On a regularly basis, certainly several times yearly, the lawyers at GRIFFITH XIDIAS LAW GROUP are asked by a client something like this- “I signed this employment agreement but want to join a competitor (or start my own company). Can my employer enforce this covenant not to compete against me?” And the answer is usually, yes, the covenant is drafted in a way that makes it enforceable under Indiana law. However, each such employment agreement must be specifically analyzed, and not all agreements are enforceable. The Indiana Supreme Court recently addressed this issue in a case titled Heraeus Med., LLC v. Zimmer, Inc., No. 19S-PL-471, 2019 WL 6485087 (Ind. Dec. 3, 2019). Before we explore the ruling in Heraeus Med., LLC v. Zimmer, Inc., let’s review some basics about restrictive provisions in employment agreements.
There are ordinarily three different types of restrictions in an employment agreement-
A covenant not to compete
A covenant not to solicit customers, employees or vendors
Confidentiality or trade secret protections for the employer
As a side note, these same provisions can be found in independent contractor agreements and agreements for the sale/purchase of a business, both stock purchase and asset purchase agreements. The analysis for the contractor and business purchase agreements, however, are different than how the courts review agreements impacting employees.
The Heraeus Med., LLC v. Zimmer, Inc. case dealt with an agreement signed by an employee named Kolbe, which agreement included non-compete and non-solicitation of Zimmer Surgical’s customers and employees. Kolbe initially worked as a regional group director for Zimmer, Inc., which manufactured and sold bone cements. Zimmer had a subsidiary (Zimmer Surgical) with exclusive rights to distribute bone cements manufactured by Heraeus Medical. Kolbe quit his job with Zimmer after a couple years and accepted a position as vice president of sales for Heraeus Medical, which planned to sell bone cements manufactured by Heraeus Medical. Heraeus Medical terminated its distribution agreement with Zimmer Surgical, and became a direct competitor to Zimmer. In response, Zimmer filed a lawsuit to enforce the non-compete and non-solicitation agreement signed by Kolbe.
The case went to the Indiana Court of Appeals, which addressed the threshold question- whether Zimmer showed it had a “protectable business interest” by demonstrating that the employment relationship gave the former employee (Kolbe) a unique competitive advantage or ability to hurt the employer (Zimmer) competitively. In these kinds of cases, the employer must show that its employee agreement was a reasonable means to protect a “protectable business interest” by demonstrating that the competitive restraints were reasonable as to geographic area, duration, and activities.
The Court of Appeals first found that contract language prohibiting Kolbe from soliciting “any individual employed by [Zimmer, Inc.]” was overbroad. The Court of Appeals found that Zimmer had no legitimate protectable interest in an entire workforce, which could include any employee from the CEO to a delivery driver down to a janitor. The Court held that an employer cannot fairly restrict the mobility of employees at the lower levels, who have no access to customer or sales data, which is what gives a competitor an unfair advantage. But Zimmer had hope that it was not completely out of luck, because its agreement with Kolbe contained a “blue pencil” clause.
A “blue penciling” clause in a restrictive covenant is a reformation clause, which empowers a court to modify (reform) contract provisions that are unenforceable, because those provisions are too broadly written. So, the Court of Appeals made the Zimmer-Kolbe agreement enforceable by adding “language limiting the covenant’s scope to only ‘those employees in which [Zimmer] has a legitimate protectable interest.”’ Heraeus Medical was unhappy with that decision and petitioned for transfer to the Indiana Supreme Court, which transfer has the effect of voiding the decision by the Court of Appeals. The Indiana Supreme Court limited its review to this question- whether an Indiana court can use a reformation clause (“blue pencil clause”) to “add language to an unenforceable restrictive covenant in a noncompetition agreement.”
Previously, the “blue pencil” doctrine was used by trial courts to strike through or sever the unreasonable, divisible portions of a restrictive covenant, leaving behind the reasonable and enforceable parts that remain. So, the trial courts would strike but not rewrite bad contract language. The blue pencil doctrine was not used by trial courts to “rewrite a noncompetition agreement by adding, changing, or rearranging terms.” The Zimmer-Kolbe agreement gave a court the power to “reform” the agreement to make any unenforceable provision enforceable. In essence, the Zimmer-Kolbe agreement gave a court the power to rewrite the agreement. The Indiana Supreme Court found that the “blue pencil” doctrine cannot be expanded in this way and that the Zimmer-Kolbe agreement could not lawfully delegate power to a trial court to “fix” an overly-broad restrictive covenant by rewriting language in the contract. The Supreme Court reasoned that only the parties to a contract can draft their agreement and that courts should not write into a contract language that the parties to the contract themselves did not agree to and accept as originally drafted.
The Supreme Court also agreed with the Court of Appeals’ conclusion that the Zimmer-Kolbe agreement was overly broad, because it prohibited Kolbe from soliciting “any individual employed” by Zimmer, and was not limited to those employees who have “access to or possess any knowledge that would give a competitor an unfair advantage.” The Supreme Court considered removing the phrase “any individual employed” from the agreement by using the “blue pencil” doctrine, but the Supreme Court concluded that removing that one phrase would remove the subject of the non-solicitation clause. Thus, the Supreme Court held that the non-solicitation could not be saved by applying the “blue-pencil” doctrine. So, in the end, Zimmer lost the case, and its non-solicitation clause was unenforceable.
In conclusion, covenants not to compete and non-solicitation clauses are enforceable, but must be carefully drafted and must make sense relative to the individual employee or competitor. One size does not fit all. The courts will focus on whether the contract protects legitimate business interests given the particular circumstances of each individual case. “Blue pencil” clauses are also enforceable, but can only be used to strike language in a contract and cannot be used to rewrite contract language that deviates from language negotiated and agreed to by the parties to the contract. In the final analysis, these restrictive agreements cannot be written from “off the shelf” pre-printed forms and must be carefully drafted to meet the particular circumstances of each employee and employer.
If you are a business owner or an employee with questions about your particular employment or other agreements, please contact our office to schedule a consultation with one of our lawyers.