Masks, quarantine, social distancing, hand-sanitizer,
super-spreader events, all may be new parts of your daily
vocabulary thanks to the COVID-19 world pandemic. However, in this
dramatically changed world, aren't we glad for a few constants
to the universe? Please raise your glasses to cheer that beacon in
the coronavirus darkness: employment non-compete law.
You may be less thrilled if you were the employee challenging his non-compete in the recent decision of Zollinger v. Wagner-Meinert Engineering LLC, 146 N.E.3d 1060 (Ind. App. April 23, 2020). This very recent case presents all the classic elements of employment non-compete law.
The employee defendant featured in our story started with his employer in 1996 and eventually rose to be a vice president and part-owner of the business. In 2011, a corporate re-organization saw the employee's interest sold for a cool $1.8 million. As part of the deal, the employee became a vice president of the defendant employer and part-owner in the new entity.
The employee signed three agreements as part of the deal: (1) an asset purchase agreement; (2) an operating agreement as one of the new owners; and (3) an employment agreement. All three agreements contained non-compete and non-solicitation provisions. The latter two served as the basis of the litigation.
The operating agreement contained a 42-month post-employment non-compete obligation with no less than 14 specific qualifying restrictions. Of these, the key restrictions were no competing business ownership or employment in a competing business in the same geographic area served by plaintiff. The employment agreement contained a similar restriction, but with a 24-month limitation.
In April of 2015, defendant happily sold his ownership to the plaintiff for a profit of over $1 million. However, he continued as an employee.
In January of 2018, plaintiff terminated defendant for submitting false expense reports. Plaintiff also sent a letter reminding defendant of his non-compete obligations.
Defendant respectfully protested and claimed the operating agreement non-compete was extinguished by the 2015 buyout and he would continue working in the industry but would not violate his post-employment non-compete obligations as found in the employment agreement. When pressed for details, defendant rather cryptically responded that he had several offers and that there is "no anticipated conversation with any customers."
Ten days later, plaintiff filed its lawsuit against defendant, asking for a declaratory judgment enforcing all existing non-compete obligations. After filing the lawsuit, plaintiff learned defendant had actually done work for a competitor in plaintiff's geographic service area. After a bench trial, the trial court granted an injunction and awarded plaintiff attorney fees. Defendant appealed.
Defendant argued on appeal that the language of the 2015 sales agreement set forth all the obligations of the parties, and thus extinguished the prior asset purchase agreement and operating agreement non-compete obligations. Carefully parsing the language, the appellate court found that it did not extinguish the operating agreement obligations, let alone the employment agreement obligations.
Next defendant asserted the non-compete obligations were overbroad and unreasonable. Here, defendant ran into multiple problems. First, the court chose to assess the obligations under the more generous approach (to prospective enforcers) found in the sale of business context. Second, and even more important, the court noted that precedent obligated the court to look at both the operating agreement non-compete and the employment agreement non-compete, under the generous sale of business context, because both agreements arose as part of the business deal—indicating an equality of bargaining power not found in the typical employment setting. This allowed the court to ignore some potentially dodgy issues concerning the breadth of the restriction and find it enforceable in the sale of business context, affirming the trial court and enforcing the injunction.
As to actual violations, defendant argued that while he worked for a competitor, he did not disclose any of plaintiff's confidential information. Unmoved, the court simply pointed out that working for a competitor, standing alone, violated the agreements; disclosures made no difference.
So where does that leave us? As to non-competes, some simple rules still apply: wear the white hat; don't dissemble; recognize that a sophisticated business person gets no slack when he or she signs a non-compete as part of a business transaction, particularly one involving millions of dollars going into his or her pockets—which will buy you a lot of masks and hand-sanitizer.
You may be less thrilled if you were the employee challenging his non-compete in the recent decision of Zollinger v. Wagner-Meinert Engineering LLC, 146 N.E.3d 1060 (Ind. App. April 23, 2020). This very recent case presents all the classic elements of employment non-compete law.
The employee defendant featured in our story started with his employer in 1996 and eventually rose to be a vice president and part-owner of the business. In 2011, a corporate re-organization saw the employee's interest sold for a cool $1.8 million. As part of the deal, the employee became a vice president of the defendant employer and part-owner in the new entity.
The employee signed three agreements as part of the deal: (1) an asset purchase agreement; (2) an operating agreement as one of the new owners; and (3) an employment agreement. All three agreements contained non-compete and non-solicitation provisions. The latter two served as the basis of the litigation.
The operating agreement contained a 42-month post-employment non-compete obligation with no less than 14 specific qualifying restrictions. Of these, the key restrictions were no competing business ownership or employment in a competing business in the same geographic area served by plaintiff. The employment agreement contained a similar restriction, but with a 24-month limitation.
In April of 2015, defendant happily sold his ownership to the plaintiff for a profit of over $1 million. However, he continued as an employee.
In January of 2018, plaintiff terminated defendant for submitting false expense reports. Plaintiff also sent a letter reminding defendant of his non-compete obligations.
Defendant respectfully protested and claimed the operating agreement non-compete was extinguished by the 2015 buyout and he would continue working in the industry but would not violate his post-employment non-compete obligations as found in the employment agreement. When pressed for details, defendant rather cryptically responded that he had several offers and that there is "no anticipated conversation with any customers."
Ten days later, plaintiff filed its lawsuit against defendant, asking for a declaratory judgment enforcing all existing non-compete obligations. After filing the lawsuit, plaintiff learned defendant had actually done work for a competitor in plaintiff's geographic service area. After a bench trial, the trial court granted an injunction and awarded plaintiff attorney fees. Defendant appealed.
Defendant argued on appeal that the language of the 2015 sales agreement set forth all the obligations of the parties, and thus extinguished the prior asset purchase agreement and operating agreement non-compete obligations. Carefully parsing the language, the appellate court found that it did not extinguish the operating agreement obligations, let alone the employment agreement obligations.
Next defendant asserted the non-compete obligations were overbroad and unreasonable. Here, defendant ran into multiple problems. First, the court chose to assess the obligations under the more generous approach (to prospective enforcers) found in the sale of business context. Second, and even more important, the court noted that precedent obligated the court to look at both the operating agreement non-compete and the employment agreement non-compete, under the generous sale of business context, because both agreements arose as part of the business deal—indicating an equality of bargaining power not found in the typical employment setting. This allowed the court to ignore some potentially dodgy issues concerning the breadth of the restriction and find it enforceable in the sale of business context, affirming the trial court and enforcing the injunction.
As to actual violations, defendant argued that while he worked for a competitor, he did not disclose any of plaintiff's confidential information. Unmoved, the court simply pointed out that working for a competitor, standing alone, violated the agreements; disclosures made no difference.
So where does that leave us? As to non-competes, some simple rules still apply: wear the white hat; don't dissemble; recognize that a sophisticated business person gets no slack when he or she signs a non-compete as part of a business transaction, particularly one involving millions of dollars going into his or her pockets—which will buy you a lot of masks and hand-sanitizer.
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