Court split on non-compete geography

Geography is the main sticking point that has split the Indiana Supreme Court on determining reasonableness of non-compete covenants as they relate to physicians and medical practices.

With its 3-2 ruling March 11 in Central Indiana Podiatry v. Kenneth Krueger, Meridian Health Group PC, No. 29S05-0706-CV-256, the court held that employment contracts between doctors and medical practice groups don’t absolutely go against public policy and are enforceable if written reasonably.

But views on what’s “geographically reasonable” in the latter part of the holding is what drew disagreement from the court, with covenants only being able to restrict an area where a physician has developed patient relationships using the practice group’s resources. That didn’t happen in this case, the majority determined.

The case involved a claim that the Carmel practitioner violated his non-compete contract with his former employer, Indiana’s largest podiatry group, when he began working for a nearby competitor within two years. Krueger had been fired in 2005 from Central Indiana Podiatry on the north side of Indianapolis in Marion County, and set up shop about 10 minutes north in Hamilton County at Meridian Health Group.

An agreement he’d signed before leaving Central Indiana Podiatry prevented him from working within 14 counties during those two years. He ended up in court and Hamilton Superior Judge Daniel Pfleging ruled in January 2006 that the geographic restrictions of the contract were unreasonable and couldn’t be enforced.

Last summer, the Indiana Court of Appeals had reversed the trial court decision on grounds that the non-compete was geographically reasonable, since Central Indiana Podiatry had several locations and drew patients from surrounding counties.

But a majority of justices determined the podiatry group’s restrictions were too strict and the business shouldn’t be able to stop Krueger from practicing in the Hamilton County area, since the record didn’t reflect a large number of patients traveling from other areas to that new office location. The court did leave in place some of the off-limit locales of Marion, Howard, and Tippecanoe counties.

In doing so, justices applied what is known as the blue pencil doctrine, which is typical in non-competes with a territorial issue, and allows courts to reform or rewrite portions of agreements determined to be too broad.

Justices Ted Boehm, Frank Sullivan, and Robert Rucker held the majority; Chief Justice Randall T. Shepard wrote a dissent, and Justice Brent Dickson joined him.

“The competitive reality is that these two areas function as one for commercial purposes,” the chief justice wrote. “That a county line divides these two locations means very little to most customers or purveyors of service, and I wouldn’t regard it as grounds for a court voiding a contract by which two relatively sophisticated parties ordered their commercial relationship.”

While the court determined the issue of injunctive relief is moot in this case – as the two-year term expired in July 2007 – justices decided that injunctive relief is permissible in physician non-compete agreements because they raise significant policy concerns and recur frequently.

Overall, the court declined to ban non-competes all together as three other states do and Krueger urged the court to consider. Justices relied on a quarter-century old case of Raymundo v. Hammond Clinic Association, 449 N.E.2d 276 (Ind. 1983) that established a reasonableness test for the contracts, pointing out that banning the covenants is a public policy decision for legislators and no change has come since then.