At the outset of hiring a new employee, a common practice is to have the new employee sign a non-compete agreement. Generally, these types of agreements will prohibit an employee from working for another company in direct competition against their employer. This is to protect confidential information, trade secrets and goodwill from being used at competing businesses. While these types of agreements are commonplace at the outset of many types of employment, the enforceability of said agreements can sometimes be called into question. It is important for employers to know how Indiana courts have handled non-compete agreement enforceability in the past to ensure their agreements are in line with court enforcement.
In general, Indiana courts disfavor non-compete agreements because they can be seen as a restraint on trade. However, non-compete agreements meeting a two-prong test can be, and often are, enforceable.
1. Protected Business Meeting Interest
The first step in determining the enforceability of a non-compete agreement is whether or not the business has a protected interest. This might seem vague, but there are two categories that are usually considered protected business interest:
● Confidential Information or Trade Secrets: A business’s confidential information or trade secrets can be protected through a non-compete agreement. This type of information can include financial information, marketing strategies, customer information, or other unique approaches a business uses in conducting their business.
● Business/Customer Relationship Preservation: Businesses thrive through their customers or users. A non-compete agreement can be used to protect the relationship a business has with its customers. Former employees can be prohibited from taking customers from a business when they leave the business. Former employees can also be prohibited from soliciting customers and trying to get them to leave their current business. Indiana courts have also held that “goodwill” developed with customers is a protected interest.
2. Scope of the Restrictions
The second step in determining the enforceability of a non-compete agreement is the scope of the agreement and restrictions that are placed on an individual. A non-compete agreement cannot severely limit an employee from working elsewhere, nor may the agreement be so broad that the restrictions on the former employee’s interests are also not protected. Restrictions on employment type are generally limited to the scope of work the previous employee did for the company, and must be of a reasonable duration.
When drafting non-compete agreements for employees to sign, it is important to keep in mind the above two-step process in the event that the validity or enforceability of it is challenged by a former employee seeking employment elsewhere. Making sure that the non-compete agreement is not overly broad, has reasonable restrictions, and is clear can help reduce the chances that its enforceability is challenged. Each case is unique, however, and must be examined independently.
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The employment law attorneys at Beers Mallers Backs & Salin, LLP are here to help draft agreements between a business and its employees that are designed to reduce the likelihood of the agreements being challenged in court. Contact us today for all your employment law needs.