As noted in previous postings, Indiana courts will enforce reasonable noncompete agreements. But, what happens if parts of a noncompetition agreement are reasonable and others reach too far? In these situations, the court has the ability to use its “blue pencil” to craft a reasonable and enforceable restriction.
How is the “Blue Pencil” Doctrine Applied?
When presented with an overly broad noncompete, a court may apply the blue pencil doctrine if: (1) the covenant is clearly divisible into separate parts; and (2) some of the parts are reasonable and others or not.
As the Indiana Supreme Court has determined, a noncompete agreement is clearly divisible if it is clearly separated into parts. Recently, the Indiana Court of Appeals clarified that the court may not use its blue pencil where the noncompete provision is expressed as an “indiscrete whole.” In other words, the blue pencil should not be used where the noncompete has no “clear separation of terms or clauses that were or could be intended to be excised from the whole without changing the entire meaning and import of the passage.” Clark’s Sales and Service, Inc. v. Smith, 4 N.E.3d 772, 784 (Ind. Ct. App. 2014). In Clark’s Sales, the court refused to apply the blue pencil to “redact sentence fragments from the indivisible whole of each contested paragraph.”
Assuming the noncompete is sufficiently divisible, the court may apply its blue pencil by striking the unreasonable portions and enforcing the remaining reasonable portions. However, when interpreting a noncompete agreement, a court is not allowed to add or modify the language of the agreement – it can only delete divisible, unreasonable parts. This is because permitting a court to add or modify language would subject the parties to an agreement they did not actually make.
What is the State of the “Blue Pencil” Doctrine After Clark’s Sales?
For many years, employers used noncompete agreements to limit competition and minimize employee movement by imposing broad – seemingly absolute – prohibitions on competition, while also including reasonable restrictions that would survive application of the blue pencil.
But, in Clark’s Sales, the court was critical of this practice. In fact, the court labeled this approach “unsavory” and noted that it “leads to great uncertainty in contracting and does not promote good public policy regarding the relationship between employees and employers.” The court was also critical of the in terrorem effect that noncompete agreements can have on current and former employees – that broad noncompete agreements can be used to scare or intimidate employees from pursuing employment or business opportunities. The court reasoned that “Indiana courts will not engage in rewriting the covenant, as ‘the courts need not do for the employer what it should have done in the first place – write a reasonable covenant.’” Indeed, the court admonished that “the consequence to employers for drafting such overreaching contract is that the covenant cannot be enforced at all.”
So, while a noncompete agreement can be a valuable tool for protecting an employer’s business interests, it must be used with great care and precision.
For more information, please contact Dan Burke at dan@dkblegal.com or 317-709-4242.