What is a Noncompete Agreement?

Consider this scenario. You’ve just received an e-mail from your company’s top salesperson, informing you that she’s leaving the company and going to work for your competitor. As with most businesses, your company’s existing and repeat customers are its lifeblood. As with most businesses, your company relies on its sales representatives to establish, grow and maintain relationships with its customers. If your sales representatives leave, what’s to stop them from taking your customers along with them? What will prevent them from raiding your company’s other employees? What will keep them from using your company’s confidential information against it?

In most situations, the frustrating answer to these questions is: not much. However, you and your company can largely avoid this all-too-common conundrum and instill a measure of certainty with a carefully crafted covenant not to compete – otherwise known as a noncompete or noncompetition agreement.

Or, consider a different situation. You’ve just started your dream job. It’s the role you’ve been seeking for a long time. But, just as you’re about to get started, you get a letter from your former employer, reminding you that you signed a noncompete agreement when you started your last job. Can they do that? Is that agreement enforceable? Do you tell your new employer about it?

Let’s start with a basic explanation of noncompete agreements under Indiana law. A noncompete is a contract between an employer and its employee. It is designed to protect the employer’s business interests by preventing a former employee from utilizing for his or her own benefit—or for the benefit of a competitor—relationships formed and maintained on behalf of the employer or from confidential information the employee obtained in the course of employment.

Like all contracts, the noncompete must be supported by consideration, which means that there has to be an exchange of value (goods, services, money, promises to perform, etc.) for the contract to be enforceable. As for noncompete agreements, Indiana courts have concluded that continued employment – in other words, the right to come to work the next day – is sufficient consideration from the employer.

There are generally two types of restrictions found in most noncompetition agreements. First, employers may impose geographic restrictions, which prevent the former employee from engaging in competitive activities within certain geographic areas. Second, employers may insist on customer-based restrictions (also known as non-solicitation provisions), which preclude the former employee from engaging in competitive activities with respect to certain of the employer’s customers.

Generally, an employer should consider requiring any employee who is responsible for establishing, maintaining and/or growing customer relationships to sign a noncompete. This certainly includes sales representatives, but it could also include executives, office staff, delivery personnel and many other types of employees. Further, because noncompetition agreements can be coupled with anti-raiding, confidentiality and other important and generally applicable restrictions, employers often find it prudent to insist that all employees sign covenants not to compete.

In my next post, I'll discuss the enforceability of noncompete agreements under Indiana law. In the meantime, if you'd like to discuss implementing noncompete agreements for your company's employees, or if you find yourself confronting a former employer's noncompete agreement, please don't hesitate to contact me at dan@dkblegal.com or 317-709-4242.