Drafting Effective and Enforceable Employment Contracts · During the employment period, Executive’s base salary will be $100,000 per annum (your “Base Salary”). The Base Salary

Drafting Effective and Enforceable Employment Contracts

By Greg Guevara and Tyler Moorhead Bose McKinney & Evans LLP

Indiana Continuing Legal Education Forum June 12, 2019

This article was produced for the June 12, 2019, Indiana Continuing Legal Education Forum. This publication is intended for information purposes only and should not be construed as legal advice. Reproduction or redistribution

of material without permission from Bose McKinney & Evans LLP is expressly prohibited.

Drafting Effective and Enforceable Employment Contracts ~ 1 ~

TABLE OF CONTENTS

I. What Is an Employment Contract?.................................................................................3

II. Do I need an Employment Contract in the First Place?.................................................3

III. The Essential Terms of a Typical Employment Contract……………………………..4

A. Form of the Agreement……………………………………………………….…4

B. Parties……………………………………………………………………………..4

C. Job Titles/Duties………………………………………………………………….5

D. Compensation and Benefits……………………………………………………...5

E. Term of Employment…………………………………………………………….6

F. “Cause” for Termination………………………………………………………..7

G. “Good Reason” Termination……………………………………………………8

H. Other Grounds for Termination………………………………………………...8

I. Severance Benefits……………………………………………………………….9

J. Return of Policy…………………………………………………………………10

K. Jurisdiction, Choice of Venue, and Choice of Law………………………...…10

IV. Protecting Confidential Information and Customer Relationships by Crafting

Valid and Enforceable Restrictive Covenants………………………………………..11

A. Consideration…………………………………………………………………...13

B. The Employer’s Protectable Business Interests………………………………14

C. Time, Space, and Activity Restrictions………………………………………..15

D. Customer Restrictions………………………………………………………….18

E. The “Blue Pencil” Doctrine…………………………………………………….18

F. Choice of Law and Venue……………………………………………………...20

G. Other Helpful Provisions……………………………………………………….21

H. Simplicity, Clarity, and Concision……………………………………………..21

V. Conclusion………………………………………………………………………………22


I. What Is an Employment Contract?

The logical starting point when addressing the topic of drafting valid and enforceable

employment contract is: What exactly do we mean by an employment contract? We may be

talking about a formal contract of employment, a written agreement that documents the legal

relationship between an employer and an employee and that often addresses issues such as length

of employment, compensation and benefits, job expectations, severance, and the like. We may be

talking more narrowly about restrictive covenant agreements; contracts that are incidental to the

employment relationship and that address important topics such as confidentiality and trade

secrets, restrictions on soliciting customers and employees, and post-employment restrictions on

competition. We may be talking about collective bargaining agreements, which are contracts

between an employer or an employer group and a union that represents certain classifications of

workers. And we may be talking about any number of other employment-related agreements,

such as bonus plans, stock option agreements, ERISA-plan documents, or other documents

relating to employee compensation or benefits.

This article focuses on drafting the first two of those types of agreements: (1) contracts of

employment, and (2) confidentiality/restrictive covenant agreements. Because restrictive

covenants are often incorporated into employment contracts as an essential element of those

agreements, we will begin with employment contracts and then turn our attention to restrictive

covenant agreements.

II. Do I Need an Employment Contract in the First Place?

The first question to ask when drafting a contract of employment is: Do I really need one

at all? In most situations, the answer is no. Like most American jurisdictions, in the absence of a

contract guaranteeing employment for a fixed term, Indiana follows the employment-at-will

doctrine which allows the employer or the employee to terminate the employment relationship at

any time, with or without cause. See Harris v. Brewer, 49 N.E.3d 632, 639 (Ind. Ct. App. 2015).

This doctrine provides substantial protection for the employer because it is not bound to continue

to employ a worker whose job performance is substandard, whose conduct is unacceptable,

whose attitude is poor, or whose position may no longer be required. At-will employment

provides great flexibility to the employer in shaping its workforce and making adjustments to

personnel as needed. A formal written employment contract merely serves to create limitations

on what the employer can and cannot do, and the potential costs of severing the relationship with


an employee whose conduct may not rise to the level of contractually-defined “cause,” but with

whom the employer would nonetheless like to part ways.

So why would an employer ever choose to deviate from employment at-will? In most

instances, it is because the employer wants to entice the employee to accept employment or to

remain in a position, and because the employee will not accept the position without the added

protections of an employment contract (e.g., guaranteed employment, incentive compensation,

severance benefits, etc.). For this reason, employment contracts are typically only used with

business executives, former business owners or managers whose services are being retained in

connection with a business acquisition, professionals (such as doctors, athletes, etc.), or other

highly-compensated workers.

If a formal employment contract is not necessary, the employer should still carefully

evaluate whether an agreement protecting confidential information and trade secrets, prohibiting

customer and employee solicitations, or otherwise restricting competition would be warranted. In

many instances, as discussed in detail below, that type of agreement will be warranted.

We will begin by considering the elements of a typical employment contract. After that,

we will drill down on the elements of an effective confidentiality and non-competition

agreement. Bear in mind that in most instances, the employment agreement will also include the

confidentiality and/or non-competition clauses discussed below.

III. The Essential Terms of a Typical Employment Contract.

A. Form of the Agreement.

The form of the agreement is really a matter of preference, rather than legal import. An

employment contract can be drafted in the form of a typical contract, or it can be done by offer

letter signed and accepted by both parties. Employers sometimes prefer to utilize a letter format,

as it may seem less formal and daunting, but the legal effect will be the same as long as the other

elements of a contract exist.

B. Parties.

In any employment contract, the preamble should clearly identify the parties to the

agreement. In complex transactions or layered organizations, the proper entity to identify as the

employer may be difficult to determine, but the legal employing entity should typically be

identified as the contractual employer. Other related entities that benefit from the employment


relationship may, if appropriate, be identified elsewhere in the agreement as intended

beneficiaries of the agreement.

C. Job Title/Duties.

Most employment contracts state the employee’s job title and job duties. Reporting

relationships are often identified as well. In many instances, simply stating that the employee’s

job duties will be those duties commensurate with such position, or something to that effect, will

be sufficient. In other instances, however, where the employer wishes to clearly document

expectations of the role, it may be helpful to identify specific job duties or prepare a bullet-point

list of functions that are expected. Of course, adding “other duties as assigned” is helpful to

maintain flexibility on the part of the employer.

D. Compensation and Benefits.

A significant part of employment contract negotiations is compensation and benefits. In

most instances, this means identifying the starting salary, as well as any considerations regarding

increasing (or decreasing) such salary during the term of the contract. Incentive compensation is

typically included as well, and that can be addressed by detailing the required conditions for

securing bonuses, commissions, or other incentive pay in the contract, or it can be handled by

reference to external documents either in existence at the time or to be developed in the ordinary

course of business. What is most important about incentive compensation, whether it is a

commission plan, bonus program, or equity incentive arrangement, is clarity. The best way to

mitigate the risk of future litigation over such issues is to identify clear, measurable metrics for

calculating and awarding such compensation, and also providing clarity about what happens to

incentive compensation in the event of termination of employment. For example, what happens

if the employee is terminated mid-way through the bonus plan year? Does the employee have to

be actively employed at the time the bonus is paid in order to qualify? What happens to recurring

commission payments that have been “earned” by an employee but whose employment is

terminated before the commission is paid?

Benefits are often included in employment contracts by reference to standard plan

documents (e.g., health insurance, life insurance, 401(k) plans, etc.) or employee handbook

programs (e.g., paid time off, holidays, etc.). If a highly compensated employee is entitled to

additional vacation or other paid time off that is greater than the standard employee program,

then that may be helpful to include in the agreement. If the employer plans to deviate from


standard ERISA plan documents in providing benefits to highly-compensated employee, it would

be advisable to consult with a benefits lawyer before including that in the agreement.

Here is some sample language for consideration:

During the employment period, Executive’s base salary will be $100,000 per annum (your “Base Salary”). The Base Salary will be payable in regular installments in accordance with the Company’s general payroll practices and subject to standard employment withholdings. The Base Salary may be reviewed annually (beginning in January 2020) by the Company in its sole discretion, provided that the Base Salary may be increased by the Company but may not be decreased during the employment period.

In addition to Executive’s Base Salary, Executive will be eligible to receive an annual bonus in accordance with, and subject to the terms and conditions of, a bonus plan to be established by the Company (the “Bonus”). Payment of the Bonus will be contingent upon Executive (a) meeting or exceeding certain annual targets established by the Company with respect to such calendar year and (b) Executive being continuously employed with the Company through the last date of the calendar year for which the Bonus, if any, is paid by the Company. The amount of the Bonus for a particular calendar year and the targets for such calendar year will be determined by, and communicated to Executive by, the Company from time to time during the employment period.

Executive shall be entitled to participate in the Company’s group health, life, and disability insurance plans, 401(k) retirement savings program, and any and all other employee benefits pursuant to the terms of the Company’s applicable benefit plans on the same basis as offered to other company employees. Other benefits, such as holidays and paid time off, are provided in accordance with the Company’s employee handbook. The Company’s benefit plans and programs, together with the requirements of participation, may be modified from time to time by the Company in accordance with applicable law.

E. Term of Employment.

Another essential term of an employment agreement is the length of employment. Of

course, even a formal employment contract may be at-will, but more typically there will be a

defined term of employment. The first question to ask is: How long should the initial term be?

Many employment contracts offer an initial fixed period of one to five years of employment, but

in each instance that must be determined based upon the circumstances. After the initial term

ends, the contract should address what happens next. If there is no further language regarding

renewal, then presumably the employment relationship becomes an at-will relationship at the end

of the term. A more common option is for the contract to renew automatically for successive,

typically shorter terms (e.g., another one or two years), subject to either party giving advance


written notice of non-renewal (e.g., 30-, 60-, or 90- days’ notice). A third option is to specifically

provide that the parties will enter into a new or amended agreement upon expiration of the initial

term. The challenge of that approach, however, is that often times in the ordinary course of

business the work of negotiating a new contract gets delayed or missed altogether, in which case

the individual’s employment status becomes uncertain, thereby undermining the intent of the

parties.

Here is some sample contract language:

The initial term of this agreement shall be for two (2) years, commencing on the effective date, unless earlier terminated as provided herein (the “Initial Term.”) This agreement shall automatically renew for successive one (1) year terms, and continuing each year thereafter (each a “Renewal Term”), unless either party provides written notice at least thirty (30) days prior to the expiration of the Initial Term or a subsequent Renewal Term of that party’s intention not to renew the agreement, in which case the agreement will expire at the end of such Initial Term or Renewal Term.

F. “Cause” for Termination.

When a contract of employment is for a fixed term, it is important to define the

circumstances by which the employer may terminate the agreement, typically for a defined

“cause.” This provision should provide specific examples of improper conduct but should be

broad in its application in order to give the employer flexibility in its enforcement. Examples of

conduct that often are included in the definition of cause for termination include breach of the

employment contract, fraud, theft, embezzlement, conversion, violation of company policy,

refusal to obey reasonable directions of the employer, conduct unbecoming of the company or its

reputation, or failure to maintain required licenses or other conditions of employment. Regarding

work performance issues, it is common for the contract to include a written notice and

opportunity to cure provision, allowing the employee to have notice of the performance issue and

a reasonable period of time to correct that issue before being subject to a cause dismissal.

Here is some sample contract language:

The Company may terminate the employee’s employment during the employment period for “Cause,” effective upon written notice of such termination to the employee, for any of the following reasons: (i) the employee’s breach of one or more restrictive covenants set forth in this agreement or any other material breach hereof; (ii) the employee’s commission of theft or embezzlement of property belonging to the Company or other acts of dishonesty; (iii) the employee’s commission of a crime resulting in injury to the business, property, or reputation of the Company or commission of other activities harmful to the business or reputation of the Company; (iv) the employee’s commission of an act in the


performance of Employee’s duties hereunder determined by the Company to amount to gross, willful, or wanton negligence; (v) the employee’s refusal to perform or neglect of the duties assigned pursuant hereto; (vi) any significant violation of any statutory or common law duty of loyalty to the Company; or (vii) the absence of the employee from employment by reason of illness or incapacity for a period of more than twelve (12) consecutive weeks. In the event of the employee’s termination for Cause, the Company shall have no obligation to pay any severance benefit pursuant hereto but the employee’s obligations under the restrictive covenants herein shall remain in full force and effect.

G. “Good Reason” Termination.

Some employment contracts also allow the employee to resign for “good reason.”

Typically, this would include circumstances such as a material reduction in

compensation, a material change in job duties, a change in employment locations, or a

change in control of the company. Again, if such provisions are included, it may make

sense to include a notice and opportunity to cure with respect to at least some of these

items.

H. Other Grounds for Termination.

In the absence of cause for the employer to terminate or good reason for the

employee to resign, the contract should also address other manners in which the contract

may be terminated (e.g., by mutual agreement, by the employer without cause, by the

employee without good reason, by the death or incapacity of the employee, etc.), and the

implications of such terminations. Typically, if severance benefits are provided, they are

linked directly to the employee’s resignation without good reason or the employer’s

termination without cause. Any provisions of the contract that survive termination, such

as confidentiality obligations, restrictive covenants, and post-employment cooperation

obligations should be specifically identified in the termination provision.

Here is some sample language allowing the employee to resign without good

reason:

The employee may terminate the employment period without Good Reason at any time upon sixty (60) days’ prior written notice to the Company. In such instance, the Company shall have no obligation to pay any severance benefit pursuant hereto but the employee’s obligations under the restrictive covenants set forth herein shall remain in full force and effect. This agreement shall terminate upon the date specified in the employee’s notice, or such earlier date as may be elected by the Company in writing.


I. Severance Benefits.

Severance benefits are often provided in employment contracts when the employment

relationship is terminated by the employer at no fault of the employee. Most commonly, this

occurs when the employee is discharged without cause, laid off, or terminated due to

restructuring after a change in ownership. In the absence of a formal severance plan or program

of the company, there is no requirement on the part of an employer to pay severance benefits.

Nonetheless, the inclusion of such benefits in an employment agreement provides added security

to the employee and is often a critical term of the employment negotiation. The contract should

clearly state the circumstances which trigger severance (and directly or by implication, those that

do not) and should also clearly identify the actual severance benefit to be provided. The contract

should state whether the severance is paid in a lump sum or over time and whether benefits other

than monetary payments are included, such as for example payments to cover health insurance

continuation, outplacement services, or other extra benefits. In addition, it is important to state

that severance benefits are conditioned on the employee signing and not revoking a release of

claims in a form acceptable to the company.

Here is some sample severance language:

In the event of termination of this agreement by the Company without cause, or in the event of a Change in Control (as defined herein), in addition to earned salary, benefits, and accrued but unused paid time off as of the date of termination, Employee will be entitled to receive a severance benefit consisting of: (a) an amount equal to six (6) months of Employee’s Base Salary in effect at the time of such termination, subject to applicable withholdings, payable in regular installments over the first six (6) months following such termination in the same amounts and at the same intervals as if the Employee had remained employed throughout such period (provided that the first payment will not be required to be made until the first normal payroll date after the release has become effective and may no longer be revoked by Employee), (b) a pro rata portion of any bonus as may be payable for the calendar year in which the termination date occurs, such bonus to be payable at such time as the bonus would otherwise have been paid, and (c) if Employee timely elects continuation health care coverage under COBRA, reimbursement of the premiums for such coverage in an amount equal to the employer’s share of the health insurance premiums paid by the Company based upon the Employee’s elections in effect as of the date of termination, for a period of six (6) consecutive months or until Employee becomes covered by another health insurance plan, whichever is sooner (the “Severance Benefit”). The Severance Benefit will be conditioned upon Employee signing and not revoking, in a form acceptable to the Company, a release agreement releasing all claims against the Company. The continued provision of the Severance Benefit shall


further be conditioned upon Employee’s strict compliance with Employee’s post-employment obligations under this agreement.

J. Return of Property.

At the end of the employment relationship it is essential that the company protect its

property and confidential information by requiring the employee to return all such information to

the company. In today’s digital business world, this requires the return of tangible and intangible

items such as electronic devices, data storage devices, and electronic copies of company

information. One of the most common problems companies face when an important employee

leaves is stolen data, client lists, or business secrets. This provision, along with the restrictive

covenants discussed in the next section, ensure that the company’s assets, confidential

information, and work product remain protected.

Here is an example:

Upon termination of Employee’s employment for any reason, or at any other time upon the request of the Company, Employee shall immediately deliver to the Company all Confidential Information belonging to the Company and shall not retain hard copies or electronic copies of such Confidential Information. Employee shall also immediately return to the Company any and all company property, including without limitation tools, equipment, supplies, vehicles, computers, mobile/smart telephones, tablets, electronic devices, external data storage devices, software, hardware, keys, and all other property belonging to the Company. Employee agrees to certify in writing that Employee has returned all company property, including confidential information, to the Company, and has not retained any hard copies or electronic copies thereof.

K. Jurisdiction, Choice of Venue, and Choice of Law.

Forward thinking drafters of employment contracts anticipate litigation, and a clause

addressing jurisdiction, choice of venue, and choice of law is an important term in that regard.

These provisions are typically enforceable in employment agreements in most jurisdictions,

provided there are minimal contacts with the chosen forum, and can provide a significant

strategic advantage if litigation is contemplated. Considerations regarding the appropriate forum

should include not only the most convenient access to the judicial system and the most favorable

venue and law, but also the practical considerations of enforcing a judgment if necessary. It may

make sense to include a jury trial waiver. This analysis should also include whether arbitration or

another means of dispute resolution is preferred over court litigation.

This agreement, its construction, and the determination of any contractual or non-contractual rights, duties or remedies of the parties hereto arising out of or relating


to this agreement will be governed by, enforced under, and construed in accordance with the laws of the State of Indiana, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws. Exclusive jurisdiction for any legal suit, action, or proceeding arising out of or relating to this agreement or Employee’s employment shall be in the Indiana Commercial Court located in Marion County, Indiana, or in the United States District Court with jurisdiction over Marion County, Indiana. Each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action, or proceeding. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action, or proceeding in such court and agree not to plead or claim in any such court that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. EACH PARTY HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THIS AGREEMENT.

IV. Protecting Confidential Information and Customer Relationships by Crafting Valid and Enforceable Restrictive Covenants.

Confidential business information, advantageous customer relationships, and marketplace

goodwill are among a company’s most valuable assets. Businesses invest significant resources

and energy to develop and protect them. In many business acquisitions, these are the primary

assets acquired, with real estate, equipment, and inventory having secondary value in the

transaction. Indeed, without these critical assets few businesses would survive. Yet the law

favors free market competition and does little to protect them on its own.

Trade secret laws offer some protection, but only for highly confidential information that

has marketplace value due to its secrecy and that is deliberately guarded from disclosure by the

company. Much (if not most) business information does not qualify for trade secret protection,

yet that information may be of tremendous value to a company – and to its competitors.

Common law property rights offer some measure of protection against theft of business records

and documents, including electronically stored files, but a company’s interests in maintaining

confidentiality extend beyond physical documents and data files to the information contained

therein, where common law property interests end.

When are these assets at greatest risk? Often times, it is when a senior manager, veteran

sales representative, or another key employee leaves the company to work for a competitor. As a

general rule, employees are free to actively compete with their prior employer, solicit the former

employer’s customers, and recruit the former employer’s employees. As long as the departing


employee does not steal the employer’s “trade secrets” or business records on the way out the

door, he or she is typically free to set up shop across the street and actively compete with the

former employer.

In this context, restrictive covenant agreements – often colloquially referred to as “non-

competes” – have tremendous value. These types of covenants include confidentiality/non-

disclosure clauses, restrictions on soliciting or servicing customers, limitations on recruiting or

hiring employees, and geographic covenants against competition or working for a competitor.

Though disfavored in the law, most jurisdictions will enforce some or all of these types of

covenants to varying degrees.1 At a high level, these covenants must be supported by adequate

consideration, must protect a valid business interest, and must not be broader than necessary

given that protectable interest. In other words, the constraints on the former employee’s

competitive activities must not be overly restrictive given the legitimate business interests the

employer seeks to protect. If the covenant is overbroad, it will likely be struck down altogether –

or (at best) narrowed to the extent it is reasonable.

Given these considerations, the deliberative drafting of restrictive covenants is of

paramount importance. Indeed, creating a customized non-compete agreement is the company’s

best chance to protect these important assets before the workforce gains access to them.

Attorneys that litigate these claims routinely deal with issues arising from overzealous drafting,

forcing them to seek creative theories to enforce a restrictive covenant that is facially overbroad

and cannot be saved by Indiana’s archaic “blue-pencil” doctrine. Other times, the covenant’s

restrictions are narrowly drafted or simply fail to expressly prohibit the objectionable activity to

the extent that it is effectively worthless in preventing competition. The art of drafting a valuable

non-compete agreement requires skillfully threading the needle of these extremes, crafting a

legal document that contains enforceable restrictions that genuinely protect the company’s

legitimate business interests.

Effective “one-size-fits-all” non-compete agreements do not exist. Simply copying a

form from a competitor or visiting a website that offers do-it-yourself legal templates is a risky

endeavor. Thoughtfully drafting an agreement that is tailored for your client’s specific industry,

1 In California, for example, geographic non-competes in employment are void as a matter of public policy, although other types of restrictive covenants may still be enforced. Cal. Bus. & Prof. Code § 16600; Dowell v. Biosense Webster, Inc., 102 Cal. Rptr. 3d 1, 8 (Cal. Ct. App. 2009) (forbidding geographic restrictions in employee non-compete but allowing geographic restriction in sale of business). Many U.S. jurisdictions will enforce all of these types of covenants to some degree, however, and in a few jurisdictions, such as Florida and Michigan, they are generally favored. See Mich. Comp. Laws Ann. § 445.774a; Fla. Stat. Ann. § 542.335.


business, and circumstances is ideal. Periodically reviewing that agreement to comply with

recent legal developments is highly advisable. Even within a single company, it may be best to

have different agreements with varying restrictions for individuals with different roles within the

company – for example, one set of restrictions for senior managers and sales personnel, another

for engineers and production personnel, and still another for administrative staff.

With that backdrop, this section of the article will take more detailed dive into drafting

enforceable restrictive covenants. Whether the restrictive covenants are part of a broader

employment contract, or whether contained in a stand-alone agreement in connection with

employment at-will, they are a necessary tool to protect clients’ business interests. When it

comes time to draft or revise your clients’ restrictive covenants, here are some suggestions and

guidelines to take into account.

A. Consideration.

The starting point in drafting a non-compete agreement – as is true for any agreement – is

consideration; the quid pro quo for promising not to compete after employment ends. In the

context of a business acquisition, the purchase price of the business should constitute adequate

consideration for the covenants. In the context of employment non-competes, the issue can

become more thorny.

In Indiana, an offer of initial at-will employment, as well as an offer of continued at-will

employment, is deemed sufficient consideration to support a non-competition agreement. Clark’s

Sales & Serv., Inc. v. Smith, 4 N.E.3d 772, 778 (Ind. Ct. App. 2014); Dearborn v. Everett J.

Prescott, Inc., 486 F. Supp. 2d 802, 817 (S.D. Ind. 2007) (applying Indiana law). In other

jurisdictions, additional consideration may be required. In Illinois, for example, initial at-will

employment is deemed sufficient consideration only after the employee has worked for the

employer for a reasonable period, typically at least one year. See Stericycle, Inc. v. Simota, 2017

WL 4742197, at *4-5 (N.D. Ill. Oct. 20, 2017) (applying Illinois law). In Kentucky, initial at-will

employment is sufficient consideration for a post-employment non-compete, but continued at-

will employment is not. If an employer wants a current employee to sign a new or amended non-

compete, the employee must receive something else of value as consideration, such as a

promotion, pay raise, or bonus payment. Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345, 353

(Ky. 2014).

Practically speaking, even in jurisdictions in which at-will employment alone is

sufficient, courts may be more likely to enforce a non-competition agreement if the employer has


provided something of additional value (beyond at-will employment) in exchange for the post-

employment restrictions. Because these covenants are disfavored and restrict a former

employee’s ability to earn a living after employment ends, an extra bonus payment or promotion

can help sway the equities toward enforcement. Whatever consideration forms the basis for the

agreement should be evaluated at the time of drafting, and the selected consideration should be

expressly set forth in the agreement itself.

B. The Employer’s Protectable Business Interests.

The non-compete agreement should also specifically identify the legitimate business

interests the employer is seeking to protect. Courts recognize the protection of confidential

information as an important interest, and every non-compete agreement should include a

thoughtfully drafted confidentiality covenant that includes, but is not limited to, trade secrets. Ideally, the

confidentiality covenant should identify broad categories of documents and information that the

company considers confidential, and should also identify any specific documents or business

records that the company seeks to protect. The covenant should assert a property interest in the

information, including customer information in the company’s possession. The covenant should

also include restrictions on the disclosure of such information outside the scope of ordinary

business, prohibit the use of such information by the employee other than in the furtherance of

the employer’s business, mandate the return of all company property and information

immediately upon termination of employment for any reason, and prohibit the retention of digital

or hard copies thereof.

Confidential information may be the only affirmative business interest that will warrant

its own separate covenant, but other interests should also be articulated in the recitals or

elsewhere in the agreement. Depending on the circumstances, this may include a company’s

interest in protecting its business goodwill and company reputation, its investment in customer

relationships, its investment in employee recruitment, hiring, and training, and its other valuable

business relationships (e.g., suppliers, contractors, etc.). See Clark’s Sales & Serv., 4 N.E.3d at

780-81; Unger v. FFW Corp., 771 N.E.2d 1240, 1244 (Ind. Ct. App. 2002). The more clearly

these interests are articulated in the document, the more likely it is they will be found to be a

valid protectable interest supporting the covenants.

Here is some sample language:

In connection with the performance of Employee’s duties, Employee has been and will be given access to and may participate in developing certain confidential and


proprietary information, including without limitation financial information, customer information, personnel information, constituent information, strategic plans, board presentations, internal correspondence, and other information relating to the business or financial matters of the Company, its employees, its customers, and its vendors, whether maintained in electronic, hard copy or any other form (collectively and individually, “Confidential Information”). Employee agrees that all Confidential Information is and shall remain the sole and exclusive property of the Company, including Confidential Information developed in whole or in part by Employee on behalf of the Company. Employee shall not at any time, either during or subsequent to the termination of the employment for any reason, use, divulge, disclose, report, disseminate, publish, transfer or otherwise disclose to any person, corporation, or other entity any Confidential Information, without the prior written consent of the Company, except for such information that is or becomes generally available to the public other than as a result of an act or omission on the part of Employee, or except as required in the ordinary course of employment. If Employee is required by a third party to disclose Confidential Information (e.g., pursuant to any law, regulation, court order, or audit), Employee agrees to provide the Company with prompt written notice and the opportunity to seek a protective order or other appropriate remedy before disclosing such Confidential Information and not to disclose any such information until after the Company’s request for a protective order or other appropriate remedy has been resolved by a court of competent jurisdiction, and in no event shall the employee disclose more than that portion of the Confidential Information required to respond to such request.

C. Time, Space, and Activity Restrictions.

The traditional non-competition covenant restricts an individual from working for a

competitor in the industry, in a defined geographic area, during a specified period of time. The

absence of valid restrictions with respect to any of these three criteria (by failing to identify a

specific time limit or omitting a geographic restriction, for example) will render the covenant

invalid on its face. Coates v. Heat Wagons, Inc., 942 N.E.2d 905, 913 (Ind. Ct. App. 2011).

In evaluating the time restriction, consider how long the employee would likely have a

competitive advantage and how much time the employer needs to shore up the customer base

and protect goodwill. In employment cases, courts routinely enforce covenants of one or two

years, although longer covenants have been enforced in some circumstances. E.g., Zimmer US,

Inc. v. Keefer, 2012 WL 5268550, at *7 (N.D. Ind. Oct. 23, 2012) (enforcing one-year post-

termination restriction under Indiana law); Hannum Wagle & Cline Eng’g, Inc. v. Am.

Consulting, Inc., 64 N.E.3d 863, 882 (Ind. Ct. App. 2016) (enforcing two-year restriction);

Washel v. Bryant, 770 N.E.2d 902, 907 (Ind. Ct. App. 2002) (same). In most instances, a two-

year post-employment restriction should be sufficient. A covenant longer than that may create an


unnecessary risk of overbreadth. In the context of a business sale, longer periods are commonly

upheld given the greater business interest in protecting against competition after acquiring the

business. E.g., Dicen v. New Sesco, Inc., 839 N.E.2d 684, 688 (Ind. 2005) (enforcing five year

restriction after sale of business).

With respect to the space or activity restriction, the geographic area should be limited to

the area in which the employee actually works, makes sales, or services customers. If the

employee’s sales territory is limited to central Indiana, for example, then the geographic

restriction should be limited to that same area. The geographic area may be specifically defined

in the covenant (e.g., “within Monroe County, Indiana” or “within a 30-mile radius of

Bloomington, Indiana”) or it may be defined by reference (e.g., “within Employee’s assigned

sales territory” or “within any county in which Employee sold widgets in the preceding two-year

period”). The tendency of many employers is to define the geographic area more broadly than

the employee’s actual work area to prevent unwanted competition and to deter the employee

from leaving or competing in the first instance. The risk of doing so is that the covenant may be

struck down altogether. E.g., Buffkin v. Glacier Grp., 997 N.E.2d 1, 13 (Ind. Ct. App. 2013)

(non-compete unenforceable because geographic restriction was broader than employee’s actual

work area).

The activity restriction may be the most challenging of the three to get right. Prohibiting

an employee from working for a competitor in any capacity is impermissible because such a

restriction is broader than necessary to protect the company’s legitimate interests (although

generous courts will sometimes enforce such restrictions anyway). Someone who worked as a

sales representative for ABC Company cannot be prevented from working as a janitor for a

competitor because ABC’s protectable interest does not extend that far. See Distrib. Serv., Inc. v.

Stevenson, 16 F. Supp. 3d 964, 974 (S.D. Ind. 2014) (applying Indiana law). And if that

restriction is struck down, the employee may still be able to work for a competitor as a

salesperson, which is what ABC Company most wants to prevent. So in crafting this restriction,

the drafter should focus on defining the prohibited competitive activities based upon the services

performed by the employee for the company. Id.

Here is some sample language addressing these considerations.

To further protect the Company’s legitimate business interests in its training, confidential information, business goodwill, and customer, contractor, employee, and supplier relationships, Employee agrees that during Employee’s employment with the Company, and for a period of eighteen (18) months following the termination of Employee’s employment with the Company for any reason,


whether such termination is initiated by Employee or the Company, Employee shall not, whether directly or indirectly, and whether on Employee’s own behalf or on behalf of any other person or entity, offer to sell or provide Competitive Products or Services, or actually sell or provide Competitive Products or Services, or manage the sale or provision of Competitive Products or Services, to the extent that Employee was personally involved in selling, providing, or managing the sale or provision of such products or services on behalf of the Company in the preceding two (2) year period, to any other person or entity in the following geographic areas (the “Restricted Territory”):

a. Within a twenty-five (25) mile radius of the corporate or branch office(s) of the Company to which Employee was assigned (i.e., Employee’s home office) within the previous two (2) year period;

b. Within a twenty-five (25) mile radius of any corporate or branch office(s) of the Company with respect to which Employee had any managerial or supervisory authority within the previous two (2) year period;

c. Within the county in which any company office identified in subsections (a) or (b) hereof is located;

d. Within any county contiguous to any county identified in subsection (c) hereof to the extent that Employee made any sale, provided any service, or exercised managerial or supervisory authority within such county within the previous two (2) year period; and

e. Within any sales or service territory to which the employee was assigned by the Company or with respect to which Employee had any responsibility within the preceding two (2) year period.

As used herein, the following terms have the following definitions:

a. “Competitive Products or Services” means products or services in the same product or service line offered for sale by the Company in the preceding two (2) year period, or that could be used as a replacement for the products and services sold or provided by the Company in the preceding two (2) year period, such as (by way of example) mechanical widgets used in industrial applications, together with parts or services incidental to the sale and distribution of such widgets.

b. “Customer” means any person or entity to whom the Company sold or provided products or services at any time within the preceding two (2) year period, including any contractor or supplier to whom or through whom the Company sold any such products or services, and any end user who purchased or received any such products or services, and with respect to whom Employee had direct or indirect responsibility on behalf of the Company, made any sale, provided any service, or had access to any Confidential Information.


D. Customer Restrictions.

In Indiana, as in most other jurisdictions, a non-geographically bound customer

restriction may substitute for a geographic restriction on competition. In fact, courts are often

more inclined to enforce customer restrictions over a geographic non-compete because the latter

prevents competition altogether, whereas a customer restriction merely prevents competition

where the employer’s business interests is the greatest – in its existing customer relationships.

See Clark’s Sales & Serv., 4 N.E.3d at 781; Titus v. Rheitone, Inc., 758 N.E.2d 85, 93 (Ind. Ct.

App. 2001). But again, the restriction must bear a reasonable relationship to the employee’s

actual activities and should not simply prevent the employee from contacting any of the

employer’s customers, particularly when the employee has access to only a small segment of the

company’s business or customer bases. So, for example, a customer restriction that prohibits a

Fort Wayne-based sales representative who works with 50 customers from soliciting or servicing

any customer of ABC Company – a nationwide service business with thousands of accounts in

30 branch locations across the country – may well be overbroad and unenforceable. More

narrowly tailored, however, that restriction would likely stand. A narrower restriction is designed

to protect what the employer actually cares about most: the customers the employee is actively

soliciting and supporting during his or her employment.

Indiana courts have held that, while employers have a protectable business interest in

their current customers, they do not have a similar interest in past customers or in future (i.e.,

prospective) customers. Clark’s Sales & Serv., 4 N.E.3d at 779; Distrib. Serv., Inc., 16 F. Supp.

3d at 976. This is another area in which to be cautious in drafting so as not to unwittingly write

an unenforceable covenant.

By way of example:

For a two-year period after Employee’s employment ends for any reason, Employee is prohibited from selling or servicing products or services that are competitive to those sold by the Company to any customer to which Employee sold any products or services, about which Employee received any confidential information, or with respect to which Employee was paid any commission, in the two-year period preceding Employee’s termination.

E. The “Blue Pencil” Doctrine.

If a court of competent jurisdiction determines that a non-competition agreement is

overbroad and unenforceable as written, then as a matter of public policy the covenant must be


struck down and cannot be enforced. With respect to such overbroad covenants, Indiana follows

the “blue pencil” rule which grants the court discretion to redact overbroad covenants so as to

render the covenant enforceable.

When reviewing covenants not to compete, Indiana courts have historically enforced reasonable restrictions, but struck unreasonable restrictions, granted they are divisible. This principle is known as the blue pencil doctrine. If a court finds that portions of a noncompetition agreement are unreasonable, it may not create a reasonable restriction under the guise of interpretation, since this would subject the parties to an agreement that they have not made. But, if the noncompetition agreement is divisible into parts, and some parts are reasonable while others are unreasonable, a court may enforce the reasonable portions only. When blue-penciling, a court must not add terms that were not originally part of the agreement but may only strike unreasonable restraints or offensive clauses to give effect to the parties’ intentions.

Clark’s Sales & Serv., 4 N.E.3d at 783-84 (internal citations and quotations omitted).

Effectively, this means that if a covenant is overbroad in terms of its geography, time, or activity

restrictions, the court cannot save the covenant unless its divisible portions may be stricken to

render it enforceable.2

From a drafting perspective, the author should seek to identify potential areas of

overbreadth, and then draft separate divisible covenants to allow for the court to strike the

overbroad covenant and enforce the narrower one. This approach still has some risk because the

application of the blue pencil doctrine is discretionary, but it is safer than only including the

potentially overbroad restriction or drafting the varying elements of a geographic limitation in a

manner that is not readily divisible.

While Indiana law generally does not allow for courts to reform an agreement outside of

the scope of the blue pencil doctrine, a recent Indiana Court of Appeals opinion deviates

significantly from precedent in this area, suggesting that parties may be able to contractually

agree to allow the court to reform the agreement. In Heraeus Med., LLC v. Zimmer, Inc., the

Indiana Court of Appeals determined that a non-solicitation agreement was overbroad because

2 Many jurisdictions, such as Illinois, Michigan, Ohio, and Tennessee apply a more lenient “reformation” rule, which give the court discretion to modify the overbroad covenant and enforce it to the extent reasonable. So, for example, if the court deems a statewide prohibition on competition unenforceable, the court could narrow it to prohibit competition in the three-county area in which the employee worked. See, e.g., Weitekamp v. Lane, 620 N.E.2d 454, 461 (Ill. Ct. App. 1993) (upholding trial court’s decision to modify covenant not to compete); Innovation Ventures, L.L.C. v. Custom Nutrition Labs., L.L.C., 2015 WL 5679879, at *25 (E.D. Mich. Sept. 28, 2015) (reforming duration of restriction under Michigan law); MP TotalCare Servs., Inc. v. Mattimoe, 648 F. Supp. 2d 956, 964 (N.D. Ohio 2009) (justifying reformation of non-compete); BFS Retail & Commercial Operations, LLC v. Smith, 232 S.W.3d 756, 764 (Tenn. Ct. App. 2007) (discussing trial court’s ability to reform non-compete). Indiana law does not permit this result.


the company could not prevent solicitation of its entire workforce; only those employees in

which it had a legitimate protectable interest. No. 18A-PL-1823, 2019 WL 1591971, at *7 (Ind.

Ct. App. Apr. 15, 2019). Rather than implementing the blue pencil doctrine, which would have

struck down the covenant altogether, the Court found that the agreement specifically called for

judicial reformation if it was found to be unreasonable, stating:

As a general rule, if a court finds that portions of a noncompetition agreement or covenant not to compete are unreasonable, it may not create a reasonable restriction under the guise of interpretation, since this would subject the parties to an agreement they have not made. Here, however, the parties specifically agreed that we have the authority “to reform any [unreasonable] provision to make it enforceable under applicable law.” To that end, we reform the non-solicitation of employees covenant of the Kolbe Agreement to be limited in scope to those employees in which the Company has a legitimate protectable interest.

Id. (internal citations and quotations omitted). It is not clear whether this rule will be adopted by

other appellate courts in Indiana, and ultimately the Indiana Supreme Court, but it does invite

covenant authors to include language expressly authorizing and inviting the court to reform any

overbroad aspect of the covenant. For example:

The parties intend for the covenants set forth herein to be enforceable to the fullest extent permissible under applicable law. To the extent that any court of competent jurisdiction determines that any covenant contained herein is overbroad and unenforceable as written, the parties expressly authorize and invite such court to reform such covenants to the fullest extent permissible by applicable law so as to effectuate the intentions of the parties. As well, each individual covenant and divisible clause herein shall be considered severable from each other, and the invalidity or unenforceability of any such covenant or clause shall not invalidate the remaining covenants or clauses herein.

F. Choice of Law and Venue.

One of the greatest challenges in drafting and enforcing non-competition agreements is

the diversity of rules across various jurisdictions. Some jurisdictions are more favorably inclined

to enforce restrictive covenants than others. Where the company does business must be taken

into account, and it may be necessary to have different agreements for employees based in

different jurisdictions.

Drafters should also consider whether to include a choice of law and/or choice of venue

provision in the agreement. Having the option to sue an out-of-state employee in the employer’s

home state may be simpler and more cost effective from a litigation perspective, but that strategy

may require securing a judgment and then seeking to domesticate a foreign judgment in the


employee’s home state before the employer can actually stop competitive activity – thereby

potentially requiring the issues to be litigated twice. Choice of law provisions can also be a

double-edged sword because often states will only apply a foreign jurisdiction’s law in a non-

compete case if doing so would not be contrary to the public policy of the home state – again

requiring the employer to jump through two sets of hoops rather than just one to secure

enforcement. E.g., Zimmer, Inc. v. Sharpe, 651 F. Supp. 2d 840, 852 (N.D. Ind. 2009) (applying

Indiana law rather than employment agreement’s choice of law provision selecting Louisiana law

due to public policy concerns); Dearborn, 486 F. Supp. 2d at 812 (applying Indiana law and

refusing to apply Maine law under non-compete choice of law provision).

G. Other Helpful Provisions.

There are several other provisions to consider including in a non-competition agreement

that may enhance the potential for enforcement – and create leverage if the employee breaches or

contemplates a breach. A remedy provision specifically calling for injunctive relief is important

to establish up front that injunctive relief, as well as money damages, may be available in the

event the employee chooses to violate the restrictions. A clause in which the employee agrees to

waive the requirement for posting a bond may be helpful, although some courts will still require

a bond when issuing a preliminary injunction. A one-sided attorneys’ fee shifting provision –

allowing the employer to recover its fees in securing enforcement of the agreement – also adds

significant leverage in enforcement proceedings. A liquidated damages clause for specified types

of breaches is also something to consider, provided that the agreed-upon damages fairly

approximate damages and do not constitute a penalty.

A clause that provides that the agreement is automatically tolled during any period of

breach is also a good idea. This allows the employer to secure injunctive relief and still receive

the benefit of the full period of non-competition bargained for in the agreement. As well,

consider an admonition in bold all caps at the end of the document to read the agreement

carefully and to consult an attorney before signing. Doing so shows good faith on the part of the

employer and makes it easier to argue in enforcement proceedings that the employee voluntarily

entered into the agreement with full understanding of its implications.

H. Simplicity, Clarity, and Concision.

Given that courts tend to disfavor restrictive covenants, and because such agreements

typically will be construed against the drafter, the best non-competes are those that are simple,


clear, and concise. Courts are more inclined to enforce an agreement that makes sense and is

easy to understand. Vague and confusing covenants are commonplace, but they create significant

enforcement challenges. See, e.g., Oxford Fin. Grp., Ltd. v. Evans, 795 N.E.2d 1135, 1143 (Ind.

Ct. App. 2003) (vague covenant precluded admission of extrinsic evidence to explain

ambiguity); Seach v. Richards, Dieterle & Co., 439 N.E.2d 208, 214 (Ind. Ct. App. 1982) (non-

compete unenforceable due to vagueness). Moreover, one of the primary benefits of having a

non-compete agreement is its deterrent effect on the employee who is contemplating

competition, so having an agreement that a lay person can understand is much more helpful than

an incomprehensible document filled with legalese.

V. Conclusion.

In conclusion, employment contracts and the restrictive covenants contained therein or as

standalone agreements are effective tools that allow companies to competitively hire and retain

talent while protecting their own confidential information, customer relationships, and business

goodwill. Thoughtfully crafted employment contracts and non-competition agreements tailored

to a business’s specific needs can be one of the most important steps to take in securing sought

after employees and assuring that the employer will have a good recourse if the employee seeks

to engage in harmful post-employment competition.

Documents

Drafting Effective and Enforceable Employment Contracts · During the employment period, Executive’s base salary will be $100,000 per annum (your “Base Salary”). The Base Salary