Non-Competiton Agreements; Is there an interest to protect?

A common question that business lawyers are asked about is the enforceability of non-competition agreements, or “non-competes”.The general topic of non-competition agreements requires far more discussion than can be completed in a single post. I will address other issues in later posts. As a very general rule, even thought the prevailing wisdom is that “judges hate non-competes”, in Indiana non-competition agreements are enforceable so long as the terms are reasonable in terms of time, geography, and the type of activity prohibited. Of course, what is reasonable is going to be determined on a case-by-case depending on the type of business, the customer base, the role of the employee, and many other factors. Businesses should be aware, however, that non-competes are strictly construed against the employer, and courts will look for any excuse not to enforce a non-compete so that an individual may to continue to work in his chosen field. While Indiana strongly favors the freedom to contract as parties see fit, public policy does not favor any restraints on trade, including restraints on a person’s ability to work. One area that is sometimes overlooked initially is whether the employer can demonstrate that it has a legitimate business interest to protect through the enforcement of the non-compete. If the employer cannot show it has a legitimate interest to protect, then it may not enforce the non-compete. That interest to protect can be as obvious as a patented trade secret or other confidential information, or as “soft” as goodwill. If the real issue is the customers, then a “non-solicitation” agreement may be the better alternative, or at least a supplement...

Just Sue ’em!

Although the linked case does not involve a business dispute, the procedural history serves as a cautionary tale to business owners and all other people who think litigation is the magic pill that will quickly cure and resolve a business dispute. In the case of Moore v. Ford, the accident occurred on December 20, 2001, the lawsuit filed in May, 2003, and the Indiana Supreme Court just sent it back to the trial court for a new trial. Litigation is typically a slow process, and much moves slower than business people are used to moving and making decisions. Keep that in mind the next time you pick up the phone and, believing that a lawsuit is the best way to obtain a quick resolution, tell your lawyer to “just go sue” the other party to the dispute. There are certainly times where a lawsuit is need to protect your rights or enforce appropriate remedies, but just be aware of the time and resources that will be spent by you and the business in either prosecuting or defending a lawsuit, regardless of the how meritorious (or not) the claims are in the...

Why Lien Searches Are Important

Here is a link about a recent case where the Indiana Court of Appeals held that a secured creditor could obtain pre-judgment possession of its collateral, despite the fact that the borrower had sold that collateral to a third party. The Court rejected the idea that the buyer could rely upon the statements of others concerning whether there were any liens attached to the property being sold. The buyer never contacted the lienholder. The Court stated: We find that it is unreasonable to rely on the statements of third parties – or the debtor – about the current status of security interests, and noted that in these situations the debtor often has a strong incentive to be untruthful. The business tip here is to conduct a UCC or other title search prior to purchasing property to determine if any liens attach to the property you want to buy.  If there are perfected liens, and you buy the property without obtaining a release of those liens, you may find yourself paying twice for the same property....

Business Partners are Like Spouses

When deciding to go into business with a partners or partners, people need to be aware that in many ways a business partner is like a spouse. Business owners who succeed together do not need to always agree, but the successful owners have a relationship of trust, respect, equal division of effort, willingness to compromise, and an equal willingness to stick together through the rough times. The law in Indiana imposes certain obligations upon co-owners of a business, whether those “partners” (lawyers hate to loosely use that term partners, and the reasons why will be explained in later posts) are shareholders in a closely held corporation, members of a limited liability company, or partners in a partnership. The most important of these obligations is that each shareholder/member/partner owes fiduciary duties to his fellow shareholders/members /partners, as well as to the company itself. This duty is the same in Indiana regardless of whether the business is a corporation, partnership or limited liability company. The fiduciary duty that is owed is to deal fairly, honestly and openly with the fellow shareholders as well as with the company. This has been sometimes described as dealing with the “utmost good faith”. Examples of a breach of this duty including situations where a shareholder learns of a business opportunity and takes advantage of that opportunity without allowing the company an opportunity to participate; setting up a competing business; and using one’s majority shareholder status to cause the company to enter into agreement that are solely for the benefit of the majority shareholder. There are countless ways that the fiduciary duty can be breached. As...

Beware Of The First Breach

Businesses deal with contracts on a daily basis. While it is always preferable to have your contracts in writing, oral contracts are enforceable, with certain limited exceptions. This is not news to most of you in the business world. A lesser known tenet of contract law is the first breach doctrine. This doctrine stands for the rather common sense notion that when a party to a contract does not live up to his own obligations owed under the contract, he may not sue to enforce the contract against the other party. Stated another way, if a party has committed the “first breach”, it cannot thereafter sue to enforce provisions of the contract that are favorable to that party, even if there is a subsequent “breach” by the other party. For this doctrine to apply, the first breach must be “material” to the agreement between the parties. A common example would be if an employer fails to pay an employee all that is owed pursuant to an employment contract, that employer will not be allowed to enforce non-competition and non-solicitation covenants contained in that same contract. It is also well established that a failure to pay an amount owed under a contract is a “material breach.” In 1983, in the case of Licocci v. Cardinal Associates, the Indiana Court of Appeals succinctly stated this principle, which has been consistently upheld since that time: “As a rule, a party first guilty of a substantial or material breach of contract cannot complain if the other party thereafter refuses to perform … where a contract is not performed the party is guilty of...
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