An Indiana appellate court recently declined to enforce an executive’s non-compete on the grounds that the covenant’s activity restriction was overbroad.
In Med-1 Solutions, LLC v. Taylor (Opinion 24A-PL-450, November 25, 2024), a group of medical fee collection companies (“RevOne Companies”) attempted to enforce a non-compete against their former Chief Operating Officer (the “Defendant”). The trial court declined to enforce the non-compete, finding a restriction prohibiting her from working for a competitor in any capacity to be overbroad and unenforceable. The RevOne Companies appealed the decision to the Indiana appellate court.
On November 25, 2024, the appellate court affirmed the trial court decision. The appellate court held that such broad activities restrictions are “unreasonable because they extend beyond the scope of the employer’s legitimate interests.”
While the appellate court did not invoke the oft-cited “janitor rule” by name, the decision is consistent with the rule. The “janitor rule” provides that a court should not enforce a broad non-compete prohibiting an employee’s ability to work for a competitor in any capacity. Courts employing the “janitorial rule,” have concluded that a non-compete should instead contain more narrowly tailored prohibitions on post-employment work. For instance, a more narrowly tailored restriction would prohibit an employee from working in a role that is the same as or similar to that which the employee held with the former employer or in a capacity that may risk disclosure of the former employer’s confidential information. In other words, if the non-compete is drafted so broadly that it would prevent the former employee from working for a competitor even as a janitor, a court will deem the covenant unenforceable.
Some states permit courts to modify or “blue-pencil” overly broad covenants to make them enforceable to the maximum extent permitted under applicable law. Some, like Indiana, give courts limited discretion to “blue-pencil” overly broad covenants. Indiana courts may delete unreasonable provisions that are severable, but they cannot add provisions or otherwise modify the covenant. In the end, the Indiana court did not exercise its limited discretion. Without citing the “janitor rule,” the Indiana appellate court’s affirmation of the district court’s finding suggests the “janitor rule” is alive and well in Indiana.
As the new year approaches, it is an opportune time for employers to audit their employment documents, including their restrictive covenant agreements, to ensure enforceability under applicable law. Employers who may be considering entering into new or amended restrictive covenant agreements with existing employees (rather than with only new hires) must remain mindful that certain states require independent consideration beyond continued employment when entering into a restrictive covenant agreement with a current employee.