By: Jessica Jackler
In Zollinger v. Wagner-Meinert Engineering, LLC, 146 N.E.2d 1060 (Ind. Ct. App. 2020), the Indiana Court of Appeals enforced a non-compete agreement barring a former employee from working for a competitor based on non-compete restrictions the employee had executed in connection with the sale of the employee’s prior company.
The employee previously worked for a mechanical contracting company for a number of years and eventually became vice president and part-owner in the company. When the company’s assets were sold to a subsequent company, the employee received $1.8 million in proceeds from the sale and became a salaried vice president of the new company. In connection with the sale, the employee executed, among other things, an operating agreement and an employment agreement. Both agreements contained non-compete and non-solicitation provisions which precluded the employee from performing similar employment and management-related activities at a competitor company in the same geographic area for two years. Shortly after the sale, the employee sold his ownership interest in the company to a majority member for $1.3 million but continued his employment.
The employee was eventually terminated for submitting false expense reports. The company also suspected the employee was considering a move to a competitor and filed a lawsuit seeking to enforce the non-compete provisions. The company then amended the lawsuit when it learned that the employee had actually been performing consulting services for a competitor. The trial court found that the non-compete restrictions in the management and employment agreements were not extinguished when the employee sold his interest in the company, that the restrictions were reasonable and that the employee had ultimately violated those restrictions.
On appeal, the employee primarily argued that the restrictions in the agreements were overbroad and unenforceable. The court pointed out that non-compete covenants are enforceable if they are reasonable and the manner in which reasonableness is determined depends on the context in which the covenant was established. While the reasonableness of employment contracts is typically reviewed under a “skeptical” standard, the reasonableness of covenants that arise ancillary to the sale of a business are subject to a more “liberal” standard.
The court then applied the “liberal” standard to the noncompete provisions in both the operating agreement and the employment agreement and found that they were both reasonable. This finding was premised on the fact that both agreements were executed in connection with the sale of the company, that the employee was paid a considerable sum of money in connection with the sale and that the employee had long-standing ownership interests which rendered him a “sophisticated businessman.” The court further affirmed the employee violated the non-compete provisions because he had been consulting with a competitor and performing essentially the same activities there as he had performed at his current company.
Practice Tip: Zollinger demonstrates that non-compete provisions’ reasonableness and enforcement can be based on the former employee’s business relationship with the company. To the extent a former employee has significant ties to the company and more “bargaining power,” the more likely the restrictive covenant will be enforced.