Indiana Court of Appeals upholds and “reforms” covenants not to compete and not to solicit customers or employees
By: Arend J. Abel, Attorney
On April 15, 2019, the Indiana Court of Appeals issued a decision that could mark a major shift in the law relating to non-compete and non-solicitation agreements. Heraeus Medical, LLC v. Zimmer, Inc., No. 18A-PL-1823 (April 15, 2019). The decision contains three holdings of significance: (1) that a covenant need not have an explicitly defined geographic scope, (2) that a covenant can protect prospective customers with whom the departing employee had recent contact, and (3) that an express provision in a covenant can permit a court to reform an overly broad covenant so as to make it enforceable.
The case involved two medical device companies who had an agreement for one of them (Zimmer) to serve as the exclusive distributor of bone cement manufactured by the other (Hereaus). Hereaus terminated the agreement in December of 2018, formed its own subsidiary to sell and distribute the product, and hired Robert Kolbe, who had been Zimmer’s Director of Enterprise Solutions for the eastern United States. Kolbe had a non-compete agreement with Zimmer, which also prohibited him from soliciting Zimmer customers and employees.
In part, the employee non-solicitation agreement prohibited Kolbe from soliciting “any individual employed by Company at the time of Employee’s separation from Company employment.”
The “Restricted Territory” for the non-compete and customer non-solicitation clauses was defined as:
(i) any Customer-specific or geographic territory assigned to, or covered by, Employee during Employee’s last two (2) years of employment with Company; (ii) any state or portion of any state assigned to Employee by Company for purposes of any sales or service activities or responsibilities at any time during the two (2) years preceding the termination of Employee’s employment with Company; or (iii) any county, municipality or parish of any state or commonwealth assigned to Employee or in which Employee engaged in any sales or service activities on behalf of Company at any time during the two (2) years preceding termination of Employee’s employment with Company
The customer non-solicitation covenant prohibited Kolbe from soliciting both customers and “Active Prospects, which the agreement defined as:
[a]ny person or entity that Company, through its representatives, specifically marketed to and/or held discussions with regarding the sale of any of Company’s products or services at any time during the last six (6) months of Employee’s employment with Company and with respect to whom, at any time during the six (6) months immediately preceding the termination of Employee’s employment with Company, Employee had (i) any marketing or sales contact on behalf of Company and/or ii) access to, or gained knowledge of, any Confidential Information concerning Company’s business prospects with such Active Prospect.
Defendants first contended that the failure of the agreement to geographically describe the restricted territory rendered it void. However, the Court held that Indiana law “requires only that the geographic scope of restrictive employment covenant be reasonable, not that it be spelled out in explicit terms.” The Court also held that the geographic scope of the covenant could be shown by extrinsic evidence concerning the portions of the country that were assigned to Kolbe.
Defendants also contended that the prohibition on soliciting “active prospects” was invalid, asserting that Indiana Law did not permit covenants that reached prospective customers. Again, the Court rejected the argument, holding that because the covenant applied only to prospective customers with whom Kolbe had contact during the last six months of his employment with Zimmer, it was “limited in both scope and duration,” and therefore was valid.
Finally, Defendants contended that the employee non-solicitation covenant was void because it was overly broad. Specifically, it applied to all employees of Zimmer, including “employees such as drivers or shelf stockers.” The Court agreed that the provision against soliciting employees was overly broad because Zimmer “has not shown that it has a legitimate protectable interest in its entire workforce, which includes many employees who would not have access to or possess any knowledge that would give a competitor an unfair advantage.”
However, the Court refused to invalidate the entire covenant because the parties agreed to a provision in the agreement that “any court interpreting the provisions of this Agreement shall have the authority, if necessary, to reform any such provision to make it enforceable under applicable law.” The Court acknowledged that prior law held that a court could not “not create a reasonable restriction under the guise of interpretation, since this would subject the parties to an agreement they have not made.” But the Court held that the reformation provision made all the difference because “ the parties specifically agreed” that a court interpreting the agreement had the authority to reform any unreasonable provision to make it enforceable.
There are several lessons that can be learned from Heraeus Medical. First, it is permissible to define the geographic scope of a non-compete by reference to the employee’s assigned territory, without expressly naming or describing that territory. Second, restrictions on soliciting prospective customers are enforceable as long as they are limited to prospective customers with whom the employee had contact within a short period before the employee’s departure. Finally, and perhaps most surprisingly, a court can “reform” an invalid non-solicitation provision to make it valid as long as there is an express provision in the agreement providing that authority. Businesses should review (and likely should revise) their non-compete and non-solicitation agreements in light of this new decision.