Non-Compete Agreements in Indiana: FAQ

As Indiana becomes a more prominent state for more specialized and service-based businesses, more employers are looking into protecting their business interests from competitors poaching their employees or customers. Non-compete agreements have served as a common method in making sure each business has a fair shot at maintaining the talent and customer base they spend so many resources to cultivate. However, Indiana also recognizes how restrictive or even professionally debilitating these agreements can be for some professionals. Hopefully, this FAQ can spark some initial thoughts on whether creating or modifying non-competes in your business would be appropriate.

Q: Is there a law or regulation that governs non-competes in Indiana?

A: No, at least for employment generally; however, some specific professions (like lawyers) may have rules related to non-competes.

 

Q: Then how does Indiana deal with non-competes?

A: Indiana uses common law, or reasoning developed by judges through cases over the years, to determine whether a non-compete is enforceable.

 

Q: What did these judges come up with to determine if a non-compete is enforceable?

A: Most cases come down to whether the non-compete is reasonable (super explicit and bright-line, right?). Since that’s not really helpful, Indiana lists some factors that can help determine reasonableness as: 1) whether the restraints are necessary to protect an employer’s legitimate interests, such as good will, trade secrets, and confidential information; 2) the restraint’s effect on the employee; and 3) the public’s interest. Indiana takes those factors into consideration when looking at the: 1) duration, 2) geographic extent, and 3) scope of activities restricted, in order to determine if the non-compete is reasonable.

 

Q: Who gets to decide what counts as reasonable?

A: The judge. In courts, juries determine questions of fact (i.e., what happened) while judges determine questions of law (i.e., how does the law apply). While the factors surrounding a non-compete are often fact-sensitive, the courts see reasonableness as a question of law.

 

Q: Do courts generally like non-competes?

A: Nope. Indiana generally disfavors non-competes since they restrain trade. Because of this disfavor, courts tend to interpret non-competes narrowly and construe any ambiguities against whoever drafted the non-compete.

 

Q: Who has the burden of proof?

A: The employer. Burden of proof means who is responsible for making a judge see the case their way, so an employer is responsible for proving the non-compete is enforceable, rather than the employee needing to prove the non-compete is unenforceable.

 

Q: Do non-competes apply even if the employee is terminated?

A: Yes. Whether the employee quits or the employer terminates them, the non-compete may apply. However, if the employer commits a “material breach” prior to the employee leaving, then the employer forfeits their right to enforce the non-compete. A material breach is a very lawyer-y term that describes when someone fails to follow some part of the contract in such a significant way that the contract becomes irreparably broken.

 

Q: If a court doesn’t like the non-compete is it totally void?

A: Not necessarily. A court can do something called “blue penciling,” where the court modifies the contract in order to make it legally enforceable, which the employer and employee would then be held to follow that modified version. However, Indiana only allows courts to delete language in the contract, not to add or otherwise modify the contract. Some drafters maneuver around this doctrine by having multiple versions of the non-compete and include language to allow for whichever version is allowed by law.

 

Q: Can an employer make an employee agree to a non-compete at any time?

A: No. Contracts become valid when there is consideration, offer, and acceptance. While the latter two elements are usually self-explanatory, “consideration” describes the concept that both sides are promising to either do something they don’t have to or not do something they have the right to do. Obviously the employee is providing consideration by promising not to compete against the employer but the employer has to provide consideration as well. Most often, employers satisfy the consideration requirement by tying the non-compete agreement to 1) an offer of employment, 2) continued employment, and/or 3) monetary consideration.

 

Q: What counts as “reasonable” for the duration of a non-compete?

A: The shorter the better. Each case is going to be different depending on the facts but the courts regularly uphold one- to two-year agreements. Courts can even uphold a five-year agreement but the longer the duration, the more the employer will have to prove that amount of time is necessary to protect their interests.

 

Q: What counts as “reasonable” for the geographic scope of a non-compete?

A: The smaller the better. The courts will likely uphold an agreement that corresponds with the employee’s territory. The further people may travel in order to interact with that employee, the more likely a court will allow for a broader restriction. Courts will also be more likely to allow broader restrictions if the employee’s role involves confidential information, trade secrets, or business sales. Statewide and nationwide restrictions are most likely going to be deemed too broad and unnecessary to an employer’s legitimate business interests.

 

Q: Can the non-compete allow for the geographic scope to change?

A: Yes. Indiana does allow for non-fixed geography, such as customer contacts, which can serve as a proxy for geographic scope. Courts may allow for a restriction other than geography for the restriction as well, such as a clearly defined class of people.

 

Q: What remedies are available to enforce a non-compete?

A: Typical contractual remedies apply. These usually are 1) loss in profits or loss in value of business, 2) liquidated damages, or 3) injunctive relief. The employer will have to be able to prove as specific amount of actual money lost in order to prove option 1. Option 2 is when the contract itself specifies an amount ahead of time that will be the appropriate amount to remedy the breach, which can be useful in situations when quantifying the loss will be difficult or cumbersome to prove. An injunction is an order from the court that someone is required by law to do something or to stop doing something, or else face legal consequences. If the agreement includes liquidated damages, then courts are unlikely to grant an injunction, unless the agreement discusses it or the court determines monetary damages are inadequate.

 

Q: What if I can’t wait for a court to stop someone from breaching a non-compete?

A: Ask the court for a preliminary injunction. In order to be granted such an order from Indiana state courts, the employer has to show by a “preponderance of the evidence” (meaning more evidence supports the claim than not) that: 1) there is no adequate legal remedy and the employer will suffer irreparable harm before the case is resolved, 2) there is at least a reasonable likelihood of success on the merits at trial, 3) injury to the employer outweighs the harm to the employee would suffer as a result of the injunction, and 4) public interest would not be disserved by the injunction. If the court does grant the preliminary injunction, then the employer will have to post a bond to the court that will cover damages to the employee that would result from the injunction, in case the employee is found to be wrongfully enjoined (Indiana Trial Rule 65(C)).

 

Q: What should I do if I want to make a non-compete agreement or check if my agreement is appropriate?

A: Contact your attorney and/or Van Gorp Legal Services. Also, be very wary of form non-competes you find online. Each situation is going to be different in determining how to make an appropriate non-compete, not just between industries or companies but even among the employees of the same company. Ultimately only a judge can decide if the agreement is enforceable but hopefully this FAQ demonstrates the variety of measures you can take to make the court end up on your side.

 

 

 

Indiana 2018 Update on Administrative Dissolution and Reinstatement

As a quick alert of an upcoming deadline (as of blog publication) that business owners who have their business entities administrative dissolved more than five years ago, must file an application for reinstatement by July 31, 2018, in order for the application to be accepted. This deadline is coming up very soon and involves a few steps before you can submit. If you believe this may apply to your business, please contact your business attorney or Van Gorp Legal Services ASAP.

 

Depending on the type of business entity a business owner chooses, Indiana has historically required various basic filings in order to stay active and in good standing with the state. Some of these filings include biennial (every 2 years) reports, maintaining a registered agent, and paying business taxes (Ind. Code 23-18-10-1). If a business owner does not fulfill these requirements, the Secretary of State’s office will send a notice that the business is going to be administratively dissolved if the issues are not resolved within 60 days (Ind. Code 23-18-10-2). What such a designation means is that, as far as the state of Indiana sees it, your business may still exist but can no longer carry on its business (other than to wind up and liquidate assets) or benefit from the protections that come from being a business entity (Ind. Code 23-18-10-3). This means the business (nor its agents) can sign contracts or be protected from legal exposure from anything that goes wrong.

 

However, not all is lost if your business has been administrative dissolved. Indiana does allow for the Secretary of State to reinstate the business and continue on as if nothing went wrong. The owner can file for reinstatement and, if approved, “the reinstatement relates back to and takes effect as of the effective date of the administrative dissolution, and the limited liability company resumes carrying on business as if the administrative dissolution had never occurred” (Ind. Code 23-18-10-4). The bolded part is particularly important since any business actions taken while administratively dissolved would not be valid, but instead become totally fine once reinstated.

 

Back in 2017, Indiana enacted its largest update to the business code in the state’s history by passing the Uniform Business Organizations Act. Most of the law was meant to modernize and simplify Indiana’s business laws that were spread out and fragmented due to over a century of small changes. Some substantive changes primarily focused on making the requirements for businesses to file with the state consistent among the different business entities (looking at you, LPs and LLPs who now have to file biennial reports). The law also established a deadline for reinstatement. While before, a business could request reinstatement anytime after dissolution, the Secretary of State now only extends that opportunity for five years after the effective date of the dissolution. For businesses that are outside of this five-year window, the SOS office is allowing for a grace period until July 31, 2018, to file for reinstatement. After that, once a business passes five years beyond the effective date of the dissolution, the business cannot be reinstated and the owner must create a new business entity.

 

If you are not sure if your business is administratively dissolved, you can check the Indiana Secretary of State’s online portal for businesses, called INBiz. That portal is also where you can send in the application or any relevant documents related to the process. For more details of the specific steps required for reinstatement, check out this page.