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Indiana Court of Appeals upholds and “reforms” covenants not to compete and not to solicit customers or employees

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.

Prenuptial Agreements and Postnuptial Agreements: What to Know

By: Brian K. Zoeller and Nicole Makris, Attorneys

Prenuptial agreements and postnuptial agreements are practical resources for couples seeking to simplify the property aspects of their relationships by designating how the property and debts of their marriage will be distributed in the event of a future legal separation, divorce, death, or other event.

What is a Prenuptial Agreement?

Far from a new concept, the ancestor of today’s prenuptial agreement, also known as a premarital or antenuptial agreement, is estimated to date back around 2,000 years. Under Indiana Code 31-11-3-2, a premarital agreement is an agreement between prospective spouses that is executed in contemplation of marriage and becomes effective upon marriage. These agreements define the parties’ property rights in the event of legal separation, divorce, death, or other events. Because of this, courts have noted that prenuptial agreements are favored in that they can resolve property issues that otherwise would be the source of litigation.

In order for a prenuptial agreement to be valid, the agreement must be in writing, cannot be unconscionable, and must be entered into freely, without fraud, duress or misrepresentation. Full disclosure between the soon-to-be spouses as to their individual assets and debts is extremely important when entering into a prenuptial agreement to insure their enforcement.

Prenuptial agreements can prove to be extremely valuable in the event of legal separation or divorce by outlining each spouse’s property rights, from real estate to bank accounts. Prenuptial agreements also distinguish responsibility for the debts of the couple, such as student loans and credit cards. Having an agreement on these issues before marriage can minimize the number of issues that the couple would otherwise have to determine if a spouse later files for legal separation or divorce.

What is a Postnuptial Agreement?

Postnuptial agreements, also known as reconciliation agreements, are a useful option for couples who are facing the possibility of divorce but are willing to reconcile. When there has been infidelity or other conflicts in the marriage, postnuptial agreements provide couples with the opportunity to reconcile while outlining their respective rights and responsibilities as to marital property and debts in the event that the relationship ends in the future.

The key distinction between prenuptial agreements and postnuptial agreements is that postnuptial agreements take place after the couple is married rather than before the marriage. As with prenuptial agreements, the couple should fully disclose to one another the extent of their assets and debts.

Prenuptial agreements and postnuptial agreements are useful tools for couples who wish to clearly outline how the marital estate is to be divided in case a legal separation, divorce, death, or other event occurs in the future.

Maximizing the Possibility that Using an Entity For Your Business Will Actually Limit Liability

By: Arend J. Abel, Attorney

Many times, business owners will set up one or more corporations, or other entities such as LLCs, to conduct business. Typically, the entities are created to limit the owner’s liability for the business’s debts, or to protect one business from the liabilities of another business. However, often the owner does not go beyond formation of the entity to take the additional steps needed to maximize the chance that having one or more entities will fulfill those goals. Absent those steps, Courts sometimes disregard the existence of the entities by “piercing the corporate veil” and hold the owners liable for the business’s debts, or hold one entity liable for the debts of another. Here are some steps that can help avoid such a result.

Keep Finances Separate and Document Transfers

The most important step in making sure the entity is recognized as separate from its owner is to keep the owner’s and the entity’s financial affairs strictly separate. Among other things, this requires a good set of books for the entity, and a separate bank account. Multiple entities each should have a separate set of books. Any transfers between owner and entity should be scrupulously documented as loans, capital contributions, distributions, or salary, depending on the nature of the transfer. Transfers between the entities should be avoided, if possible, unless one entity is a subsidiary of another. If one entity is a subsidiary of the other, then transfers from the subsidiary should be documented as distributions or dividends. Transfers from parent to subsidiary should be avoided, but if necessary should be documented as loans or capital contributions. Other inter-entity transfers should ordinarily be documented as loans and, again, should ordinarily be avoided.

Adequately Capitalize the Entity When Formed

One factor Courts look at in deciding whether to pierce the corporate veil is whether the entity was adequately capitalized when formed. Many business owners don’t contribute substantial working capital to an entity at the outset, instead simply moving money in and out of the entity as needed. But the lack of capitalization, and shuffling funds in and out, creates a risk a court will disregard the entity. Given that a business will inevitably have expenses and need working capital, the owner should put in an amount large enough to sustain the business’s expenses for several months, at least. A year’s worth of expenses is even better. The money should be put into the entity when it is formed, in exchange for shares the entity issues to the owner.

Create and Issue Share Certificates

Another step that owners should take is to actually issue share certificates, in exchange for the capital contributions made when the entity is formed. It is surprising how many business owners fail to take this basic step. The absence of share certificates suggests that the owner is doing business in his personal capacity, rather than through the entity. This creates an unnecessary risk of personal liability.

Have Separate Phone Numbers, Addresses and Letterhead

The owner and the business should have separate phone numbers, even if the business number is forwarded to the owner’s line. They should also have separate addresses. If the business is run out of the owner’s home, even a P.O. box as a corporate address helps reinforce the fact that the business is separate from the owner. Multiple entities should also have separate phone numbers and addresses. The entity should have letterhead for correspondence, and if there are multiple entities, each should have its own letterhead.

Use Distinct Names for Multiple Entities

Another factor courts sometimes look at in piercing the veil between multiple entities is whether they share similar names. Avoiding similar names is another way to reinforce corporate separateness between entities.

Have a Management Structure and Regular Meetings

If the entity is a corporation, it should have a Board of Directors. If there is only one shareholder, trusted advisors can act as members. The Board should meet at least once a year. If there are multiple shareholders, they should also meet at least once a year. Even a single shareholder can have a “meeting” at which corporate action is taken. No Board of Directors is required for an LLC, but if there are multiple members, they should have regular meetings. The entity should issue notices before the meetings, and a corporate secretary should document all meetings with minutes. Minutes, notices, and corporate resolutions should be kept in a minute book.

To maximize the chance that entities formed for businesses will effectively shield the owner from personal liability, and will shield the assets of one entity from the debts of another, business owners should consult with an experienced attorney to guide them through the process.

Protecting Confidential Business Information

By: Arend J. Abel, Attorney

Sometimes businesses face a situation where an employee has departed and taken key information that can be used to hurt the business competitively. This article focusses on steps a business can take to minimize that risk, and if information is nevertheless stolen, to seek redress under the Uniform Trade Secrets Act. The Act has been adopted in Indiana and most other States.

Identify the Information to be Protected

The first step a business should take is identifying the specific information to be protected. Customer lists may be some of the most valuable information a business has, and their theft and use by competing businesses may cause severe harm. Other information, including formulas, business processes and technology, can also be valuable trade secrets. A trade secret can be any information that derives independent economic value from not being generally known and not being readily ascertainable by other parties through proper means, i.e., means other than stealing the information from the business.

Take Reasonable Steps to Maintain Secrecy

Information does not qualify as a trade secret unless the business has made reasonable efforts to keep the information secret. These efforts can and should include physical and electronic security measures. The business should keep paper information in locked offices and filing cabinets. Electronic information should be protected through the use of computer security that limits access to the information to only those employees who need to know the information to do their jobs. In some cases, the business should require employees with access to confidential information to use only company-provided computers, phones, and portable devices to conduct company business and store company information.

A business should also maintain the secrecy of its confidential information by requiring employees with access to the information to sign non-disclosure agreements. The agreements should list the types of information the employee is barred from disclosing.

Non-competition agreements are also an important tool to maintain the secrecy of confidential information. However, non-competition agreements must be reasonable in scope. This means that the geographic area in which the employee is barred from competing must be well defined , and no broader than necessary to protect the employer’s legitimate interests. The agreement must also be limited in time, barring the employee from competing for only as long as necessary. Finally, the agreement must be limited in terms of the activities prohibited. Typically, agreements should prohibit the employee only from working for a competing business in the same or a similar capacity as the employee worked for the business with which the employee signed the agreement.

Enforcing Restrictions

Sometimes, despite the business’s best efforts, an employee may steal confidential information and use it to compete. In such cases, the only recourse may be litigation against the employee. A business might obtain a court order requiring the employee to stop using the information and return it. If there is a non-competition agreement, a court may prohibit the employee from competing in violation of the agreement’s time, geographic and activity limitations. If the business has been harmed, damages may be available.

To protect confidential business information, a business owner should consult with an attorney experienced in such matters, including litigation. Cohen & Malad, LLP’s business and litigation attorneys can assist with this process.

Third-Party Payments for Legal Services

By: Arend J. Abel, Attorney

Occasionally, a lawyer will run into a situation where someone other than the client agrees to pay the lawyer for the representation. This situation arises most frequently with insurance, but also can occur when a company pays for an employee’s defense or a relative pays for the representation of an individual. Third-party payment creates ethical issues for the lawyer, and is specifically governed by the Indiana Rules of Professional Conduct. Rule 1.8(f) provides:

A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client gives informed consent;

(2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6.

Los Angeles Jury Awards $45 Million to Sexual Abuse Survivor After Years of Abuse

On Thursday July 26, 2018, a Los Angeles jury awarded $45 million to a girl who endured sexual abuse at the hands of her mother and four men at a home where she was placed by the county despite evidence she was being molested. The girl, now 15, said in a lawsuit against Los Angeles County that social workers had reasonable suspicions she was being abused, but they failed to inform authorities. The girl’s mother and the men were previously convicted of abusing the girl starting in 2010.

Unfortunately, cases like this are not isolated events. However, victims of sexual abuse do have ways to hold a perpetrator accountable. Similar to the brave young woman in the Los Angeles case, a victim of sexual abuse can initiate a civil lawsuit. While a criminal case is designed to hold a defendant accountable to the State, a civil lawsuit is designed to hold the defendant accountable to the victim. In a civil case, the victim initiates and controls the case and brings the action regardless if the perpetrator has been found guilty in a criminal prosecution.

Effective Appellate Briefing

By: Arend J. Abel, Attorney

What’s the best way to write an effective appellate brief? The short answer is to use every part of the brief as an opportunity for advocacy. Here are some section-by-section tips for doing so.

The Table of Contents

The first thing the court sees when opening the brief is the table of contents. A good table of contents will be an outline of the argument, so the Court can read, understand, and hopefully be persuaded by the argument before ever reading a substantive paragraph of the brief. The best way to create such an outline is to make sure each heading in the argument is a full statement of one of the points of the argument, not just a statement of the subject of the section or subsection. So, a heading that says, for example, “The Statute of Limitations Did Not Begin to Run Until Mr. Brown Learned Smith Was Planning to Sell the Business When He Bought Mr. Brown’s Stock” is superior to one that simply says “The Statute of Limitations Has Not Run” or a subject heading “Statute of Limitations.” Worse still is the uninformative heading “The Trial Court Erred in Granting Summary Judgment.”

Nursing Home Understaffing Leads to Falls and Other Injuries

By: Ashley N. Hadler, Attorney

Most nursing homes are operating without enough nursing staff. Staff members will often complain about having, “too many residents and too little time.” Family members visiting their loved ones often experience this first-hand through very slow response times to answer call lights or difficulty finding a nurse or nursing assistant in the facility. Other signs of understaffing include finding a resident in soiled clothing or bedding, with an empty water pitcher, with their call light on, or without routine hygiene tasks completed.

Staffing report change will hold nursing homes more accountable for care

Recently, the way that nursing homes report their staffing levels to the federal government changed. Facilities used to be able to self-report their staffing levels for just a two week period over the course of the year. No data was used to back up or verify the facility’s report. Now, the staffing levels are reported quarterly throughout the year and are based on the payroll at the facility. The government can now verify the staffing based on how many hours nursing staff were paid to work and can determine exactly which days and times the staff was working. The results show that nursing homes have been inflating their staffing numbers significantly for years. This means that residents and families who sensed and or complained of low staffing in nursing homes were justified in their concerns, even if they were told that the facility’s staffing was in compliance with federal regulations. The numbers show staffing for nurses is lower after business hours and on weekends—which is when many falls and other serious injuries occur.

Understaffing puts nursing home patients at risk for injury

If residents aren’t getting the care and treatment they need at a nursing home, understaffing is usually to blame. Individual nurses and certified nursing assistants or “CNAs” may not have the assistance they need to care for the number of residents they are assigned. If the staff isn’t given the support they need things like hygiene tasks, incontinence care, and supervision of residents are often the first to fall through the cracks. Staff members can be put into a position to choose between leaving one resident who requires supervision unattended or answering a bed or chair alarm of another resident to prevent a fall.

When nurses and CNAs are forced to choose between providing necessary services to multiple residents injuries and medical problems occur. Injuries like falls, bedsores or “pressure sores,” dehydration, malnutrition, or infections happen because the facility’s staff is not providing vital care. The New York Times recently featured the stories of several nursing home residents who have been subject to injuries due to understaffing and discussed the flaws of the rating system.

With the new reporting system, the government will have a better indication of the days, times and duration nursing staff is present in the facility. However, there is no substitute for residents’ and families’ personal experiences of staffing levels. If you are or have a loved one in a nursing home, pay attention to the response times to call lights and requests for help. If you become concerned that care and treatment is not being provided in a timely manner, or if you believe your loved one has been injured due to poor staffing practices, contact me. My practice is focused on fighting for victims of nursing home abuse and neglect. I can give you a free consultation and explain your legal rights and options.

Home Renovation Projects: Purpose, Scope, and Notice of the Deceptive Consumer Sales Act- Part 2

By: Aaron J. Williamson, Attorney

The DCSA has three broad purposes, which are to: “(1) simplify, clarify, and modernize the law governing deceptive and unconscionable consumer sales practices; (2) protect consumers from suppliers who commit deceptive and unconscionable sales acts; and (3) encourage the development of fair consumer sales practices.” Ind. Code 24-5-0.5-1(b). The DCSA is liberally construed and applied to promote these purposes. Ind. Code 24-5-0.5-1(a).

What does the Deceptive Consumer Sales Act cover?

The scope of the DCSA is far reaching and is outlined in Ind. Code 24-5-0.5-2 (definitions) and 3 (listing deceptive acts). Deceptive acts generally include acts and omissions, as well as explicit and implicit misrepresentations, Ind. Code 24-5-0.5-3(a), made by a supplier, Ind. Code 24-5-0.5-2(a)(3), in the context of a consumer transaction. Ind. Code 24-5-0.5-2(a)(1).

“A person relying upon an uncured or incurable deceptive act may bring an action for the damages actually suffered as a consumer as a result of the deceptive act or five hundred dollars ($500), whichever is greater.” Ind. Code 24-5-0.5-4(a). This amount may be increased to three times actual damages or $1,000, whichever is greater, when the deceptive act of the supplier is found to have been done willfully. Id. Moreover, the court may award reasonable attorney fees to the prevailing party in the action under this subsection of the DCSA. Id.

Two words of caution are required here. First, if the supplier prevails under this subsection then they may be entitled to attorney’s fees (paid by you). Second, certain requirements must be satisfied before a consumer can sue under the DCSA. Specifically, the consumer must provide the supplier with notice of the deceptive act and opportunity to fix the problem or “cure” it in legal terms. (“Notice”). Id. at 4(j); see also Ind. Code 24-5-0.5-5(a).

Rules for issuing a notice to a negligent contractor

As to the Notice, there are timing and substance requirements that must be satisfied. The notice must be sent on or before six months from the initial discovery of the deceptive act, one year following the consumer transaction, or 30 days after any warranty applicable to the transaction expires, whichever occurs first. Ind. Code 24-5-0.5-5(a). The Notice, must state the nature of the alleged deceptive act and the actual damage suffered. Id.

Conclusion

As discussed in Part 1 of this series, the DCSA is a consumer protection statute, which is liberally construed for the benefit of consumers. For consumers, this statute offers robust protections against deceptive acts. Moreover, the DCSA provides remedies in the way of actual and treble damages as well as the potential recovery of attorney’s fees. For suppliers, the DCSA provides significant guidance about prohibited conduct and provides various opportunities to cure defective conduct that amounts to deceptive acts.

If you have any questions about Indiana’s Deceptive Consumer Sales Act or need representation in pressing or defending a claim under this statute please feel free to contact me.

Disclaimer: These materials are made available for educational purposes only and are not intended as legal advice. If you have questions about any matters in these materials, please contact the author directly. The furnishing of these materials does not create an attorney-client relationship with the author or entities affiliated with the author.

Permissions: You are permitted to reproduce this material in any format, provided that you do not alter the content in any way and do not charge a fee beyond the cost of reproduction. Please include the following statement on any distributed copy: “By Aaron J. Williamson © Cohen & Malad, LLP – Indianapolis, Indiana. www.cohenandmalad.com”

Home Renovation Projects: A Statutory Overview- Part 1

By: Aaron J. Williamson, Attorney

It pays to be in the know. This adage is all the more true when it comes to large and costly projects; especially when those projects concern the home. Whether you are a home improvement contractor or a homeowner, knowing the lay of the land is invaluable. And, in light of the relatively new changes in the law, a refresher seems in order.

This article will provide a quick overview of the Deceptive Consumer Sales Act, the Home Improvement Contracts Act, the Home Improvement Fraud Act, and the Statutory Home Improvement Warranties Act. It is important for consumers and renovators alike to have a general understanding of how these laws work at each stage of the renovation project. So the first key takeaway is: do not be unwary! Know the law.

A more in-depth analysis of these statutes and how they work together will be outlined in future articles.

Indiana’s Deceptive Consumer Sales Act

The purpose of Indiana’s Deceptive Consumer Sales Act (“DCSA”) is to protect consumers from deceptive and unconscionable consumer sales practices. Specifically, DCSA’s aim is to prevent those regularly engaged in consumer sales from making false or misleading statements about the goods or services sold. A person harmed under the statute can sue for, among other things, their actual damages and attorney’s fees.

Home Improvement Contract Act

Likewise, the purpose of Indiana’s Home Improvement Contract Act (“HICA”) is to prevent deceptive and unconscionable acts by, in part, requiring certain provisions and disclosures in all real property improvement contracts with an aggregate value of $150 or more. A good example of HICA in action is Warfield v. Dorey, 55 N.E.3d 887, 891 (Ind. Ct. App. 2016) (citing Hayes v. Chapman, 894 N.E.2d 1047, 1052 (Ind. Ct. App. 2008)) wherein the court said

–few consumers are knowledgeable about the home improvement industry or of the techniques that must be employed to produce a sound structure. The consumer’s reliance on the contractor coupled with well-known abuses found in the home improvement industry, served as an impetus for the passage of [HICA], and contractors are therefore held to a strict standard.

A violation of HICA constitutes a “deceptive act” under DCSA. HICA was recently amended and the changes took effect on July 1, 2017. A few highlights regarding changes to the HICA are the scope of coverage, additional required terms, and notices. As such, a contract or practice, which may have previously complied with the former version of the law may need to be revisited.

Home Improvement Fraud Act

The Home Improvement Fraud Act (“HIFA”), serves a similar purpose, i.e., forbidding home improvement contractors from making misrepresentations or false promises, giving misimpressions, acting deceptively, or the like.

In common law fraud or constructive fraud, a homeowner must show that they relied on false information from the contractor. Under the HIFA, no such reliance is required. Moreover, the statute defines what an “unconscionable contract” is and outlines what must be shown to prove it.

Home Improvement Warranty Act

The Statutory Home Improvement Warranties Act (“SHIWA”) does what its name suggests, i.e., imposes warranties related to home improvement projects. This statute deals with workmanship and materials, generally, as well as specific defects caused by faulty installation.

Conclusion

Future articles will discuss these statutes in depth, how they have been interpreted, the interplay between these statutes, and common issues that have been litigated surrounding these statutes.

If you are a home improvement contractor or a homeowner and you have questions about these statutes and how they affect your business or home, please contact me.