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Beware: The Five Things You Must Know About Employment Non-Compete Agreements

Most people are familiar with Non-Competition Agreements, whether it be from first-hand experience or from the general knowledge you have from a friend or acquaintance. But for those who are not familiar with Non-Competition Agreements, also known as covenants not to compete, you may be wondering what they are and when they apply? Non-Competition Agreements can come into play in several different areas of life, but this blog will focus on non-competes in employment.

Employment Non-Competition Agreement. The place to start is understanding what a non-compete is. They are agreements that are contracts between an employer and employee which limits the employee from going to work for another company during a specific time period after the employee separates from employment. If enforceable, you may be fired without cause and be unable to work. As you may imagine, determining if non-competes go too far is an extremely fact-sensitive matter for the court and must be analyzed on a case-by-case basis. With that being said, below discusses four things to know or keep in mind, for both the employer and employee, before and when entering into a non-compete.
Courts Disfavor Non-Competes. The first thing to be aware of is that, in general, Indiana courts disfavor non-competes. The reasoning behind the court’s dislike of non-competes is that they, in the court’s view, act as a “restraint in trade”¹. The court’s general disdain towards non-competes is rooted in the consequences they may have on society as a whole. Most agree that society tends to operate better when individuals work, which requires individuals to have the opportunity to work. As such, agreements or contracts that prevent people from working are not generally good for society as a whole. But you have the right as an employee to enter into a bad contract (i.e., a non-compete).
Strictly Construed Against the Employer. Building off of the court’s general disfavor of non-competes comes the second point to keep in mind. Because non-competes are disfavored, when issues arise surrounding them, the courts analyze non-competes “strictly against the employer”². This means that the Court will resolve any discrepancy or ambiguous provision in favor of the employee. The Indiana court’s reasoning in construing non-competes strictly against the employer is that they are likely the product of unequal bargaining power³. The employee is not typically in the position to make demands in securing employment. As such, an employee should not have to suffer the loss of his livelihood (i.e., not being able to work) just because they did not understand the full implications of the agreement when he or she signed it. But remember again the court may enforce it—so the takeaway is have an attorney read a non-compete and advise you before you enter into it. If not, you may not be able to work.
Employer Must have Legitimate Interest. Non-competes, while disfavored, are necessary in some circumstances. As such, court’s do not simply find them unenforceable only because they are a restraint of trade—your right to work for the employer of your choice. Court’s will allow employers to argue why a non-compete should be enforceable. To be enforceable, a non-compete must be reasonable⁴. To be reasonable, employers must first prove that it has a legitimate interest to be protected by the agreement⁵. This is a subjective standard as a legitimate interest can, and will, vary from employer to employer. One legitimate employer interest the courts have found is in “the goodwill generated between a customer and a business”⁶.
Reasonable Limit as to Time, Activity, and Geographic Area. Even if an employer is able to prove that they have a legitimate interest to protect, the non-compete still may not be enforceable. The scope of the non-compete must also be reasonable in terms of time, geography, and types of activity prohibited⁷. In regard to time, Indiana courts have found that non-competes for a time period of two years or less can be upheld⁸. In looking at the geographical restriction, courts have found that the reasonableness depends on the interest of the employer that the restriction serves. For example, a geographical restriction limited to a county may be more likely to be enforceable than a restriction spanning the whole state or region—but it depends on the job. Lastly, the types of activities being restricted must relate to and be within the scope of the employer’s stated legitimate interest. For example, a restriction against working in any type of sales industry (such as if you were selling airplanes would probably be too large of a restriction because sales can encapsulate so many different things, such as you are becoming a car salesman.

Noncompetition agreements are controversial and put an employer and former employee against each other which can create tension between the constitutional right to contract and enter into a non-compete and right to work and earn a living. A noncompetition agreement may be enforceable for one individual and may not be enforceable for another. As such, it is important to retain a competent and skilled attorney if you find yourself being requested to enter into a non-compete or in the middle of a dispute arising from a non-competition agreement. This blog post was written by attorneys at Ciyou & Dixon, P.C. who handle drafting, enforcing and challenging non-competes throughout the state and other contract law matters. This blog is written for educational purposes only. It is not intended as legal advice or a solicitation for services. It is an advertisement.