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 to a non-compete. A non-solicitation agreement would not bar the ex-employee from “competing”, but would prohibit that person from soliciting the customers of the former employer for a period of time. These types of agreements are typically more favored by courts.
An interesting issue arises where the ex-employee “brought” certain customers to the employer, and now that the employee has left, the customers have told the employer that they (the customers) wish to continue doing business with the ex-employee and the former employer. Does the former employer then have a business interest to protect?
Again, each case will be different, so it is impossible to tell in advance what will or will not be enforceable. Parties are often well served to negotiate some sort of buy-out or other resolution concerning the non-compete, rather than engaging in protracted and expensive litigation to determine the extent to which a court will decide to enforce the parties’ agreement.