasonable?

Thomas B. BlackwellCourts in Indiana have uniformly held that covenants not to compete or not to solicit, while being in restraint of trade, can nevertheless be enforced if they are found to be “reasonable”.   Whenever a loaded term like “reasonable” is used, the meaning of such term is always in the eye of the beholder.   The “reasonableness” of the geographic region involved and time period during which the restriction applies have led to significant litigation and legal expenses.  However, the one thing that many attorneys overlook when analyzing these cases is that such covenants are only enforceable if there is a legitimate proprietary interest that is deserving of protection.   For instance, if the departing employee is going to work for a company which is not a competitor, or is going to perform a task different than what that employee performed for the now offended employer, it is possible to attack the enforceability on the grounds that there really is no proprietary interest worthy of protection.   Given the fact that the Indiana Supreme Court has said these types of covenants are “disfavored by the law”, counsel should always analyze first whether or not there is actually any proprietary interest substantiating the protection.

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Wage Claims Under Indiana Law

Thomas B. Blackwell Indiana has two statutes which function to provide a serious incentive to employers to ensure that an employee’s final paycheck is paid by the next regularly scheduled pay date.   One statute applies to an employee whose position is terminated (I.C. §22-2-9-2) while the other statute applies if the employee leaves voluntarily (I.C. §22-2-5-1).   The penalty provisions have been interpreted to be the same.   An employee is entitled to 10% of the amount owed accruing on a daily basis up to the point where an additional 200% of the owed wages has accrued.   This is effectively a treble damages award.   Additionally, the employee is entitled to the costs, including attorney’s fees, that the employee incurs in seeking collection of the unpaid wages.   This is a very valuable provision which gives attorneys the incentive to take on cases for relatively small amounts of wages which would otherwise be unprofitable to pursue.  All corporate clients should be advised that they need to pay the employee’s last paycheck, in full, with no deductions for any claimed expenses or other amounts allegedly owed to the employer, at the time of that last pay date.   Failure to do so not only results in the rapid accrual of additional monies, but often, the amount of attorney’s fees exceeds the amount of unpaid wages.

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Enforceability of Non-Competition Agreements

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We have written before about non-competition/non-solicitation covenants that are included in many employment contracts as well as purchase agreements involved in the sale or purchase of a business. We recently were involved in several situations which have again reminded us of the importance of understanding the types of terms and conditions that will be enforced under Indiana law in non-compete and non-solicitation covenants, and those which will not.

 

Non-competition agreements are not favored by courts. In our experience, judges will look for any way to find such agreements unenforceable so as to allow an employee to continue to work in his or her chosen profession. However, Indiana is a freedom of contract State, which means that the courts will enforce these non-competition provisions so long as they are reasonable in their scope. The reasonableness requirement and scope applies to the time, geographic area, and types of services that an individual is prohibited from engaging in following termination of employment with a company. In the event that there are terms that are either missing or so broad as to be deemed “unreasonable,” a court will refrain from rewriting the covenant for the benefit of either party, but instead will either strike any unreasonable terms or read the agreement exactly as written. The court will not add any terms that are not in the original agreement. After doing so, if it appears that the scope is still unreasonable in any respect, the court may not enforce that agreement.

 

A type of provision that may well be deemed unreasonable is one that contains no limitations on geographic restriction. For example, an individual working for a company in a particular line of business may be prohibited from working for a competitor of that business within the geographic region in which the business typically operates. However, to prohibit that employee from working in that industry anywhere in the world, even if the company does not operate internationally, may well be deemed unreasonable. In such a circumstance, if there was no geographic limitation, a court could very well refuse to enforce that covenant as being overbroad and therefore unenforceable. Alternatively, there could be circumstances where a very broad geographic definition would be enforceable in the event that it was a highly specialized company that did operate internationally and had very few competitors around the world.

 

While courts will look for reasons not to enforce these non-competition agreements, they are enforceable under Indiana law. Therefore, before signing such an agreement an employee needs to review that agreement to make sure that he fully understands exactly what he is signing. For example, most “standard” non-compete provisions provide that if the employee is terminated for any reason, then the employee is prohibited from working for a competitor or soliciting customers of the prior employer for some period of time following that termination of employment. The practical effect of that provision is that an employer could fire the employee without cause, and then enforce the non-compete/non-solicitation provision against that employee. While such a result hardly seems equitable, in a freedom of contract State a court may very well enforce that sort of agreement. We would expect that to especially be the case where the parties are sophisticated professionals such as doctors, accountants and the like.

 

It is impossible to predict if your particular non-competition provision will be enforceable. These cases are all very fact specific and therefore require analysis of the particular situation before making any determination about what a court might do in terms of enforcing or not enforcing the agreement. The important thing to remember is to read your contract and make sure you understand exactly what it says (or does not say) and what the practical effect may be on your particular circumstance.   If you are unsure, it is often well worth the money to find an attorney with experience in dealing with these types of agreements to review the contract and discuss with you your particular circumstances, and then you can make an informedbusiness decision as to whether or not you are willing to live with the consequences of signing the particular non-competition provision in your contract.   You may actually be able to negotiate away some of the more onerous terms of the agreement, especially those which allow the employer to terminate you without cause and still enforce the non-competition provisions. However, the time to try to negotiate those terms is before you sign the contract.

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Consequences For Failure To Timely Record Mortgage Assignments

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A recent Indiana Court of Appeals opinion, Wells Fargo Bank, N.A. v. Edward P. Dechert, Trustee of the Bankruptcy Estate of John E. Smith and Isley’s Plumbing, Inc., (Ind.App. June 18, 2014) (www.in.gov/judiciary/opinions/pdf/06181402lmb.pdf), emphasizes the importance of lenders timely recording mortgage assignments.

In Wells Fargo, two mechanic’s lien holders foreclosed their liens and named Washington Mutual Bank, F.A. (“WaMu”), who held a prior recorded mortgage, as a defendant to the action. The mechanic’s lien holders properly served WaMu’s registered agent with a copy of the complaint, the second mechanic’s lien holder’s counterclaim, and other pleadings and filings. After the action had been pending for several months, each of the mechanic’s lien holders sought a default judgment against WaMu while again serving copies of such filings with WaMu’s registered agent. The trial court granted the default judgments requested.

About nine months after the entry of such default judgments, Wells Fargo appeared in the action as WaMu’s successor in interest. WaMu was closed by the Comptroller of the Currency and most of its assets were sold to Wells Fargo, including the subject loan. Wells Fargo requested that the trial court set aside the default judgment entries, then filed a motion to reconsider when the motion to set aside was denied, then filed the appeal once the motion to reconsider was denied.

In such motions and on appeal, Wells Fargo made a number of arguments in favor of setting aside the default judgments that are beyond the scope of this blog topic. The trial court and appellate court found each of Wells Fargo’s arguments unavailing while determining that the mechanic’s lien holders had complied with their obligation to notify the parties with liens of record as of the filing of the action. An assignment of the WaMu mortgage to Wells Fargo was not recorded as of the filing of the litigation, and therefore the mechanic’s lien holders had complied with the Indiana Trial Rules by properly serving the registered agent of WaMu. Consequently, the appellate court held that it was not reversible error for the trial court to have denied Wells Fargo’s efforts to set aside the default judgment.

The takeaway of this decision for lenders is that mortgage assignments need to be recorded promptly so that litigants will have notice of the proper party in interest, and, in the case of mergers and acquisitions, safeguards need to be put in place to ensure that summonses properly served on the acquired institution are received by the acquiring institution. Trial courts have discretion to set aside default judgments. In fact, had the Wells Fargo trial court granted Wells Fargo’s motion to set aside the default judgment entries, it is almost a certainty that the Indiana Court of Appeals would have also upheld that decision and found such a decision to have been within the trial court’s discretion. However, it is best to avoid this uncertainty entirely by properly and promptly recording mortgage assignments so that the world is on notice of the correct mortgagee.

 

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