Product Action International, Inc. v. Mero
2003 WL 21982359, 2003 U.S. Dist. LEXIS 14565, 277 F.Supp.2d 919 (2003)
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Rule of Law:
Under Indiana law, a court may not rewrite an overly broad covenant not to compete to make it reasonable, even if the agreement contains a 'savings clause' authorizing the court to enforce the covenant 'to the maximum extent permitted by law.' The court's power is limited to the 'blue pencil' doctrine, which only permits striking through grammatically severable, unreasonable provisions.
Facts:
- On April 22, 2002, Product Action International, Inc. (PAI) hired Carl Mero as a Regional Sales Manager.
- On the same day, Mero signed a Confidentiality/Non-Competition Agreement drafted by PAI.
- The agreement prohibited Mero for 24 months post-employment from working for any 'Competitive Business,' which was defined broadly to include competitors that did business with any PAI customer, operated within 100 miles of any PAI facility, or did business in any state or country where PAI did business.
- The agreement contained a clause stating that if any restriction was too broad, it should be 'enforced to the maximum extent permitted by law' and that the court had the power to modify the agreement.
- PAI terminated Mero's employment on February 6, 2003.
- On February 24, 2003, Mero began working for Quality Industrial Services, Inc. (QIS), a direct competitor of PAI.
- In his new role at QIS, Mero worked in a similar geographic area and contacted some of the same customers he had served while employed at PAI.
Procedural Posture:
- Product Action International, Inc. (PAI) sued its former employee, Carl Mero, in the U.S. District Court for the Southern District of Indiana, based on diversity jurisdiction.
- PAI filed a motion for a preliminary injunction to enforce the non-compete agreement.
- The parties agreed to have the court first decide the legal question of the covenant's enforceability.
- PAI and Mero filed cross-motions for partial summary judgment on that issue.
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Issue:
Under Indiana law, does a contractual provision stating that an overly broad non-compete covenant 'shall be enforced to the maximum extent permitted by law' allow a court to rewrite or add terms to the covenant to make it enforceable, rather than simply striking severable, unreasonable portions?
Opinions:
Majority - Hamilton, District Judge
No. A contractual provision inviting a court to enforce an overly broad non-compete covenant 'to the maximum extent permitted by law' does not expand the court's power beyond Indiana's strict 'blue pencil' doctrine. The court reasoned that the non-compete covenant as written was facially unreasonable and overbroad because its geographic and customer restrictions extended far beyond PAI's legitimate protectable interests. The 'savings clause' in Paragraph 10 was merely an invitation for the court to rewrite the contract by adding new, reasonable terms, which is precisely what Indiana law prohibits. The court predicted that the Indiana Supreme Court would reject the contrary approach taken in 'Smart Corp. v. Grider,' as allowing judicial reformation would encourage employers to draft oppressive covenants, knowing courts would later narrow them. Such an approach would destroy the predictability of contracts and undermine the established blue pencil rule, which only permits striking unreasonable, severable language, not adding it.
Analysis:
This decision reaffirms Indiana's strict adherence to the traditional 'blue pencil' doctrine, which limits a court's ability to modify non-compete agreements. It establishes that 'savings clauses,' which purport to allow a court to reform an unreasonable covenant, are ineffective and will not save an overly broad agreement. The ruling places the full burden on employers to draft non-competes that are reasonable and narrowly tailored from the outset, as they cannot rely on courts to fix overreaching provisions. This provides greater certainty for employees and discourages the use of broad, intimidating covenants that have a chilling, or 'in terrorem,' effect on employee mobility.
