Non-Compete Agreements: A Cautionary Tale

By:  Mike Cavosie

Indiana employers:  Do not assume that your non-compete agreements are enforceable.  The September 30, 2013, Indiana Court of Appeals decision Joseph M. Guinn v. Applied Composites Engineering, Inc. dramatically highlights the perils of doing so.

In that case, Guinn, who held an FAA airframe and powerplant mechanic’s license, worked for Applied Composites as an airline mechanic.  Applied Composites made all of its employees execute non-compete agreements, and Guinn was no exception.

When Guinn tendered his two-week notice to start working for AAR Aircraft Services, a customer and vendor of Applied Composites, Applied Composites repeatedly threatened to sue both Guinn and AAR.  AAR initially hired Guinn but terminated his employment shortly thereafter because of the pressure from Applied Composites.  Nevertheless, Applied Composites filed a lawsuit against Guinn for breach of the non-compete agreement and against AAR for tortiously interfering in the employment relationship between Applied Composites and Guinn.

Guin filed a multiple-count counterclaim against Applied Composites.  Count II of the counterclaim alleged that the non-compete agreement was unenforceable.  Count III of the counterclaim alleged that Applied Composites had tortiously interfered in the employment relationship between Guinn and AAR.

Critically–and unsurprisingly–the trial court held that the non-compete agreement was overbroad and unenforceable.  Indiana courts have long stated that covenants which restrict a person’s employment opportunities are strongly disfavored and will be strictly construed.  Foremost among the requirements for a valid, enforceable non-compete agreement is an employer’s legitimate protectable interest.  A legitimate protectable interest is “an advantage possessed by an employer, the use of which by the employee after the end of the employment relationship would make it unfair to allow the employee to compete with the former employer.”  Proprietary methods, confidential pricing, certain types of customer lists–these are examples of a protectable interest.  General  knowledge,  information  or  skills  gained  by  anemployee  in  the  course  of  employment are not protectable interests.

During a hearing, Applied Composites admitted that the only interest Applied Composites had in Guinn was “investment and costs in the training.”  Such interests are clearly insufficient under Indiana law to support a non-compete agreement.

(As an aside, employers should generally not have all employees sign non-compete agreements.  Instead, non-compete agreements should be reserved for key employees who will, through their course of employment, garner specific information and knowledge that would allow them to unfairly compete after termination of the employment relationship.)

However, the trial court granted Applied Composites’ motion for summary judgment on Count III, Guinn’s tortious interference claim.  One of the elements in a tortious interference claim is whether the interference is justified.  Enforcement of a valid non-compete agreement is justified; enforcing what turns out to be an invalid non-compete may not be justified.  The trial court noted:

In  this  case,  ACE’s  Non-Compete  Agreement  had  legal  defects when it was signed by Guinn; however that fact was unknown to ACE at the time.  The question of whether or not the contract was enforceable had not yet been tested in a court of law. [Applied Composites] had reason to believe that Guinn was, in fact, acting in violation of said non-compete agreement.

Guinn appealed that decision (Applied Composites did not appeal the trial court’s decision that the non-compete agreement was unenforceable), and the Indiana Court of Appeals reversed.  In remanding the case to the trial court for a jury trial, the Court of Appeals noted that Applied Composites’ only asserted interest in Guinn was investment and costs in the training.  It continued:

The  factfinder  may  consider  the  extent  to  which  the  terms,  conditions,  and covenants contained in the Agreement were unreasonable, overly broad, or not narrowly tailored to protect ACE’s legitimate business interests and the extent to which this factor may weigh in favor of a finding that ACE’s conduct was justified or unjustified under the specific circumstances in this case.

And therein is the cautionary tale.  Not only was the non-compete unenforceable, but Applied Composites now finds itself the defendant in a jury trial with the possibility of paying damages to a former employee.