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The KDDK Advantage - June/July 2006
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Court Defines Non-Compete
Covenants
By Ted Barron
The Indiana Supreme Court recently published
an opinion that distinguishes what is and is not reasonable
in the enforcement of non-compete covenants arising from
employment and the sale of a business.
The case arose when New Sesco, Inc.,
an Indianapolis-based environmental consulting company,
sued Michael Dicen, a former employee who had sold them
the assets of a related company for $750,000. Dicen had
signed two separate non-compete agreements — one arising
from the sale of his business assets and the other from
an employment agreement.
The asset sale included a sale of business
covenant which prohibited Dicen from soliciting and contracting
with a specified list of customers for a five year period.
The Court deemed this covenant reasonable and well-defined,
and awarded damages to New Sesco, Inc.
But the Court rejected New Sesco’s
employment non-compete covenant prohibiting Dicen from
working in the same industry anywhere in the United States
for two years. This covenant exceeded the bounds of reasonableness
because it sought to prohibit Dicen from working in the
industry anywhere in the United States, even though his
contacts while at New Sesco had been with customers in
a limited number of states. The Court refused to modify
the geographical limitation and deemed the entire covenant
unenforceable.
The difference between a sale of a business
covenant and an employment covenant is that in the sale
of a business there is more likely to be equal bargaining
power between the parties. In addition, since the seller
is usually paid a premium for agreeing not to compete
and the proceeds of the sale generally enable the seller
to support himself temporarily without the need to compete,
a broad non-compete agreement may be necessary to assure
the buyer receives the benefit of the bargain.
But a typical employee has only his
own labor or skills to sell and often is not in a position
to bargain with his employer. Following this reasoning,
the Court concluded that non-compete covenants arising
out of the sale of a business should be enforced more
liberally than covenants arising out of an employer-employee
relationship.
Robert F. “Ted” Barron concentrates
his practice in the areas of employment, business and
health care law. For counsel on drafting, reviewing or
interpreting non-compete covenants in any context, contact
Ted at 812-423-3183 or rbarron@kddk.com.
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