Under Indiana law, covenants not to compete (also known as noncompetition or noncompete agreements) in the employment setting are considered restraints on trade and are generally disfavored by the courts. However, Indiana courts will enforce noncompetition agreements if they are necessary to protect the employer’s business interests and are reasonable in scope. In other words, to be enforceable, a noncompete cannot impose restrictions that are vague or greater than necessary to protect the employer’s legitimate business interests.
The first step in determining enforceability of a noncompete is to determine whether or not the employer has a protectable business interest. In Indiana, protectable interests generally fall into one of two categories: (1) protection of the employer’s confidential or trade secret information, such as financial, marketing, or customer information; and (2) preservation of the employer’s relationships with its customers, including the business “good will” developed over time.
The second step is to weigh the scope of restrictions against the business interests at issue. In short, a noncompete cannot impose restrictions that are broader than necessary to protect the employer’s interests. So what does that mean? It means that an enforceable noncompetition agreement must be clear and be narrowly tailored to protect the employer’s business interests and no more.
A noncompete is more likely to meet this standard if it contains reasonable and precise limitations as to duration and scope of activity.
Although the facts and circumstances of a particular case would have to be considered, noncompete restrictions of up to two years will generally be considered reasonable and, therefore, enforceable.
In terms of the scope of restricted activity, there are generally two paths to consider. First, an employer can impose a geographic restriction, whereby the former employee is restricted from competing within certain geographic areas. However, a geographic limitation may extend only to those areas in which the former employee actually did business on behalf of the employer or within a reasonable distance from the employer’s primary place of business.
Second, an employer may seek to impose a customer-based restrictions (commonly expressed as a non-solicitation provision), whereby the former employee is prohibited from soliciting the employer’s customers. However, customer-based restrictions (or non-solicitation provisions) are generally limited to the employer’s current customers, not past or prospective customers.
An enforceable covenant not to compete must be reasonable with respect to the scope of activity restricted and cannot restrict a former employee from working for a competitor in any capacity. In other words, the agreement cannot restrict activity beyond the scope of the former employee’s employment. For example, a sales representative cannot be restricted from working for a competitor as a janitor or in some other capacity that would not encroach on the former employer’s business interests.
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