Noncompetes: What You Need to Know

Indy Chamber News Archives

By Christopher Jeter, associate attorney at Barnes & Thornburg LLP

A competitor offers you a position with better pay and benefits. The only problem? You signed a noncompete agreement with your current employer. Is the agreement enforceable? How can employers ensure that their standard documents hold up in court?

While it has almost become standard practice for companies to require new employees to sign noncompete agreements before beginning their employment, such agreements are often difficult to enforce, as seen in cases decided in Indiana.

Indiana courts have tended to rule against agreements that restrict a person’s future employment opportunity. Additionally, the courts have negatively viewed noncompete agreements because they are written by and heavily favor employers.

However, don’t abandon the use of noncompetes just yet. When used successfully, they can be an effective way to protect your competitive advantage – if you take a deliberate and focused approach when drafting these agreements.

In order to be enforced, noncompetes must be reasonable. Organizations can achieve this by articulating a legitimate business interest such as confidentiality and ensuring the non-compete is narrowly tailored to ensure protection of that interest. Just as every case, and every employee, is different, an employee’s noncompete should be just as individualized and thoughtful.

Here are four tips to effectively draft noncompete agreements that are more likely to hold up in court:

1. Articulate the business interest that you are attempting to protect. It is not enough to prohibit a former employee from operating a similar business – you must be more specific. Detail the legitimate business interest you are trying to protect. A protectable interest is some kind of advantage that the employee could use to compete with the former employer. Those interests could include goodwill, secret or confidential information, and personal contact with customers. Basically, this refers to information that the employee gained from employment at your organization. 
2. Shorten the duration. Courts will not enforce noncomplete agreements that restrict the activity for an extended period of time, so be sure to allow the shortest amount of time possible. Additionally, it is important to demonstrate why a certain amount of time is necessary to preserve a competitive advantage. Be specific about the unfairness that would result from a former employee’s ability to use the information gathered from their employment, as well as how a “cooling-off” period will diminish the impact. In general, the shorter a noncompete agreement, the more defensible it will be. The goal of a noncompete agreements is to allow an organizations to “get a head start” on solidifying important business and customer relationships after an employee leaves, not to indefinitely reduce competition.  Most effective agreements last no more than one year.
3. Narrow the geographic area. To be enforceable, a noncompete must also provide a geographic scope that is specific to the employer. If a business does not operate in an area, it is unlikely that a court will restrict a former employee from operating in that samearea. Regardless of where a company operates, companies will have difficulty enforcing noncompete agreements that restrict a former employee from working at all. As with duration, the more narrow the geographical restriction, the more enforceable it will be.
4. Specify the activity prohibited. Perhaps the most important aspect to ensure enforceability is clearly identifying the activity you wish to prohibit. Trying to restrict an employee from a connection with any company that competes with the former employer will not work. Instead, focus on specific and detailed activities, such as restricting “the recruitment of executives within the field of information technology.” Courts will not enforce noncompete agreements when the scope of activity it is trying to restrict could apply to anyone, not the specific employee in question. 

With noncompete agreements, less is often more. Courts are more likely to find these agreements reasonable when they are prepared with care and restraint. When used properly, noncompete agreements can be a powerful tool to curtail the possible harmful activity of a former employee.

Christopher Jeter is an associate attorney in Barnes & Thornburg LLP’s Indianapolis office. He is a member is the firm’s Litigation Department, where his practice focuses primarily on complez business/commercial disputes, government and banking litigation, and products liability defense. He can be reached at [email protected].

This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.