That’s Not Our Job . . .

We have written on many occasions about non-competition/non-solicitation agreements, which for purposes of this post we will refer to as non-competition agreements.  These are a topic of great interest to both employers and employees, and we get numerous calls about these types of agreements. In Indiana, non-competition agreements are enforceable provided they are “reasonable”.

In this Blog we have also discussed how courts, when asked to enforce contracts (and  non-competition agreements are contracts), will attempt to enforce the intent of the parties as determined by the words that have been chosen by the parties to be in the contract.  While doing that, the courts say that they will not ignore any of the provisions in a contract; rather they seek to enforce all of the provisions of the contract so that none of the words that have been agreed to by the parties are ignored.

There is also a provision within Indiana law that is commonly known as the “Blue Pencil Doctrine”, which is a misleading term, because, as the Indiana Supreme Court recently noted, it is not really a Blue Pencil Doctrine, but is rather an “Eraser Doctrine”.  Under the Blue Pencil Doctrine, courts can make overbroad covenants in a contract reasonable by deleting language and then enforcing the remaining parts of the covenant.  However, in utilizing the Blue Pencil Doctrine, courts may not add any terms, even if the parties have agreed within the terms of the contract to allow a court to do so.  Rather, a court may only delete the unreasonable terms.

Therefore, if the parties agree to a non-competition or non-solicitation agreement that is overbroad, and by removing certain terms the covenant cannot be made “reasonable” and therefore enforceable under Indiana law, the entire covenant will be deemed unenforceable.

In that recent case, a former employer sought to enforce a non-competition agreement that provided in relevant part that the former employee would not:

employ, solicit for employment, or advise any other person or entity to employ or solicit for employment any individual employed by Company at the time of employee’s separation from company employment . . . .

Also included in the agreement was a provision, which is not uncommon in commercial contracts such as this, that provided that if any court interpreting the provisions of the agreement found any provision to be unreasonable or unenforceable, the parties agreed that the court would have the “authority, if necessary, to reform any such provision to make it enforceable under applicable law.”   Therefore, it seems that the intent of the parties was to allow the court to re-write the agreement so that it would comport with the law.

The trial court originally found that the agreement was reasonable and therefore issued a preliminary injunction against the former employee.  The Indiana Court of Appeals found that the covenant was overbroad and unenforceable, but because of the reformation clause mentioned above, the Court of Appeals revised the non-solicitation covenant to make it reasonable by adding language limiting the scope to only those employees in which the company had a legitimate protectable interest.

The Indiana Supreme Court reversed, and once again reaffirmed that under the Blue Pencil Doctrine, a court may remove unreasonable language from a restrictive covenant, by erasing those terms, until only reasonable portions remain.  However, even if the parties have agreed to allow a court to re-write portions of the contract, a court may not rewrite agreements by adding, changing or rearranging terms.  In short, the Court reaffirmed that it is not the court’s job to write reasonable agreements; that is the job of the parties themselves.

In addition, given that most non-competition agreements are primarily, if not exclusively drafted by employers and rarely are “freely negotiated”, the burden is on those employers to follow the law and draft reasonable agreements that can be enforced rather than looking to the courts to do that for them.  This makes sense given that while non-competition agreements are enforceable in Indiana, they are a restraint of trade, generally disfavored by the law, and therefore will be strictly construed against employers.

So the next time you are reviewing a non-competition agreement and notice that it allows a court to reform the agreement to be enforceable under the law, remember that the court can only remove portions of the contract, and cannot add anything to which the parties did not previously agree.