Noncompetes – A Breach Does Not Entitle a Company to Increase the Length of an Injunction
The Indiana Court of Appeals has provided additional guidance on the enforceability of noncompetition and nonsolicitation agreements. Noncompetes, as they are often known, are regularly enforced when a former employer demonstrates that the restriction is reasonable. The reasonableness of a restriction is measured in two steps: 1) Whether the employer has a legitimate protectable interest, and 2) whether the covenants are reasonable in scope as to the time, geography and activity restricted. See our prior post here
The Court recently considered whether a provision that extended the time of the noncompete for the length of a breach was enforceable. See Hannum Wagle & Cline Engineering, Inc. et al v. American Consulting, Inc., d/b/a American Structurepoint, Inc., found at http://www.in.gov/judiciary/opinions/pdf/11301601jsk.pdf
In Hannum, the noncompete provided “that the ‘Non- Compete Period’ shall be extended by the duration of any violation by [Kuntz] of the terms of Paragraph 2 of this Agreement.” These clauses are common and are important to former employers who know that litigation takes time and want the offending employee barred for competing for as long as possible. Without such clauses, an employee is incentivized to delay litigation as long as possible, because he or she can run out the clock of any inunction for the noncompetition period. The former employee does run the risk that he or she may later be held liable for breach and damages will have accrued. However, the whole point of seeking an injunction is because it is difficult to prove damages.
However, the Court affirmed Kuntz v. EVI, LLC, 999 N.E.2d 425 (Ind. Ct. App. 2013), holding that a preliminary injunction was not an appropriate vehicle to extend the term of a non-compete. The Kuntz court found, and Hannum agreed, that a preliminary injunction upholds the status quo pending a final determination, and that the status quo was the situation prior to litigation – the original timing of the noncompete. As a result, the noncompete period terminated on the date set forth in the agreement, irrespective of any breach by the former employee.
The Court did not address whether alternative language in the noncompete may support an extension, or whether after a full hearing on the merits, the Court would permit injunctive relief even after the noncompete period had expired.
For a thorough discussion of these issues, or if you have other questions on how to best protect your company or yourself, please contact James Knauer or Steve Runyan, or one of our attorney’s here to discuss your situation. It would be our pleasure to assist you.
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