Heraeus Med., LLC v. Zimmer, Inc.

• Decision Date: 03 December 2019
• Docket Number: Supreme Court Case No. 19S-PL-471
• Citation: 135 N.E.3d 150
• Parties: HERAEUS MEDICAL, LLC, et al., Appellants (Defendants) v. ZIMMER, INC., et al., Appellees (Plaintiffs)
• Court: Indiana Supreme Court

135 N.E.3d 150

HERAEUS MEDICAL, LLC, et al., Appellants (Defendants)

v.ZIMMER, INC., et al., Appellees (Plaintiffs)

Supreme Court Case No. 19S-PL-471

Supreme Court of Indiana.

Argued: September 26, 2019

Filed December 3, 2019

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

On Petition to Transfer from the Indiana Court of Appeals, No. 18A-PL-1823

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 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 Kolbe¹ 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").

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).

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' 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...