Indiana Supreme Court Clarifies Employment-Blacklisting Statute
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Repudiating a District Court holding to the contrary, the Indiana Supreme Court recently confirmed that employers may enforce their rights under standard noncompete agreements without fearing a counterclaim under the state’s Blacklisting Statute. On a certified question from the U.S. District Court for the Southern District of Indiana, Loparex, LLC v. MPI Release Technologies, No. 94S00-1109-CQ-546 (Ind. Mar. 21, 2012), the court clarified Ind. Code § 22-5-3-2 in three respects. Most significantly, it held that an unsuccessful suit by an employer to preclude competitive employment by a former employee is not a basis for recovery under the statute. Additionally, the court held that a person voluntarily leaving employment is not precluded from seeking relief under the statute, overruling Wabash R.R. Co. v. Young, 69 N.E.2d 1003 (Ind. 1904). Finally, the court held that attorney fees incurred by the employee in litigation with his former employer would not be recoverable compensatory damages in any event. In Loparex, the court for the first time articulated a standard governing claims under the statute, and placed significant limits on the statute’s reach.
Loparex arose from a dispute between Loparex, a corporation in the “release liner” industry, and Odders and Kerber, two former Loparex employees. This industry, the court explained, “involves products such as nametags with peel-off backings, window films, and roofing underlayment,” Loparex at 3 n.2, and the “formulas involved in these products are apparently closely guarded trade secrets.” Id. Odders and Kerber both had detailed knowledge relating to Loparex’s confidential sales and technical information, and both were subject to one-year noncompetition agreements. Id. at 3.
Loparex fired Odders in September 2008. It would later allege that during the ensuing year, Odders met with MPI, a Loparex competitor, in violation of the noncompetition agreement. Odders began working for MPI in September 2009. That same month, Kerber resigned from Loparex and immediately began working for MPI.
After sending cease-and-desist letters to Odders and Kerber, Loparex sued both, along with MPI, in the U.S. District Court for the Southern District of Indiana. Although the opinion refers to the cease-and-desist letter, it does not discuss their significance. Loparex initially sought to enjoin MPI from employing Odders and Kerber, although it later withdrew that request, and it “apparently offered to dismiss its suit if MPI agreed to terminate the employment of Kerber and Odders.” Loparex at 4. Kerber and Odders filed counterclaims against Loparex under the Blacklisting Statute, and sought damages including the attorney fees they incurred in defending against the Loparex suit. The District Court would eventually grant summary judgment to Kerber and Odders on Loparex’s claims, and certified three questions relating to the counterclaims to the Indiana Supreme Court.
1. A lawsuit to protect trade secrets cannot give rise to a blacklisting claim.
The most significant holding in Loparex lies in its discussion of the third certified question. Here, the Supreme Court articulates a list (though apparently nonexhaustive) of actions prohibited by the Blacklisting Statute, and determines that a lawsuit to protect trade secrets is not prohibited conduct. The court specifically rejects claims that the Blacklisting Statute prohibits employers from suing former employees in bad faith to prevent them from obtaining employment. To the contrary, it holds, a host of common-law torts, fee-shifting statutes, and procedural rules provide adequate protection from sham litigation. Loparex at 17. The court effectively limits statute either to a literal list of employees to be denied employment, or conduct that that accomplishes the same result as a traditional blacklist – circulating information about employee behavior or associations among employers, with the intent to deny the employees jobs – without using an actual list.
After analyzing both the history of Indiana’s statute, and a variety of other authorities, the Supreme Court articulates the standard governing claims under the Blacklisting Statute, which forbids employers both to “black-list” discharged employees, and to “attempt by words or writing” to prevent the employee from obtaining employment elsewhere. See id. (citing Ind. Code § 22-5-3-2). The “specific prohibition – the actual blacklist – is best defined as a list of one or more workers, circulated by employers, who are to be refused employment or otherwise marked for special avoidance, antagonism, or enmity, because those workers are reputed to hold opinions or engage in actions contrary to the employers’ interests.” Id. at 21.
Holding that “the more general language would encompass only those activities of a like kind or class to the classic manner of blacklisting,” the court finds “a series of underlying commonalities which are helpful guides” for interpreting the “attempt by words or writing” provision of the statute. Id. The court identifies several examples of “impermissible conduct” including “an identification of past employees based upon their conduct, association, or belief; the transmission or exchange of that information by or between employers in the same industry; and doing so with the wrongful intent to inhibit or prevent a listed employee from obtaining future employment within that industry.” Id.
The Supreme Court restated the certified question as “whether a lawsuit to protect alleged trade secrets, brought by an employer against a former employee, falls within the framework of the blacklisting prohibitions we discuss above.” Id. at 22. Finding that it does not, the court repudiates Bridgestone/Firestone, Inc. v. Lockhart, 5 F. Supp. 2d 667 (S.D. Ind. 1998), which reached the opposite result, for three reasons. First, that case “effectively creates a form of per se blacklisting” whereby an unsuccessful lawsuit by an employer could give rise to blacklisting liability. Id. at 26. Second, that case took too broad a view of the scope of the Blacklisting Statute. Id. at 27. Finally, Lockhart predated a pair of Indiana Court of Appeals decisions on the issue, and the court’s most recent analysis, and so lacked guidance as to the proper interpretation of the statute. Id.
Superficially, this certified question addresses only whether lawsuits to enforce noncompete agreements may constitute illegal blacklisting. While the court mentioned cease-and-desist letters in passing, the opinion does not analyze them in any detail, so Loparex does not specifically address whether an employer would be safe from a blacklisting claim if a new employer acted on a cease-and-desist letter with no lawsuit having been filed. But in ruling as broadly as it did, the court placed strict limits on the conduct prohibited by the statute, essentially limiting it to an express blacklist, or conduct that does everything a blacklist does but without an express list. It seems likely, therefore, that Indiana courts will permit employers to use means other than litigation to enforce these ubiquitous contracts without fear of a blacklisting claim.
2. An employee who resigns voluntarily may assert a blacklisting claim.
While Loparex substantially limits the scope of the Blacklisting Statute in one respect, it expands it in another, extending its remedies to a new group of potential plaintiffs. Relying on changed language in the Indiana Constitution, the Supreme Court reconsidered and overruled a century-old decision holding that the Blacklisting Statute cannot apply to an employee who resigned voluntarily.
The relevant portion of the Blacklisting Statute “provides a cause of action to discharged employees and ‘any employee who has voluntarily left said company’s service.'” Loparex at 6 (citing Ind. Code § 22-5-3-2). More than a century ago, however, the Indiana Supreme Court had ruled in Young that that portion of the Blacklisting Statute violated the Single Subject Clause of the Indiana Constitution, which at the time mandated that “[e]ach act shall embrace but one subject and matters properly connected therewith; which shall be expressed in the title.” Id. (quoting Ind. Const. art. 4, § 19 (1851)). Because the title of the Blacklisting Statute when enacted referred only to discharged employees, Young held that it violated the Single Subject Clause to the extent that it extended protections to employees who resigned voluntarily. Id. But since that time, the Supreme Court observes in Loparex, the Single Subject Clause has been amended to delete the requirement that the subject be “expressed in the title.” Id. at 8. More significantly, since the days of Young, the doctrine surrounding that clause has evolved to reflect considerable deference to the legislature. The Supreme Court discusses this evolution at length, see id. at 8-11, and concludes that Young is no longer good law and that the Blacklisting Statue permissibly confers a cause of action upon employees who resign voluntarily.
By formally overruling Young, Loparex puts employers on notice that the Blacklisting Statute encompasses employees who resigned voluntarily. In light of the significant limits the court places on the type of conduct prohibited by the statute, it is unlikely that this change will trigger a flurry of new lawsuits. For an employer that adopts similar practices for all terminated employees, whether those terminations were voluntary or involuntary, this should not require a significant change in day-to-day business decisions.
3. Attorney fees are not recoverable damages under the Blacklisting Statute.
Finally, the Supreme Court considers whether plaintiffs may recover attorney fees as a component of compensatory damages under the Blacklisting Statute, and determines that they may not. The Loparex employees, the court notes, “acknowledge our adherence to the American Rule,” under which each party pays its own attorney fees, “but instead seek attorney fees under the idea that those fees should be awarded as an aspect of compensatory damages.” Loparex at 13. Distinguishing a pair of cases allowing fee awards under Indiana’s wrongful-death statutes, the court observed that “none of the other statutes in the blacklisting chapter contain an authorization for attorney fees.” Id. at 14; see id. at 13-14 (distinguishing Patient’s Compensation Fund v. Brown, 949 N.E.2d 822 (Ind. 2011); McCabe v. Dept. of Ins., 949 N.E.2d 816 (Ind. 2011)). With no statutory basis, the Supreme Court would not depart from the American Rule, either with respect to the employees’ fees for prosecuting a successful claim under the statute, or in defending an employer’s unsuccessful claim (although that second component is probably moot in light of the court’s other holdings).
Loparex both gives and takes, but by placing significant limits on the types of conduct prohibited by the Indiana Blacklisting Statute, it should provide assurance to employers enforcing standard noncompete agreements and related contracts. The opinion is a lengthy one with extended historical discussions, and the court seemed sensitive to the types of unsavory practices that gave rise to blacklisting statutes all over the country a century ago. The court seemed disinclined, on the other hand, to permit employees to seek relief under the statute for more garden-variety disputes properly governed by other legal doctrines.