Indiana Business Law – Non-Compete Agreement: Former Employer Has Protectable Interest in Customer Goodwill; Proper Measure of Damages for Breach of Non-Compete Agreement is Lost Net Profits as Liquidated Damage Clause was Unenforceable

This past May, the Indiana Court of Appeals ruled on a breach of a non-compete agreement case addressing whether a former employee’s covenant not to compete with his past employer was enforceable under Indiana law and determined the proper measure of damages for a breach of this agreement.

Coffman, an employee of Olson & Co., an accounting firm (“Olson”), signed a non-compete Agreement in 2005, which specified that in the event of termination of employment, he would not directly or indirectly compete for Olson’s clients in the firm’s geographical area for a period of two years. The Agreement did not restrict employees from seeking accounting jobs elsewhere. The Agreement specified that if Coffman chose to provide accounting services for any of Olson’s clients during the two year period following termination of employment, he must pay Olson an amount equal to two times the amount of that client’s most recent twelve month billings. He must also notify the firm of his relationship with these clients in writing, and if Coffman failed to notify Olson of his intent to perform services for prior employees, the amount due to Olson shall be three times that client’s most recent twelve month billing.

Coffman terminated his employment with Olson on September 1, 2006 and formed his own accounting Limited Liability Company soon after. Seventeen of his clients terminated their relationship with Olson and hired Coffman to perform accounting services. Coffman did not notify or compensate Olson, and Olson soon thereafter filed suit alleging breach of the non-compete agreement.

At trial, Coffman argued that the Agreement constituted an unreasonable restraint of trade and should be unenforceable because it was overly broad. The court found that employers are entitled to contract to protect the good will of the business, and the evidence of Coffman’s relationships with Olson’s clients and the information he had about the clients gave him an advantage with the clients. This gave Olson a legitimate interest that could be protected by a covenant not to compete. The court, however, found that the liquidated damage clause in the Agreement was intended to act as a penalty for a breach, and was, thus, unenforceable. The trial court granted Olson $79,263 in damages, the amount equal to the fees Olson received from the seventeen clients during the twelve months prior to Coffman’s termination.

Both parties appealed the judgment of the trial court. Coffman again argued that the Agreement itself was unenforceable. The appellate court reiterated that goodwill between a company and its clients is a legitimate interest that may be protected by a covenant not to compete, thus, the agreement could be enforceable.

On appeal, Olson argued that the liquidated damage clause should be enforceable, but the Court of Appeals held the trial court’s ruling that penalty clauses are invalid. The Court of Appeals also held that the trial court’s measure of damages of net profits from the Olson clients for the year preceding Coffman’s termination from employment with Olson was proper. In awarding lost profits due to breach of a non-compete agreement, the court noted that net profits, and not gross profits, are generally the proper measure of recovery.

See Coffman v. Olson & Co., P.C., 906 N.E.2d 201 (Ind. Ct. App. 2009).

Jeremy L. Fetty is an associate at Parr Richey where his practice focuses on business law, utility law, labor and employment law, and municipal law. The statements contained herein are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have questions regarding this article, please contact an attorney.

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