September 26, 2017
Late Wednesday afternoon, the United States Seventh Circuit Court of Appeals decided that a five-year non-compete agreement encompassing a broad scope of prohibited activity over a large geographic area was enforceable. The court did find however, the previous owners assistance to a business who later became a competitor, and his real estate lease agreement with them, did not violate that agreement because it was not competition.
In E.T. Products, LLC vs. D.E. Miller Holdings, Inc., a Bremen, Indiana business owner and his employee son signed a broad non-compete agreement when he sold his fuel-additives business, E.T. Products, to a group of investors. The agreement prohibited the two from assisting any company directly or indirectly engaged in the same industry anywhere in North America.
A year later, the defendant sold another business, Petroleum Solutions, to another buyer, John Kuhns. At the time, Petroleum Solutions supplied lubricants, and also distributed E.T. Products’ fuel additive; it did not compete with E.T. Products. The defendant assisted Kuhns in training, consulting, and leased land to Petroleum Solutions. After a year, E.T. Products and Petroleum Solutions ended their business relationship and Petroleum Solutions began selling fuel additives that competed with E.T. Products. The defendant informed Kuhns that, pursuant to his non-compete agreement, he could no longer provide assistance to Petroleum Solutions and ceased all assistance. The real estate lease, however, remained intact. E.T. Products sued, alleging that both the defendant’s previous assistance and the lease violated the terms of the non-compete agreement. The defendant argued that the non-compete was overbroad and unenforceable, and that his actions did not a breach the non-compete agreement.
The court’s decision noted that several factors, such as whether the entity sold is service based, a distributor, or a manufacturer, as well as the value of the entity’s goodwill, all effect a non-compete agreement enforceability. The federal court also acknowledged that while Indiana law generally disfavors non-compete agreements, more deference is given to agreements resulting from the sale of a business. In these sale situations, Indiana state courts have held that a five-year duration is not overbroad. The geographic restraint, covering all of North America, would be overbroad in many instances, but the court found it reasonable here, noting that the defendant expanded to 13 states prior to selling, and that at the time of the purchase, E.T. Products intended to and had since expanded to all 50 states and Canada.
Although finding the non-compete provisions enforceable, the court rejected E.T. Products’ argument that the defendant had violated the agreement by assisting a distributor who was not, at the time, competing against E.T. Products. The court offered “[t]hat’s a bit much.” The court found the defendant’s assistance while Petroleum Solutions was distributing E.T. Products fuel additives could not have violated the agreement. Further, since the lease of the property was signed before the companies began competing with each other, it also did not violate the agreement. To require the defendant to revoke the lease once the businesses became competitors would “produce absurd results” and would itself be a breach of contract.
The court’s decision provides clarity to the confusing status of Indiana’s law on non-compete agreements. While employee agreements are often found to be too broad and unreasonable, non-compete agreements involving the sale of a business have a much higher threshold.
Have a question about this decision or a similar situation in your organization?Contact Tim Shelly or Matt Schram
Warrick & Boyn, LLP, is a full-service law firm in Elkhart, Ind., that practices in all areas of business and corporate law. Areas of practice include commercial litigation, creditors’ rights and bankruptcy law, labor and employment law, defense litigation, securities law and regulation, worker’s compensation defense, education and school law, EEOC law, employee benefits law and pension plans, environmental law and regulation, tax and estate planning, municipal law, and property and real estate law. The firm’s clients are located primarily in northern Indiana and southwestern Michigan, and most of the attorneys are licensed to practice in both Indiana and Michigan.