Blue Pencil Really “Just an Eraser” — Indiana Courts Cannot Fix Overbroad Non-Competes By Adding New Terms

Non-Compete, Non-Solicit, Indiana, blue pencil doctrine, Employment Agreements

The Indiana Supreme Court[1] has reaffirmed its narrow interpretation of the “blue pencil” doctrine, holding that courts may not add terms to an overbroad non-solicitation or non-competition provision to make it reasonable even if the contract has a reformation clause.

As the court puts it: “This doctrine … is really just an eraser.”  

Covenant Barred Recruitment of “Any” Company Employee

Zimmer, Inc. employee Robert Kolbe signed a non-competition agreement that contained several provisions, including a non-solicitation clause. That non-solicitation covenant prohibited Kolbe from recruiting “any individual employed by [Zimmer]” to work for a competitor.

In a lawsuit, Zimmer alleged that Kolbe violated the non-solicitation covenant by recruiting former Zimmer employees to work for Heraeus Medical. An Indiana trial court preliminarily enjoined Kolbe from recruiting Zimmer employees.

Appellate Court Adds Scope Limitation Per Contract’s Reformation Clause

The Indiana Court of Appeals concluded that the non-solicitation covenant was overbroad and unenforceable as written because it applied to all employees of the company.  But, finding that a “reformation” clause in Kolbe’s agreement authorized the court to modify unenforceable provisions, the appeals court added language to the non-solicitation covenant to make it reasonable by limiting the covenant’s scope to only “those employees in which [Zimmer] has a legitimate protectable interest.” A further appeal to the Indiana Supreme Court followed.

When presented with unreasonable restrictions within a non-competition agreement, Indiana courts apply the “blue pencil doctrine.” Under this doctrine, a court may excise unreasonable, divisible language from a restrictive covenant—by erasing those terms—until only reasonable portions remain. The doctrine, however, does not allow a court to rewrite a non-competition agreement by adding, changing, or rearranging terms. The blue pencil doctrine applies to all restrictive covenants within non-competition agreements, not just prohibitions against working for a competitor.

As indicated, Kolbe’s agreement contained a reformation clause in which the parties agreed to give “any court interpreting the provisions of this Agreement… the authority, if necessary, to reform any such provision to make it enforceable under applicable law.”

Indiana Supreme Court Holds Courts May “Erase” But Not Add Language

The Indiana Supreme Court concluded that parties may not, by “adding a magic phrase” like the reformation clause, “delegate to the courts the task of drafting reasonable agreements.” More specifically, reformation clauses do not allow a court to overstep the bounds of Indiana’s blue pencil doctrine by adding terms.

Because the unenforceable covenant not to solicit Zimmer employees could not be reformed, The Indiana Supreme Court vacated a portion of the trial court’s preliminary injunction order which purported to enforce that covenant.

Don’t Assume Courts Will Enforce or Rewrite Broad Covenants

The lesson, of course, is to draft a reasonable clause to avoid such a result.

Covenants barring recruitment of employees often lack any scope limitation and instead apply to all employees. In a large company with employees spread throughout the U.S. or the world, such a provision is inviting a legal challenge.

[1] The case is Heraeus Medical, LLC, et al. v. Zimmer, Inc., et al, Case No. 19S-PL-471 (Dec. 3, 2019)

by Michael R. Lied

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