A frequent companion to a non-compete agreement is a non-solicitation agreement that limits a departing employee’s ability to “raid” his prior employer to staff his new employer. Both non-competition and non-solicitation agreements are considered to be in restraint of trade, and thus disfavored by the law and subject to strict construction in Indiana. To be enforceable, the terms of the restrictions contained in these agreements must be reasonable. Agreements that are overly broad in their scope are not enforceable. In recent years, Indiana case law has chipped away at the breadth of non-solicitation agreements, finding that the reasonableness of a non-solicitation clause hinges on the legitimate competitive advantage that the contracting employer seeks to protect. Thus, an agreement that seeks to forbid solicitation of any employee from the CEO to the administrative clerk is likely unenforceable, while the agreement that tailors the restriction to those who have the access or knowledge to give a competitor an unfair advantage are much more likely to be enforceable.
One tool that Indiana courts have utilized in interpreting agreements containing non-solicitation agreements is the so-called “blue pencil doctrine” which permits a court to strike unreasonable portions from a restrictive covenant if the covenant is clearly divisible into parts and if by so doing the restriction may be rendered reasonable –and therefore enforceable.
The Indiana Supreme Court recently clarified when and how the blue pencil doctrine can be used in Heraeus Medical, LLC et al. v. Zimmer, Inc. et al., Indiana Supreme Court, December 3, 2019. Zimmer employee Robert Kolbe signed a non-competition agreement when he became a group director with Zimmer. The agreement contained a non-solicitation covenant which prohibited Kolbe from recruiting Zimmer employees to work for a competitor. Kolbe ultimately left Zimmer to work for competitor Heraeus and recruited Zimmer employees to build his Heraeus sales team. Zimmer sued, seeking damages against Heraeus, Zimmer, and others, and also sought a preliminary injunction to enjoin Kolbe from recruiting Zimmer employees based on the non-solicitation language of the agreement.
The subject agreement also contained a “reformation clause” that purported to give any court that was faced with interpreting the agreement the power to re-write any offending provision of the contract to render it enforceable. But here’s the rub-with Indiana courts armed only with their Blue Pencil, can the parties deputize the courts to exercise a greater power of revision to save their agreement from a finding that the original terms are unenforceable as written? And this is where this case really got its legs. After the trial court granted a preliminary injunction against the employee and his new employer under the terms of the non-solicitation portion of the agreement, employee and Heraeus appealed on the grounds that the non-solicitation language contained in Zimmer’s agreement was unreasonably broad. The Court of Appeals agreed that the scope of the non-solicitation clause was overly broad and that the clause could not be made reasonable by simply striking language from it under traditional blue pencil notions. However, relying on the agreement’s reformation clause, the Court of Appeals re-wrote the scope of the class of persons employee and Heraeus were prohibited from soliciting from “any employees” to “those employees in which [Zimmer] has a legitimate protectable interest,” ostensibly under the blue pencil rule as expanded by the invitation of the parties contained in the reformation clause.
Heraeus further appealed to the Indiana Supreme Court, arguing that the Court of Appeals re-writing of the non-solicitation clause they had found to be unreasonable was not an appropriate application of the Blue Pencil doctrine. The Indiana Supreme Court agreed.
Consistent with Indiana’s refusal to rewrite agreements for parties, Chief Justice Loretta Rush made clear that parties could not contract to expand the blue pencil doctrine beyond the strictly limited contours already existing under Indiana law: “Indiana Courts employ the ‘blue pencil’ doctrine to revise unreasonable non-competition agreements . . . This doctrine, though, is really an eraser.”
Writing for the unanimous court, Chief Justice Rush concluded that while the blue pencil doctrine as applied in Indiana is not a perfect solution, “we find appeal in its predictability” and concluded that it was a “sound and reasonable” means to balance the interests of employers against those of employees. The opinion further found that parties may not incorporate a “magic phrase” into their agreements that will delegate to the courts the task of crafting a reasonable agreement. “While reformation clauses might encourage an interpreting court to blue-pencil an agreement, they do not allow a court to overstep the bounds of Indiana’s blue pencil doctrine by adding terms.” The doctrine, the opinion advises, “is really an eraser.”
What are the take-aways for companies trying to protect their competitive advantage through non-compete agreements and non-solicitation agreements? First, recognize that scrutiny of these agreements is growing, and the areas of protectable interests for employers are shrinking. Overly broad agreements will draw the most attention—from your employee’s counsel and from their new employers and their counsel. Look closely at the competitive advantage that you are trying to protect, and tailor your agreements for the individual situations involved. Make the restrictions reasonable as to scope, time and geography, and relate each restriction to the specific individual and situation. And always keep in mind that while a court can “blue pencil” out offending terms, it cannot add any terms to your agreement.