Indiana Supreme Court Ruling Provides Guidance on Employee Non-Compete Agreements

Last week the Indiana Supreme Court issued an important decision involving an employee non-compete agreement.  In Central Indiana Podiatry, P.C. v. Krueger, __ N.E.2d __, 2008 WL 642529 (March 11, 2008), the Indiana Supreme Court examined the enforceability of a non-compete agreement between podiatrist Kenneth Krueger and his former employer Central Indiana Podiatry, P.C. (CIP).  Krueger's non-compete agreement prohibited him from practicing podiatry for two years within a geographic area of 14 central Indiana counties, any other county where CIP maintained an office and any county adjacent to any of those counties, which equaled a total of 43 counties in central Indiana.  During his employment with CIP, however, Krueger practiced in only three of those counties-Marion, Tippecanoe and Howard Counties.  Krueger argued, among other things, that his non-compete agreement was void and unenforceable because physician non-compete agreements are against public policy and his non-compete agreement was overbroad and unreasonable.

Podiatrist's Non-Compete Agreement Gets the Partial Boot

The Indiana Supreme Court rejected Krueger's argument that physician non-compete agreements are void per se as against public policy.  Noting that an employee non-compete agreement must be reasonable, the Indiana Supreme Court acknowledged that CIP has a legitimate protectable interest in preserving its patient relationships.  However, the Court held that the geographic scope of Krueger's non-compete agreement was "clearly overbroad" because it restricted Krueger from practicing podiatry in numerous Indiana counties other than those in which he actually practiced podiatry on CIP's behalf.   To be reasonable, a physician non-compete agreement "must be limited to the area in which the physician has had patient contact."  Utilizing the "blue-pencil doctrine," the Indiana Supreme Court struck the provisions from Krueger's non-compete agreement restricting Krueger's activity in counties other than the three in which he practiced for CIP.

While the Central Indiana Podiatry case does not forge any new law, it does provide guidance on some fundamental principles regarding the interpretation of employee non-compete agreements in Indiana, including:

• Employee non-compete agreements are in restraint of trade and will be construed strictly against the employer;
• The employer must show it has a legitimate interest, such as customer or patient goodwill, to protect;
• The non-compete agreement must be reasonable in terms of time, activities and geographic area restricted;
• To be reasonable, the restricted geographic area generally must be restricted to the area in which the employee worked, not the full area of the employer's business;
• If a non-compete agreement is overbroad and it is feasible to strike the unreasonable portions and leave only reasonable portions or terms, the court may apply the blue-pencil doctrine to strike (but not add) language of the agreement; and
• A "no-defense" provision in the agreement may trump an argument by the employee that the non-compete agreement is unenforceable because the employer first breached the employment contract by failing to pay certain monies to the employee.

Does Your Non-Compete Agreement Need a Check-Up?

The Central Indiana Podiatry case should serve as a reminder to all employers that whether an employee non-compete agreement is enforceable depends in large measure on whether the agreement is drafted correctly.  It also shows the importance of crafting such agreements with severable provisions so that if the court determines certain provisions are unreasonable, the court can exercise the blue-pencil doctrine to strike the overbroad language and enforce the remaining provisions.  Employers should have their legal counsel review their non-compete agreements periodically to ensure that such agreements are in compliance with the principles set forth in the Central Indiana Podiatry case and other recent appellate decisions.