Heraeus Medical, LLC v. Zimmer, Inc. ( 2019 )

FILED
Dec 03 2019, 12:04 pm
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
IN THE
Indiana Supreme Court
Supreme Court Case No. 19S-PL-471
Heraeus Medical, LLC, et al.
Appellants (Defendants)
–v–
Zimmer, Inc., et al.
Appellees (Plaintiffs)
Argued: September 26, 2019 | Decided: December 3, 2019
Appeal from the Kosciusko Superior Court, No. 43D04-1802-PL-21
The Honorable David C. Cates, Judge
On Petition to Transfer from the Indiana Court of Appeals,
No. 18A-PL-1823
Opinion by Chief Justice Rush
Justices David, Massa, Slaughter, and Goff concur.
Rush, Chief Justice.
Indiana courts employ the “blue pencil doctrine” to revise
unreasonable noncompetition agreements. This doctrine, though, is really
an eraser.
Under the blue pencil doctrine, courts can make overbroad covenants
reasonable by deleting language, but they may not add terms—even if the
agreement contains a clause authorizing a court to do so. Here, the
overbroad covenant cannot be blue-penciled to render it reasonable; so we
vacate the section of the trial court’s preliminary injunction purporting to
enforce that provision.
Facts and Procedural History
Zimmer employee Robert Kolbe signed a noncompetition agreement
(Kolbe Agreement) soon after he transitioned into a group director role.
At issue today is a provision within the Kolbe Agreement—a
nonsolicitation covenant.
That nonsolicitation covenant, which Zimmer drafted, prohibited Kolbe
from recruiting Zimmer employees to work for a competitor. At the time,
Zimmer was the exclusive United States distributor of one of Heraeus’s
major medical products.
But a couple years later, Heraeus created an affiliate—Heraeus
Medical—to sell its products in the United States. Kolbe then left Zimmer
and joined Heraeus Medical to build a sales team. In his new role, Kolbe
recruited agents “on a weekly basis” for Heraeus Medical. Eventually,
several positions at Heraeus Medical were filled by former Zimmer
employees.
Litigation ensued. Asserting multiple claims, Zimmer sought damages
from Heraeus Medical, Kolbe, and other former employees.
As relevant here, Zimmer alleged that Kolbe violated the
nonsolicitation covenant by recruiting former Zimmer employees to work
for Heraeus Medical. Zimmer also sought a preliminary injunction to
enforce the Kolbe Agreement. After a hearing, the trial court preliminarily
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enjoined Kolbe from recruiting Zimmer employees as prohibited by the
covenant.
On appeal, the Court of Appeals concluded that the nonsolicitation
covenant was overbroad and thus unenforceable as written. Heraeus Med.,
LLC v. Zimmer, Inc., 123 N.E.3d 158, 167 (Ind. Ct. App. 2019). But, finding
that a reformation clause in the Kolbe Agreement authorized the court to
modify unenforceable provisions, the panel revised the nonsolicitation
covenant to make it reasonable. Id. at 167–68. It did this by adding
language limiting the covenant’s scope to only “those employees in which
[Zimmer] has a legitimate protectable interest.” Id.Heraeus Medical petitioned for transfer. We granted the petition,
vacating the Court of Appeals opinion. Ind. Appellate Rule 58(A).
Standard of Review
This case presents an intersection of two standards of review.
Heraeus Medical and Kolbe 1 appeal from the trial court’s grant of a
preliminary injunction, which we review for an abuse of discretion. Cent.
Ind. Podiatry, P.C. v. Krueger, 882 N.E.2d 723, 727 (Ind. 2008). An abuse of
discretion can occur under various circumstances, including when the trial
court misinterprets the law. See Myers v. Myers, 560 N.E.2d 39, 42 (Ind.
1990). To the extent our analysis depends on the trial court’s interpretation
of a purely legal question—here, whether a court, pursuant to a
reformation clause, can add language to an unenforceable restrictive
covenant in a noncompetition agreement—we afford that matter de novo
review. Cf. Harrison v. Thomas, 761 N.E.2d 816, 818 (Ind. 2002) (noting that
“construction of the terms of a written contract is a pure question of law
for the court, reviewed de novo”).
1Because Kolbe’s interests are aligned with those of Heraeus Medical, we will hereafter refer
to the parties collectively as “Heraeus Medical.”
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Discussion and Decision
Noncompetition agreements restrict former employees from using
valuable information obtained during their employment—such as trade
secrets or confidential client data—to harm their former employers. But
because these agreements “are in restraint of trade,” courts enforce them
only if they are reasonable. Krueger, 882 N.E.2d at 728–29; see also Dicen v.
New Sesco, Inc., 839 N.E.2d 684, 687 (Ind. 2005). If a court deems a
noncompetition provision unreasonable, it will apply the “blue pencil
doctrine,” severing unreasonable, divisible portions and then enforcing
the reasonable parts that remain. Dicen, 839 N.E.2d at 687.
As written, the Kolbe Agreement’s employee nonsolicitation covenant
is overbroad because it applies to all Zimmer employees. Relying on the
agreement’s reformation clause—which purported to give a court the
power to modify unreasonable provisions—the Court of Appeals limited
the covenant’s scope to only “those employees in which the company has
a legitimate protectable interest.” Zimmer, 123 N.E.3d at 167–68. Heraeus
Medical argues that adding language to the covenant contravenes
Indiana’s established blue pencil doctrine. Zimmer, on the other hand,
contends that reforming the overbroad covenant wouldn’t upend the blue
pencil doctrine, but would rather “give effect to the parties’ stated intent.”
We disagree with Zimmer. Consistent with the history and purpose of
Indiana’s blue pencil doctrine, courts cannot add terms to an
unenforceable restrictive covenant in a noncompetition agreement—even
when that agreement contains language purporting to give a court the
power to do so. And because Zimmer’s nonsolicitation covenant is
overbroad and cannot be blue-penciled in a way that would render it
reasonable under Indiana law, the covenant is void and unenforceable.
We summarily affirm the decision of the Court of Appeals on all other
issues. See App. R. 58(A)(2).
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I. The blue pencil doctrine does not allow a court to
add language to an overbroad restrictive covenant.
Noncompetition agreements “in employment contracts are in restraint
of trade and disfavored by the law.” Krueger, 882 N.E.2d at 728–29. These
agreements are thus strictly construed against employers. Id. at 729.
When presented with unreasonable restrictions within a
noncompetition agreement, Indiana courts apply the “blue pencil
doctrine.” Id. at 730. Under this doctrine, a court may excise unreasonable,
divisible language from a restrictive covenant—by erasing those terms—
until only reasonable portions remain. Blue-Pencil Test, Black’s Law
Dictionary (10th ed. 2014); Krueger, 882 N.E.2d at 730; Dicen, 839 N.E.2d at
687. The doctrine, however, does not allow a court to rewrite a
noncompetition agreement by adding, changing, or rearranging terms.
Krueger, 882 N.E.2d at 730; Clark’s Sales & Serv., Inc. v. Smith, 4 N.E.3d 772,
783–84 (Ind. Ct. App. 2014), trans. denied. Importantly, the blue pencil
doctrine applies to all restrictive covenants within noncompetition
agreements, not just prohibitions against working for a competitor. See,
e.g., Burk v. Heritage Food Serv. Equip., Inc., 737 N.E.2d 803, 814–15 (Ind. Ct.
App. 2000) (blue-penciling an overbroad customer nonsolicitation
covenant).
Some courts have criticized the blue pencil doctrine as valuing a
contract’s wording over its substance. See, e.g., Data Mgmt. v. Greene, 757
P.2d 62, 64 (Alaska 1988). But we find appeal in its predictability.
The doctrine allows an employer to draft a reasonable and enforceable
noncompetition agreement, while discouraging the employer from
overreaching. Prod. Action Int’l, Inc. v. Mero, 277 F. Supp. 2d 919, 932 (S.D.
Ind. 2003). The doctrine also protects parties’ expectations by not
subjecting them to an agreement they didn’t make. See Licocci v. Cardinal
Assocs., Inc., 445 N.E.2d 556, 561 (Ind. 1983) (finding that “the courts may
not create a reasonable restriction under the guise of interpretation, since
this would subject the parties to an agreement they had not made”); Mero,
277 F. Supp. 2d at 932 (observing that the “Indiana courts’ refusal to
rewrite agreements for parties can also be consistent with the parties’
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intentions”). We thus concur with those courts that have deemed the blue
pencil doctrine a “sound and reasonable,” though imperfect, method to
balance the interests of employers against those of employees. Mero, 277 F.
Supp. 2d at 932; see also Smith, 4 N.E.3d at 786.
With the blue pencil doctrine’s general principles in hand, we now turn
to whether the Kolbe Agreement’s reformation clause can render the
doctrine inapplicable, by permitting a court to add language to the
unreasonable covenant not to solicit Zimmer employees.
II. The blue pencil doctrine applies despite the Kolbe
Agreement’s reformation clause.
The Kolbe Agreement contains a “reformation clause,” stating that the
parties agree to give “any court interpreting the provisions of this
Agreement . . . the authority, if necessary, to reform any such provision to
make it enforceable under applicable law.”
The Court of Appeals recognized that, “as a general rule,” the blue
pencil doctrine does not permit a court to create reasonable restrictions
after finding a noncompetition covenant unreasonable. Zimmer, 123
N.E.3d at 167 (cleaned up). But the panel nonetheless found that the
reformation clause conferred authority on a court to modify the employee
nonsolicitation covenant. Id.
Heraeus Medical asserts that authorizing courts to redraft
noncompetition agreements would fundamentally alter Indiana law by
emboldening employers to draft unreasonable restrictive covenants,
“comfortable in the knowledge that a reviewing court will be able to
reform [them] in the event of litigation.” But Zimmer claims, citing Smart
Corp. v. Grider, 650 N.E.2d 80, 84–85 (Ind. Ct. App. 1995), trans. denied, that
reforming an employee nonsolicitation covenant to “give effect to the
parties’ stated intent . . . is hardly unprecedented.”
Zimmer’s reliance on Grider is misplaced because that case did not
involve adding terms to an unenforceable restrictive covenant. Rather, the
Grider majority interpreted a noncompetition provision’s language—
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stating that the agreement could be enforced “to the extent permitted by
applicable law”—as limiting the provision’s scope to “the state of
Indiana.” 650 N.E.2d at 84–85. 2 Zimmer cannot point to, and we cannot
find, any Indiana case where a court determined it was authorized to
reform an unreasonable noncompetition agreement.
Instead, Indiana decisions have applied the blue pencil doctrine strictly.
In Sharvelle v. Magnante, 836 N.E.2d 432, 439 (Ind. Ct. App. 2005), our
Court of Appeals rejected an employer’s argument “that the parties
expressly authorized the court” to add terms to a noncompetition
agreement if it were “found overly broad and unenforceable.” Applying
the blue pencil doctrine, the panel refused to replace an overly broad
phrase in the agreement’s covenant not to compete and held that the
covenant was unenforceable. Id. Likewise, both of our federal district
courts have anticipated, based on Indiana caselaw, that we would refuse
to revise an employment contract “beyond the reach of the blue pencil
doctrine even where the contract purports to give the court that
authority.” AL-KO Axis, Inc. v. Revelino, No. 3:13-CV-1002 JD, 2013 WL
12309288, at *6 (N.D. Ind. Oct. 25, 2013); see also Mero, 277 F. Supp. 2d at
921, 929–930.
Consistent with these cases, we conclude that parties may not, by
“adding a magic phrase” like the Kolbe Agreement’s reformation clause,
“delegate to the courts the task of drafting reasonable agreements.” Mero,
277 F. Supp. 2d at 929. While reformation clauses might encourage an
interpreting court to blue-pencil an agreement, they do not allow a court
to overstep the bounds of Indiana’s blue pencil doctrine by adding terms.
See MacGill v. Reid, 850 N.E.2d 926, 933 n.4 (Ind. Ct. App. 2006) (noting
that a noncompetition agreement containing a reformation clause
“encourage[d] the use of the ‘blue pencil doctrine[]’”). To reason
otherwise would spell the end of Indiana’s blue pencil doctrine by
2Even so, the dissent argued that the majority had impermissibly rewritten the agreement by
“redrafting the contract provision at issue.” Grider, 650 N.E.2d at 85 (Staton, J., dissenting). To
the extent Grider can be read as authorizing courts to add language to an unenforceable
noncompetition agreement, we disapprove of it.
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encouraging employers to draft obviously overbroad restrictive covenants
and to then rely on courts to narrow them just enough to be reasonable.
See Mero, 277 F. Supp. 2d at 929 (predicting such an outcome). This would
frustrate the parties’ reasonable expectations, since courts cannot, after the
fact, assume what the parties intended when they entered into the
agreement. See Licocci, 445 N.E.2d at 561; Grider, 650 N.E.2d at 85 (Staton,
J., dissenting).
We thus find that the blue pencil doctrine applies to the Kolbe
Agreement, despite its reformation clause, to bar an interpreting court
from adding language to limit the scope of its restrictive covenants. We
now determine whether the Kolbe Agreement’s unenforceable employee
nonsolicitation covenant can be blue-penciled or whether it must be
wholly stricken from the preliminary injunction order.
III. Since the Kolbe Agreement’s covenant not to
solicit employees cannot be blue-penciled, it
cannot be enforced.
The Kolbe’s Agreement’s employee nonsolicitation covenant provides
as follows:
Employee will not employ, solicit for employment, or advise
any other person or entity to employ or solicit for employment,
any individual employed by Company at the time of
Employee's separation from Company employment, or
otherwise induce or entice any such employee to leave his/her
employment with Company to work for, consult with, provide
services to, or lend assistance to any Competing Organization.
As the Court of Appeals correctly held, the covenant, as written, is
unreasonably broad because it extends to “any individual employed” by
Zimmer—not just to those who “have access to or possess any knowledge
that would give a competitor an unfair advantage.” Zimmer, 123 N.E.3d at
167; see also Krueger, 882 N.E.2d at 729 (“In arguing the reasonableness of a
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non-competition agreement, the employer must first show that it has a
legitimate interest to be protected by the agreement.” (citing Sharvelle, 836
N.E.2d at 436–37)).
A court can blue-pencil unreasonable provisions from a restrictive
covenant if the covenant is clearly divisible into parts and if a reasonable
restriction remains to be enforced after the unreasonable portions have
been eliminated. But here, the covenant not to solicit “any individual
employed” by Zimmer cannot be blue-penciled because there is no
language that we could excise to render its scope reasonable. Thus, the
overbroad covenant is void and unenforceable.
Conclusion
Indiana’s “blue pencil doctrine” is really an eraser—providing that
reviewing courts may delete, but not add, language to revise unreasonable
restrictive covenants. And parties to noncompetition agreements cannot
use a reformation clause to contract around this principle. Because the
Kolbe Agreement’s unenforceable covenant not to solicit Zimmer
employees cannot be reformed, we vacate section 1(e) of the trial court’s
preliminary injunction order—which purports to enforce that covenant—
and remand.
David, Massa, Slaughter, and Goff, JJ., concur.
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ATTORNEYS FOR APPELLANTS
Robert G. Devetski
Peter D. Hamann
Barnes & Thornburg LLP
South Bend, Indiana
Mark J. Crandley
Barnes & Thornburg LLP
Indianapolis, Indiana
Gerald E. Burns
Patrick D. Doran
Buchanan Ingersoll & Rooney, PC
Philadelphia, Pennsylvania
ATTORNEYS FOR APPELLEES
Joshua B. Fleming
Lucy R. Dollens
Quarles & Brady LLP
Indianapolis, Indiana
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