Modification of Non-Competition and Non-Solicitation Agreements Rejected by Recent Indiana Supreme Court Case
In its December 2019 decision, Heraeus Med., LLC v. Zimmer, Inc., the Indiana Supreme Court held that courts cannot add language to a non-competition agreement in order to make it enforceable – even when authorized to do so by the language of the agreement. Chief Justice Rush’s opinion overturned the Indiana Court of Appeals’ prior decision in the case in which the Court of Appeals modified the non-solicitation covenant contained in the agreement by adding limiting language. The Court then enforced the covenant as modified.
It is important to remember that non-competition agreements are generally disfavored under Indiana law but will be enforced if “reasonable.” The determination of reasonableness is a question of law for the court. To improve the enforceability of non-competition agreements, contract drafters often include severability provisions and reformation provisions.
A severability provision, like the “blue-pencil doctrine,” asks courts to remove any overly broad or unenforceable language in an agreement without affecting the remainder of the contract. For instance, under the blue-pencil doctrine, if an ex-employee is prohibited from competing in Vanderburgh, Warrick and Henderson counties for three years, the Court could strike Henderson County and enforce the agreement as to Vanderburgh and Warrick counties.
On the other hand, a reformation provision asks courts to reform and even modify language of an agreement if deemed necessary to make it reasonable and enforceable. So, in the above example, if the Court determines that the three-year period is too long but one year is reasonable, the reformation provision is designed to authorize the Court to modify the duration from three years to one year and then enforce it accordingly.
The issue in Zimmer arose from a non-competition agreement that contained a non-solicitation provision restricting the employee from recruiting “…any individual employed by [Zimmer] at the time of [employee’s] separation from [Zimmer]….” on behalf of a competitor. The agreement also contained a reformation clause that gave any court interpreting the provisions of the agreement the authority, if necessary, to reform any such provision to make it enforceable under applicable law.
The employee left Zimmer for a competitor and was alleged to have recruited Zimmer employees. The Indiana Court of Appeals determined that the non-solicitation covenant was too broad as written because it applied to any Zimmer employee. The Court of appeals relied on the reformation clause to add limiting language, then applied the non-solicitation covenant only to “…those employees in which [Zimmer] had a legitimate protectable interest.”
The Supreme Court disagreed. In overturning the Indiana Court of Appeals’ decision to enforce the covenant as modified by this limiting language, Chief Justice Rush concluded that contract drafters could not intentionally draft overbroad restrictive covenants and then rely on the courts to narrow them. While rejecting the reformation clause in the agreement, the Supreme Court confirmed its recognition of the blue-pencil doctrine, stating that courts may delete, but not add, language to revise unreasonable restrictive covenants. But since the covenant not to solicit “any individual employed” could not be blue-penciled, the Supreme Court held that the overbroad covenant in Zimmer was void and unenforceable.
This recent case illustrates the importance of carefully drafting reasonable non-competition and non-solicitation restrictive covenants to enhance their effectiveness and enforceability.
For additional information about the impacts of the Zimmer ruling or the enforceability or effectiveness of non-competition, non-solicitation or other employment agreements, please contact Indiana attorney Ted Barron at rbarron@KDDK.com or (812) 423-3183, or contact any member of the KDDK business law practice team.
About the Authors
Robert F. “Ted” Barron II, a Partner at Kahn, Dees, Donovan & Kahn in Evansville, Indiana, is a member of KDDK’s healthcare law and business law practice teams. He counsels counsels healthcare clients – including hospitals, joint ventures, surgery centers, physicians, physician groups, rehabilitation centers, and mental health centers – on contractual matters, regulatory and compliance issues, various operational matters, and employment issues. In addition, Ted assists business entities in a variety of general business and employment matters, including the formation of new businesses, joint ventures, and negotiation of business contracts. Ted also represents clients in prosecuting and defending cases involving employment agreements, non-competition agreements and trade secrets provisions.
Article co-authored by KDDK attorney Robert P. Lamey.