Business owners or managers frequently make the mistake of going either too far, or not far enough, in attempts to protect their company against future competition by current employees. On the one hand, employers mistakenly believe what they too often hear – that restrictive covenants (often known as “non-competes”) are a waste of time because they are “never enforced.” On the other hand, employers believe it advisable to err on the side of too much restriction, binding all their employees to wildly aggressive and overly-broad form agreements.
What Should Employers Do To Protect Their Current Employees?
So what should employers do to ensure their customers are not later stolen by their current employees? Indiana courts have broad discretion in deciding whether and how to enforce non-compete agreements, so there are frustratingly few guarantees in this area of business litigation. Employers should be wary of any promise that a given non-compete agreement will be categorically enforceable if scrutinized by an Indiana court.
Guidelines to Protect Business’ Customers & Their Information
Following a few guidelines, however, can provide an excellent starting framework for employers to use when creating a strategy to protect a business’ customers and information:
- Take Time to Decide Which Employees Should be Subject to a Restriction
- Tailor the Non-compete Agreement to the Specific Employee Bound to It
- Make the Non-compete Secondary to the Terms of Employment
- Be Reasonable
- Carefully Examine the Interest You are Seeking to Protect
- Ensure the Employee is Given Adequate Consideration
It is neither worthwhile nor cost-effective to bind the entire workforce to non-compete agreements. Employers should look to a given employee’s job responsibilities to determine whether it merits a non-compete agreement. A good place to start is to first target specific departments (e.g., marketing, sales), and job titles (e.g., account manager level and above), and then look to each employee who falls within these parameters to determine whether a non-compete may be warranted. Binding all employees to non-compete contracts is likely to bring unnecessary expense and burden.
A non-compete for a company’s top marketing executive should look different than the agreement signed by an entry-level outside sales rep. Courts like specificity. The agreement should include a description of the employee’s duties, any specialized responsibilities or skills, the nature of the employee’s contacts with clients, and details about the employee’s utilization of the company’s proprietary information in the performance of the employee’s job.
To be enforceable, Indiana courts require that non-compete agreements be ancillary (i.e., secondary, or supplemental) to the employment contract itself.
Courts already disfavor non-compete agreements, and will only consider enforcing agreements that are deemed reasonable after careful scrutiny is given to the interest protected by the agreement (discussed below) and the scope of the covenant – e.g., the length of the restraint, geographic area covered, and lists of restricted customers. Guideposts for what Indiana courts may deem “reasonable” in terms of scope is a broad topic warranting its own upcoming installment of this RM Blog Series.
An employer can restrict employees from using specific information to later gain a competitive advantage against the employer. However, employers cannot restrict employees from using general knowledge or skills gained on the job. Employers value an employee’s efforts to cultivate close relationships with customers. But this often leaves an employer exposed when the employee leaves the company. In Indiana, an employer is entitled to protect the goodwill it pays its salespeople to generate. Information the company has uniquely generated through relationships with its customers – things such as pricing information and strategies, purchasing plans, buying cycles, and custom marketing approaches – is generally deemed protectable. But what about the customer list itself? Though an employer can have a valid protectable interest in restricting sales professionals with significant direct contact from later competing against the employer for those same customers, an employer must show the court why the customer list is an interest developed by the company that warrants actual protection. In other words, if any person could simply open the phone book to derive an employer’s customer “list” (e.g., a local lawn care service’s customer list is essentially every homeowner with a lawn), Indiana courts will be reluctant to find that a customer list is truly worthy of protection.
Like other contracts, non-competes must be supported by sufficient consideration, which essentially means that the employer must give something to the employee in return for signing a non-compete agreement. The easiest way to ensure adequate consideration is to include the non-compete with the initial employment offer, or in conjunction with a promotion that includes an increase in compensation.
ROBERTS MEANS, LLC: Your Business Litigation Experts
ROBERTS MEANS, LLC is an Indianapolis boutique law firm representing businesses and employees in matters of drafting, negotiating, enforcing and litigating non-compete agreements and restrictive covenants. The attorneys of ROBERTS MEANS, LLC have more than 20 years of combined experience representing individual business owners and businesses in dispute.
Please feel free to call ROBERTS MEANS, LLC at (317) 353-3600 or contact us via email for our cost-effective and responsive legal services for clients ranging from individuals and business owners, to local small and mid-sized businesses, to national companies.