Clark's Sales and Service, Inc v. John D. Smith and Ferguson Enterprises, Inc.

FOR PUBLICATION
ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEES:
ANDREW M. McNEIL DANNY E. GLASS
PHILIP R. ZIMMERLY ADAM E. GLASS
Bose McKinney & Evans, LLP Fine & Hatfield, PC
Indianapolis, Indiana Evansville, Indiana
ROBERT M. BAKER, III
Law Office of Robert M. Baker III
Indianapolis, Indiana
RONALD E. WELDY
Weldy & Associates
Indianapolis, Indiana
Feb 20 2014, 9:11 am
IN THE
COURT OF APPEALS OF INDIANA
CLARK’S SALES AND SERVICE, INC., )
)
Appellant-Plaintiff, )
)
vs. ) No. 49A02-1306-PL-552
)
JOHN D. SMITH and FERGUSON )
ENTERPRISES, INC., )
)
Appellees-Defendants. )
APPEAL FROM THE MARION SUPERIOR COURT
The Honorable Timothy W. Oakes, Judge
Cause No. 49D13-1205-PL-20492
February 20, 2014
OPINION – FOR PUBLICATION
CRONE, Judge
Case Summary1
Clark’s Sales & Service, Inc. (“Clark’s”), appeals the trial court’s order denying
Clark’s motion for preliminary injunction as to a restrictive covenant Clark’s sought to
enforce against former Clark’s employee, John D. Smith, and his new employer, Ferguson
Enterprises, Inc. Smith worked for Clark’s for approximately fourteen years before leaving
to work for Ferguson. During his employment with Clark’s, Smith signed an employment
agreement which included a restrictive covenant/noncompetition provision. The trial court
concluded that the restrictive covenant that Clark’s drafted is overly broad and unreasonable,
and therefore unenforceable. On appeal Clark’s asserts that the trial court clearly erred when
it concluded that the restrictive covenant is unreasonable and unenforceable. Clark’s
maintains that even assuming the restrictive covenant is unreasonable and unenforceable as
written, this Court should apply the blue pencil doctrine to make the covenant reasonable and
enforceable. Concluding that the trial court’s judgment is not clearly erroneous and that the
blue pencil doctrine is inapplicable under the circumstances presented, we affirm.
Facts and Procedural History
Smith worked for HH Gregg Appliances and Electronics (“Gregg”) for four years
prior to commencing employment with Clark’s in 1998. While working for Gregg, Smith
became familiar with and sold high-end appliances. Clark’s, a family-owned business since
it was founded in 1913, is involved in builder-distributor appliance sales and service in
1
We held oral argument on January 22, 2014 in Indianapolis. We commend counsel for the quality of
their advocacy.
2
Indiana and concentrates its efforts in high-end appliance sales. Clark’s generated
approximately $750,000 in sales in 1986, when Bob Clark purchased the business from his
parents, and he grew the business to a peak of $28 million in sales during the first decade of
the 2000s. Clark’s seeks to hire sales consultants with prior appliance experience, but does
not consider its business to be similar to that of Sears, Lowes, or Gregg, which do business in
a traditional retail setting offering low-end, middle, and high-end appliances. Smith acquired
knowledge, skill, and information in connection with his employment as an appliance sales
representative with Clark’s.
In 2004, one of Clark’s high-level managers left to join Gregg in a position that
Clark’s viewed to be a competitive role. As a result, in September 2004, Clark’s asked Smith
and other employees to sign a written employment agreement, which contained both a
nondisclosure clause and a restrictive covenant. The restrictive covenant provides in relevant
part as follows:
7. Restrictive Covenants. During the term of Employee’s employment and
this Agreement and for a period of two (2) years following the termination of
Employee’s employment, Employee agrees not to, directly or indirectly,
whether individually or as a partner, shareholder, officer, director, employee,
independent representative, broker, agent, consultant or in any capacity for any
other individual, partnership, firm, corporation, company or other entity,
engage in the following prohibited activities:
…
(C) Solicit or provide, or offer to solicit or provide, services competitive to
those offered by Employer, or those provided by Employee on behalf of
Employer, to any business account or customer of Employer who was a
business account or customer of Employer during the term of
Employee’s employment, including but not limited to any business
account or customer serviced or contacted by Employee, or for whom
3
Employee had direct or indirect responsibility, on behalf of Employer
within the 12-month period preceding the termination [of] Employee’s
employment or about whom Employee obtained Confidential
Information;
(D) Work in a competitive capacity for HH Gregg’s in Indianapolis,
Indiana, within the State of Indiana, or in any state or municipal
corporation, city[,] town, village, township, county or other
governmental association in which HH Gregg’s does business, or for an
individual partnership, firm, corporation, company or other entity
providing services similar or competitive to those offered by Employer
to the residential or commercial builder and remodeling business sectors
during the term [of] Employee’s employment with Employer, including
but not limited to providing those services performed by Employee
while employed by or working for Employer, within Marion County,
Indiana, any county contiguous to Marion County, Indiana (including
Hamilton County, Hancock County, Shelby County, Johnson County,
Morgan County, Hendricks County, and Boone County), any county in
Indiana in which Employer provided services or has at least one
customer or client, the State of Indiana, or within a 50 mile radius of
Employee’s principal office with Employer.
(E) Otherwise attempt to interfere with Employer’s business or its
relationship with its business accounts, consultants, customers,
employees, vendors, or suppliers.
Appellant’s App. at 27-28. Smith signed the employment agreement. Some employees
signed an employee handbook, which contained a nondisclosure clause but not a restrictive
covenant.
Smith was made an assistant store manager in 2009 at Clark’s Castleton showroom.
Smith’s duties involved inside sales in the showroom and did not include visiting or calling
on customers. Smith did not have assigned customers or a book of business of his own.
After approximately fourteen years working for Clark’s, Smith tendered his
4
resignation on April 13, 2012. 2 Prior to tendering his resignation, Smith emailed copies of
Clark’s 2010 and 2011 monthly and quarterly sales bonus reports for all of Clark’s sales
personnel to his personal email account from his company email address, even though he was
not authorized to do so. The reports contained information about all of the sales made by
each of Clark’s salespeople and included customer and builder contact information, the price
of the materials sold, Clark’s costs on those items, and Clark’s profit margin on each sale.
Smith provided this information to his attorney, but to no third parties.3 On April 18, 2012,
Smith accepted an offer of employment with Ferguson.
Ferguson was also in the business of high-end appliance sales and service, although it
was principally engaged in the plumbing and lighting business. Smith currently works for
Ferguson at its builder and designer showroom in Carmel as an appliance manager. The
showroom is within a fifty-mile radius of Smith’s former principal office with Clark’s.
Smith’s employment does not involve direct sales, but does include the training of sales
employees, coordinating with vendors, and assisting with service, installation, and delivery.
Smith’s position is salaried, and he is compensated for the overall growth of the department.
Clark Cutshaw, Ferguson’s sales manager for the Indianapolis area, testified that the
information contained in Clark’s sales reports is of no value to Ferguson because Ferguson’s
2
The trial court’s findings state that Smith worked for Clark’s for twelve years. However, the record
reveals that Smith began his employment in 1998 and terminated his employment in 2012, resulting in a
fourteen-year employment relationship.
3
Smith has returned these reports and, according to Clark’s, this confidential information, submitted as
Plaintiff’s Exhibits 28-83, was sealed by the trial court pursuant to Indiana Code Sections 5-14-3-4(a)(4) and
24-2-3-6. Appellant’s Br. at 6 n.3.
5
corporate office dictates cost and pricing. He further testified that Smith was expected to
develop close relationships with building and remodeling contractors, but had no direct
selling responsibilities. John Hoover, Ferguson’s general manager for the central Indiana
area and Cutshaw’s boss, testified that appliances constituted only one percent of Ferguson’s
sales to customers and that he was trying to increase those sales. He testified that he
expected Smith to “[close] the loop” with Ferguson’s customers on appliance sales. Tr. at
354. In other words, Smith was expected to convince builders, remodelers, and kitchen
designers who had not previously done so to purchase appliances from Ferguson.
Although Smith claimed that he had no direct sales responsibility, he confirmed that
he worked on landing sales through focusing on builder and remodeler referral sources, and
then allowed a salesperson to complete the actual sale. While working for Ferguson, Smith
has solicited and offered to provide competitive services to business accounts and customers
of Clark’s.
On June 1, 2012, Clark’s filed an amended verified complaint for preliminary and
permanent injunctive relief and compensatory damages against Smith and Ferguson based
upon Smith’s alleged violation of the nondisclosure provision and the restrictive covenant in
the employment agreement. Smith and Ferguson responded with affirmative defenses and
also counterclaimed for damages. Specifically, Smith and Ferguson asserted that Clark’s
first breached the employment agreement when it failed on multiple occasions to properly
pay salary and bonuses to Smith, and therefore Clark’s forfeited any right to enforce the
agreement. A preliminary injunction hearing was held on June 8, 2012. Thereafter, on July
6
3, 2012, the trial court issued its findings of fact and conclusions thereon, granting Clark’s
request for a preliminary injunction based upon the terms of the nondisclosure provision in
the employment agreement and denying in part Clark’s request for a preliminary injunction
as to the restrictive covenant in the agreement. The trial court’s denial of the preliminary
injunction regarding the restrictive covenant was based on its conclusion that the provision
was not supported by adequate consideration.
Clark’s appealed, and on March 8, 2013, another panel of this Court issued a
memorandum decision reversing the trial court’s conclusion regarding the restrictive
covenant and holding that the promise to continue Smith’s at-will employment was adequate
consideration to support the covenant. See Clark Sales & Serv., Inc. v. Smith, No. 49A04-
1208-PL-387 (Ind. Ct. App. Mar. 8, 2013). However, because the trial court did not reach
the factual issues of the reasonableness of the restrictive covenant, or Smith’s claim that
Clark’s breached the employment contract first, we were left with an inadequate record from
which to direct the entry of a preliminary injunction. Id., slip op. at 10. Accordingly, we
remanded to the trial court for a determination of the remaining issues. Id.
Thereafter, on June 20, 2013, the trial court entered its second set of findings of fact
and conclusions thereon, again denying Clark’s request for preliminary injunction.
Specifically, the trial court concluded in relevant part:
12. The Restrictive Covenant in this case operates to prevent Smith from
working directly or indirectly, in any capacity, for any other entity seeks [sic]
to solicit or provide competitive services to any entity that was a customer of
Clark’s throughout the term of Smith’s employment. If the Covenant had not
mentioned the customer base, it would be overly broad and restrictive in that it
would prevent Smith from working for any competitor, in any capacity
7
whatsoever. But the restriction to just the past customers of Clark’s, spanning
from 2004 to 2012 is also overly broad and[] unreasonable.
13. It has long been settled in Indiana courts that present customers are a
protectable interest of an employer, [Donahue v. Permacel Tape Corp., 234
Ind. 398, 411, 127 N.E.2d 235, 240 (1955)], but the issue of past customers is
less settled. The courts tend to be critical of restricting contact with past
customers, and this Court agrees. When an ex-employee is restrained from
serving a former customer of his ex-employer with whom he had no contact
during the term of his employment, the reasonableness of the restraint as a
device for protection of customer relationships is highly questionable. [Seach
v. Richards, Dieterle & Co., 439 N.E.2d 208, 213-14 (Ind. Ct. App. 1982)].
14. The Restrictive Covenant here forbids Smith from indirectly or directly
working in any capacity for an entity providing competitive services to a
customer of Clark’s between 2004 and 2012. Not only would it be overly
burdensome and likely impossible to compile the list of every Clark’s customer
from that eight year period and determine which customers could be deemed
customers of Smith himself, but it also would be entirely impractical and
unreasonable. Notwithstanding Smith’s suspicious behavior in emailing
himself the customer lists, the Restrictive Covenant on its face is overly broad
and cannot stand.
15. An Indiana court may not craft a reasonable restriction out of an
unreasonable one under the guise of interpretation. [Licocci v. Cardinal
Assocs., Inc, 445 N.E.2d 556, 561 (Ind. 1983)]. However, if a covenant is
clearly separated into parts, some of which are reasonable and some of which
are not, the covenant may be divided according to the “blue-pencil” doctrine.
Seach, 439 N.E.2d at 213. This Court looks to Seach here, where a covenant
restricted the former employee from contacting “present, past, and prospective
clients.” Id. at 214. The Seach court severed the terms “past” and
“prospective” from the covenant, leaving behind a restriction on contact with
present clients, since they are widely considered a protectable interest. Id. at
215 (referencing Permacel Tape).
16. The Restrictive Covenant in front of this [C]ourt does not contain any
qualifiers on the customers in question, such as “past” or “present,” and only
refers to those past customers of Clark’s from 2004-2012 and, therefore,
cannot be severed so as to maintain enforceability. Because the scope of [the]
Covenant is unreasonably broad and no provisions can be stricken, the entire
Covenant is unenforceable.
8
17. Given the egregious level of Smith’s pre-departure act of misusing
Clark’s confidential information, this Court finds it disconcerting that Smith
will continue his employment at Ferguson. Regretfully, however, the Court
finds the Restrictive Covenant unenforceable for unreasonableness of scope.
18. Because the Restrictive Covenant is unenforceable, it is unnecessary for
this Court to address whether Clark’s materially breached the contract first, the
tolling provision of the Restrictive Covenant, or the no-defense clause of the
Covenant.
19. Clark’s has not demonstrated a reasonable likelihood of success at trial
with regard to reasonableness of the Restrictive Covenant; therefore this Court
DENIES Plaintiff’s Motion for Preliminary Injunction. This Court now files
these Special Findings of Fact and orders that they be made a part of the record
in this cause.
Appellant’s App. at 15-17. This appeal followed.
Discussion and Decision
Standard of Review
Clark’s appeals the trial court’s denial of its motion for preliminary injunction. We
review the trial court’s denial of a request for a preliminary injunction for an abuse of
discretion. Gleeson v. Preferred Sourcing, LLC, 883 N.E.2d 164, 171-72 (Ind. Ct. App.
2008). To obtain a preliminary injunction, the moving party has the burden to show by a
preponderance of the evidence: (1) a reasonable likelihood of success at trial; (2) the
remedies at law are inadequate; (3) the threatened injury to the movant outweighs the
potential harm to the nonmoving party from the granting of an injunction; and (4) the public
interest would not be disserved by granting the requested injunction. Apple Glen Crossing,
LLC v. Trademark Retail, Inc., 784 N.E.2d 484, 487 (Ind. 2003). If the movant fails to prove
9
any one of these requirements, the trial court’s grant of an injunction would be an abuse of
discretion. Id.When considering whether to grant a preliminary injunction, the trial court is required
to make special findings of fact and conclusions thereon. Pathfinder Commc’ns Corp. v.
Macy, 795 N.E.2d 1103, 1109 (Ind. Ct. App. 2003); Ind. Trial Rule 65(D). On appeal, we
must determine whether the evidence supports the trial court’s findings, and whether the
findings support the judgment. Id. We will not disturb the findings or judgment unless they
are clearly erroneous. Id. We neither reweigh the evidence nor reassess witness credibility,
but consider only the evidence favorable to the judgment and all reasonable inferences to be
drawn therefrom. Id. Also, the power to issue a preliminary injunction should be used
sparingly, with such relief granted only in rare instances in which the law and facts are
clearly within the movant’s favor. Gleeson, 883 N.E.2d at 172.
Enforceability of the Restrictive Covenant
The parties raise several issues that bear on Clark’s first hurdle to obtain a preliminary
injunction, the reasonable likelihood of Clark’s success at trial. The dispositive issues are:
(1) whether the restrictive covenant protects a legitimate interest; and (2) whether the
restrictive covenant is reasonable in scope as to the time, activity, and geographic area
restricted.
“Covenants not to compete are contractual provisions which might be described as
step-children of the law.” Seach, 439 N.E.2d at 211. Our supreme court has long held that
noncompetition covenants in employment contracts are disfavored in the law, and we will
10
construe these covenants strictly against the employer and will not enforce an unreasonable
restriction. Cent. Indiana Podiatry, P.C. v. Krueger, 882 N.E.2d 723, 728-29 (Ind. 2008).
Indeed, “[p]ost-employment restraints are scrutinized with particular care because they are
often the product of unequal bargaining power and because the employee is likely to give
scant attention to the hardship he may later suffer through loss of his livelihood.”
RESTATEMENT (SECOND) OF CONTRACTS, § 188 cmt. G (1981). In order for a
noncompetition agreement to be enforceable it must be reasonable, and such reasonableness
is a question of law. Krueger, 882 N.E.2d at 729. In arguing the reasonableness of a
noncompetition agreement, the employer must first show that it has a legitimate interest to be
protected by the agreement. Id. Second, the employer bears the burden to show that the
agreement is reasonable in scope as to the time, activities, and geographic area restricted. Id.
Section 1 – Legitimate Interest
As to the first factor of reasonableness, in order “[t]o demonstrate a legitimate
protectable interest, ‘an employer must show some reason why it would be unfair to allow the
employee to compete with the former employer.’” Pathfinder Commc’ns Corp., 795 N.E.2d
at 1110 (citation omitted). Indeed, “the employee should only be enjoined if he has gained
some advantage at the employer’s expense which would not be available to the general
public.” Norlund v. Faust, 675 N.E.2d 1142, 1154 (Ind. Ct. App. 1997), clarified on reh’g,
678 N.E.2d 421, trans. denied. Our courts have held that “the advantageous familiarity and
personal contact which employees derive from dealing with an employer’s customers are
elements of an employer’s ‘good will’ and are a protectible interest which may justify a
11
restraint.…” Krueger, 882 N.E.2d at 729. “Goodwill includes secret or confidential
information such as the names and addresses of customers and the advantage acquired
through representative contact.” Unger v. FFW Corp., 771 N.E.2d 1240, 1244 (Ind. Ct. App.
2002). In addition, “in industries where personal contact between the employee and the
customer is especially important due to the similarity in product offered by the competitors,
the advantage acquired through the employee’s representative contact with the customer is
part of the employer’s good will, regardless of whether the employee has access to
confidential information.” Gleeson, 883 N.E.2d at 173.
Regarding this factor, the evidence supports the trial court’s finding that Clark’s
established that, during Smith’s fourteen-year employment with Clark’s, Smith had the
advantage of having been part of Clark’s efforts to build goodwill with its business accounts
and referral network of home builders, remodelers, and kitchen designers, and that such
advantage is not available to a person in the general public. Appellant’s App. at 12. As
Clark’s further described during oral argument, Clark’s has an interest in protecting its
unique “brand” in the industry. We agree with Clark’s and the trial court that such goodwill
is a legitimate protectable interest.4
Section 2 – Reasonableness of Restrictions
Next, Clark’s has the burden to establish that the restrictive covenant is reasonable in
scope as to the time, activities, and geographic area restricted. The parties agree that the two-
4
Although the trial court did not specifically conclude that Clark’s had met its burden to show a
legitimate protectable interest, both parties appear to agree that the trial court implicitly concluded as much.
12
year time restriction in the covenant is reasonable and valid. The parties disagree, however,
as to the reasonableness of the noncompetition covenant as to scope of activities and
geographic area restricted. We find the covenant unreasonable as to both.
Section 2.1 – Scope of Activities
Paragraph 7(C) of the restrictive covenant prohibits Smith from providing “services
competitive to those offered by [Clark’s], or those provided by [Smith] on behalf of
[Clark’s]” to anyone who was a customer of Clark’s during the term of Smith’s employment.
Id. at 28. First, regarding the customer base sought to be protected, as written, this restriction
prohibits Smith from providing any service competitive to those offered by Clark’s and
applies to every customer of Clark’s during Smith’s fourteen-year employment. Indeed, as
noted by Smith, this restriction enjoins Smith from providing services “to someone who may
have been a customer of Clark’s fourteen (14) years earlier and never returned to the business
after that first time ….” Appellees’ Br. at 18. This restriction applies to all customers of
Clark’s during the term of Smith’s employment and applies regardless of whether Smith had
any contact whatsoever with those customers.
This Court has held that although present customers are a protectable interest of an
employer, a contract prohibiting contact with any past or prospective customers, no matter
how much time has elapsed since their patronage ceased, was vague and too broad. Seach,
439 N.E.2d at 214. While any customer of Clark’s during Smith’s fourteen-year employment
13
may arguably be considered a present customer of Clark’s, 5 the impossibility of enforcement
for the broad restriction contained in 7(C) cannot be overlooked, as it is unlikely that the
expansive customer base referenced in 7(C) could be readily identified by either Clark’s or
Smith. Accordingly, we agree with the trial court’s conclusion that Clark’s attempt to protect
a customer base spanning the entire term of Smith’s employment is overly broad and
unreasonable.
In addition to the overly broad customer base referenced, the scope of activities
prohibited by paragraph 7(C) is also overly broad, as the activities prohibited are unrelated to
the services Smith actually provided to Clark’s during his employment. Rather, 7(C)
prohibits Smith from providing any services competitive to “those offered by” Clark’s.
Appellant’s App. at 28. For example, although Smith was an inside appliance salesman for
Clark’s, he would be prohibited from performing maintenance, repair, delivery, ordering, or
pricing services, to name just a few, to anyone who was a customer of Clark’s during his
fourteen-year employment, because those services are competitive to services offered by
Clark’s. Presumably, assuming arguendo that Clark’s sold snacks or beverages within its
showroom, Smith would be prohibited from selling snacks or beverages for a new employer
because that would be a service competitive to a service offered by Clark’s. In such
situation, “a former employee could easily violate the terms of the contract without knowing
5
This Court has previously defined a “present” customer as one who did business with the employer
during the employee’s term of employment, a “past” customer as one who did business with the employer
before the employee’s term of employment, and a “prospective” customer as one whose business contacts
occurred after the termination of the employee’s employment. See Hahn v. Drees, Perugini & Co., 581 N.E.2d
457, 460 n.3 (Ind. Ct. App. 1991).
14
he was doing so.” Seach, 439 N.E.2d at 214. “A non-competition agreement drafted so
broadly as to prohibit seemingly harmless conduct” may be unreasonable in view of all of the
circumstances of a particular case. Id. Specifically, a covenant that restricts the employee
from competing with portions of the business with which he was never associated is invalid.
Id. Under the circumstances here, the “services competitive” restriction provided in 7(C) is
overly broad, onerous, and an undue restriction on Smith’s economic freedom. See id.Paragraph 7(D) similarly prohibits Smith from working in a “competitive capacity” for
Gregg or for any other individual or entity “providing services similar or competitive to those
offered” by Clark’s “during the term [of] [Smith’s] employment with [Clark’s] including but
not limited to providing those services performed by [Smith] while employed by or working
for [Clark’s] ….” Appellant’s App. at 28. As in paragraph 7(C), this prohibition is not
limited to restricting Smith from providing those services that he actually provided to
Clark’s. Instead, it includes but is not limited to restricting him from providing the services
he actually provided to Clark’s for any entity that competes with Clark’s or did compete with
Clark’s during his fourteen-year employment and, as such, is overly broad and unreasonable.6
6
Smith and Ferguson point to paragraph 7(E) of the restrictive covenant as an unreasonable catchall
provision because it broadly restricts Smith from “otherwise” attempting “to interfere” with Clark’s business.
Appellant’s App. at 28. Notably, the trial court does not reference paragraph 7(E) in its judgment, and Clark’s
states, without explanation, that “paragraph 7(E) is not at issue in this case.” Appellant’s Reply Br. at 7.
While it is unclear to us why paragraph 7(E) would not be implicated here, because we find the scope of
activities restricted in other paragraphs of the covenant unreasonable, we need not further discuss paragraph
7(E).
15
Section 2.2 – Geographic Area
Paragraph 7(D) contains the covenant’s geographic restriction and restricts Smith
from working “in a competitive capacity” within a geographic area that extends to working
for Gregg in any state in which Gregg does business, as well as working for any other entity
providing services competitive to Clark’s in Marion County, any county contiguous to
Marion County, any county in Indiana in which Clark’s has at least one customer, the State of
Indiana, or within a fifty-mile radius of Smith’s principal office with Clark’s, which was in
Castleton. As noted by the trial court, whether a geographic scope is reasonable depends on
the interest of the employer that the restriction serves. See Krueger, 882 N.E.2d at 730. The
trial court found that “[a]s one of the largest ‘high end’ appliance stores in the area, with over
$1 million in sales each month, it is reasonable for individuals in the community to travel up
to 50 miles to visit Clark’s.” Appellant’s App. at 15. While we agree with the implication of
the trial court’s finding that a fifty-mile geographic restriction would have been reasonable
due to Clark’s prominence in the high-end appliance business, as written, the fifty-mile
radius is in addition to, and not a limitation of, the much more expansive geographic
restriction of this provision, which includes any state in which Gregg does business, the
entirety of Indiana and any county in which Clark’s has at least one customer. It is
unquestionable that the expansive geographic scope referenced in paragraph 7(D) is
unreasonable as written.7
7
To the extent that it may be argued that the trial court found the covenant reasonable as written
regarding the geographic area restricted, we specifically conclude that the evidence does not support such a
finding because, as noted above, the fifty-mile radius is written as an addition rather than a limitation to the
expansive geographic restriction provided.
16
Section 3 – Blue Pencil Doctrine
Even assuming that the restrictive covenant is overly broad and unreasonable as
written, Clark’s urges this Court to do what the trial court determined it could not: make the
covenant reasonable and enforceable by applying Indiana’s “blue pencil” doctrine. “When
reviewing covenants not to compete, Indiana courts have historically enforced reasonable
restrictions, but struck unreasonable restrictions, granted they are divisible.” Dicen v. New
Sesco, Inc., 839 N.E.2d 684, 687 (Ind. 2005). This principle is known as the blue pencil
doctrine. Id. If a court finds that portions of a noncompetition agreement are unreasonable,
it may not create a reasonable restriction under the guise of interpretation, since this would
subject the parties to an agreement that they have not made. Gleeson, 883 N.E.2d at 177
(citing Burk v. Heritage Food Serv. Equip., Inc., 737 N.E.2d 803, 811 (Ind. Ct. App. 2000)).
But, if the noncompetition agreement is divisible into parts, and some parts are reasonable
while others are unreasonable, a court may enforce the reasonable portions only. Id. When
blue-penciling, a court must not add terms that were not originally part of the agreement but
may only strike unreasonable restraints or offensive clauses to give effect to the parties’
intentions. Id.Clark’s proposes the following blue pencil modification for paragraph 7(C):
Solicit or provide, or offer to solicit or provide, services competitive to those
offered by Employer, or those provided by Employee on behalf of Employer,
to any business account or customer of Employer who was a business account
or customer of Employer during the term of Employee’s employment,
including but not limited to any business account or customer serviced or
contacted by Employee, or for whom Employee had direct or indirect
responsibility, on behalf of Employer within the 12-month period preceding
17
the termination [of] Employee’s employment or about whom Employee
obtained Confidential Information.
Appellant’s Br. at 15. First, we must agree with Smith and Ferguson that this revision does
not strike a divisible portion of the broad restriction provided by paragraph 7(C). Contrary to
Clark’s contention, the scope of activities restriction provided in paragraph 7(C) is neither
“divisible” nor “clearly separated into parts” nor written to include “severable terms.” See
Licocci, 445 N.E.2d at 561 (“[I]f the covenant is clearly separated into parts and some parts
are reasonable and others are not, the contract may be held divisible.”); Seach, 439 N.E.2d at
215 (“If the excessive restraint is severable in terms, it may be disregarded and the remaining
part of the covenant enforced.”). Rather, the restriction provided by paragraph 7(C) is
written as an indiscrete whole. There is no clear separation of terms or clauses that were or
could be intended to be excised from the whole without changing the entire meaning and
import of the passage. As our supreme court has stated, we may enforce reasonable
restrictions and strike unreasonable restrictions, “granted they are divisible.” Dicen, 839
N.E.2d at 687. Paragraph 7(C) is indivisible and unreasonable as a whole, and the blue
pencil doctrine is inapplicable.
Moreover, even were we to blue-pencil paragraph 7(C) as proposed by Clark’s, such
modification does nothing to remedy the overbreadth of the scope of activities prohibited.
Smith would still be prohibited from providing “services competitive to those offered by
[Clark’s]” irrespective of what services Smith actually provided to Clark’s during the term of
his employment. Although Clark’s suggested revision attempts to somewhat reduce the
expansive customer base originally referenced, the revision does nothing to aid or explain
18
how it would be determined which customers Smith “serviced” and whether those services
were limited to sales only. We remind Clark’s that we cannot create a reasonable restriction
under the guise of interpretation, as that would subject the parties to an agreement that they
did not make. Gleeson, 883 N.E.2d at 177.
Clark’s also suggests the following blue pencil modification for paragraph 7(D):
Work in a competitive capacity for HH Gregg’s in Indianapolis, Indiana,
within the State of Indiana, or in an state or municipal corporation, city town,
village, township, county or other governmental association in which HH
Gregg’s does business, or for an individual, partnership, firm, corporation,
company, or other entity providing services similar or competitive to those
offered by Employer to the residential or commercial builder and remodeling
business sectors during the term of Employee’s employment with Employer,
including but not limited to providing those services performed by Employee
while employed by or working for Employer, within Marion County, Indiana,
any county contiguous to Marion County, Indiana (including Hamilton County,
Hancock County, Shelby County, Johnson County, Morgan County, Hendricks
County, and Boone County), any county in Indiana in which Employer
provided services or has at least one customer or client, the State of Indiana, or
within a 50 mile radius of Employee’s principal office with Employer.
Appellant’s Br. at 18. As we concluded with the proposed modification for the preceding
paragraph, this blue-penciling, which merely removes the reference to Gregg, also fails to
adequately address the grossly overbroad restrictions. Although Clark’s maintains that the
scope of activities restricted by paragraph 7(D) is narrowly tied to Clark’s protectable interest
and is reasonably limited to Smith’s actual duties for Clark’s, this alleged reasonable
limitation as to the scope of activities restricted appears nowhere in the language of the
provision, modified or otherwise. Moreover, the mere removal of the reference to Gregg
does not cure the remaining expansive geographic restriction of the covenant. In sum, the
restrictions contained in paragraphs 7(C) and (D) are not clearly separated into divisible
19
parts, and Clark’s proposed modifications result in restrictions that are still overly broad and
excessive to protect Clark’s legitimate interest.
In an attempt to persuade us that we should find the restrictive covenant properly
divisible and enforceable pursuant to the blue pencil doctrine, Clark’s directs us to Welcome
Wagon v. Haschert, 125 Ind. App. 503, 508-09, 127 N.E.2d 103, 106 (1955), in which we
applied the doctrine to delete overbroad language restricting the former employee from
competing with the employer in any city in the United States where the employer rendered or
had signified its intention to render services, and we enforced the remaining reasonable
restriction that the former employee be prohibited from competing in Kokomo, the city where
she had been employed. However, Welcome Wagon is distinguishable, as the restrictive
covenant in Welcome Wagon was drafted significantly different than the covenant at issue
here. In Welcome Wagon, the overbroad geographic restriction of the covenant was written
in clearly separate and divisible clauses, and the “interdicted territory” was referenced
separately rather than as “one indivisible whole.” Id. Thus, we concluded that the overbroad
restriction was divisible and the offending clauses could be stricken, requiring us merely to
excise the two final clauses of the provision. See id.Unlike Welcome Wagon, the blue-penciling proposed by Clark’s is much more
extensive and elaborate. Clark’s is requesting us to redact sentence fragments from the
indivisible whole of each contested paragraph while conveniently changing the entire
20
meaning and import of each paragraph.8 Moreover, as stated above, Clark’s proposed
redactions do not adequately solve the overbreadth of the restrictions, and we would be
required to do additional redaction and engage in substantial interpretation to render the
restrictions reasonable.9 This is not the purpose of the blue pencil doctrine as we see it.
Indeed, an overriding theme of this case is that the parties advocate drastically
different philosophical approaches to the blue pencil doctrine. Clark’s insists that the broad
restrictive covenant here was drafted specifically with the blue pencil doctrine in mind,
assuming that a court would strike or remove any particular restriction in order to make the
covenant reasonable and enforceable. Appellant’s Br. at 15. Clark’s argues that this drafting
practice is permissible and merely the result of its “good faith effort to provide itself the
greatest level of protection allowed by law.” Id. Smith and Ferguson find this approach
unsavory. We agree, as the approach advocated by Clark’s leads to great uncertainty in
contracting and does not promote good public policy regarding the relationship between
employees and prospective employers. We remind Clark’s that “Indiana law strongly
discourages employers’ attempts to draft unreasonably broad and oppressive covenants.”
Product Action Int’l, Inc. v. Mero, 277 F. Supp. 2d 919, 924 (S.D. Ind. 2003) (citing Young v.
Van Zandt, 449 N.E.2d 300, 304 (Ind. Ct. App. 1983)).
8
We note that at no time has Clark’s suggested that the entirety of either paragraph 7(C) or (D) be
stricken.
9
It became clear at oral argument that even counsel for Clark’s was wavering and still negotiating as
to how precisely the restrictive covenant could be blue-penciled to make it reasonable and enforceable. The
extreme effort Clark’s is going through to alter the overbroad language of the covenant reminds us of an oft-
quoted line from William Shakespeare’s Hamlet: “[Clark’s] doth protest too much, methinks.”
21
In Mero, then-District Judge Hamilton, discussing Indiana’s blue pencil doctrine,
acknowledged the “reality of the problem and the power that employers usually hold over
their current and former employees in cases of covenants not to compete” and how, as a
practical matter, “such unreasonably broad contracts often have in terrorem effects on current
and former employees.” Id. at 931. Indiana courts will not engage in rewriting the covenant,
as “the courts need not do for the employer what it should have done in the first place—write
a reasonable covenant.” Id. at 932. The consequence to employers for drafting such
overreaching contracts is that the covenant cannot be enforced at all. Id. Judge Hamilton
explained:
The Indiana courts’ refusal to rewrite agreements for parties can also be
consistent with the parties’ intentions. When an employer hands an employee
an employment agreement with a covenant not to compete, the employee is of
course entitled to consult a lawyer before signing the agreement. If the
employer has drafted an unreasonably broad covenant, the employee should be
entitled to rely on sound advice that the covenant is simply not enforceable
under Indiana law. That employee’s intent may well have been not to agree to
any enforceable restriction. That same employee could sign quite happily a
covenant, knowing that the courts would shred it.
Id. at 932 (footnote omitted). Judge Hamilton described the blue pencil doctrine as an
imperfect, but sound and reasonable solution to the problem of overreaching: “It balances
the employer’s and employee’s interests, gives the employer a fair opportunity to draft a
reasonable and enforceable covenant, protects the employee by discouraging the employer
from overreaching, and provides a rather mechanical but reasonably predictable answer in the
case of overly broad covenants.” Id.
22
Here, Clark’s had a fair opportunity to draft a reasonable and enforceable restrictive
covenant yet failed to do so. The overly broad and unenforceable covenant that Clark’s did
draft is not clearly separated into divisible parts or severable in terms such that we can
mechanically strike unreasonable restrictions and enforce reasonable ones. The restrictions
are unreasonable as a whole. Therefore, we conclude that the blue pencil doctrine is
inapplicable, as it would subject the parties to an agreement that they did not make.10
Accordingly, we agree with the trial court that Clark’s has failed to establish by a
preponderance of the evidence its likelihood of success at trial. The trial court’s denial of
Clark’s motion for preliminary injunction is affirmed.
Affirmed.
BARNES, J., and PYLE, J., concur.
10
Because we have determined that the restrictive covenant in the employment agreement is not, and
cannot be made, reasonable and enforceable, we need not address Smith and Ferguson’s arguments that
Clark’s previously committed a material breach of the employment agreement.
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