Indiana and several other states statutorily prohibit employers from “blacklisting” former employees, that is, attempting to prevent them — whether they were discharged or resigned — from obtaining subsequent employment. Responding recently to certified questions from the U.S. District Court for Southern Indiana, the Indiana Supreme Court held that former employer Loparex, LLC did not violate the statute when it sued (unsuccessfully) for an injunction to enforce a non-competition agreement signed by two ex-employees, one who was terminated and another who left voluntarily. Loparex, LLC v. MPI Release Technologies, LLC, 2012 WL 955426 (Ind. Sup. Ct. Mar. 21, 2012). In reaching that result, the Supreme Court rejected its almost century-old decision in Wabash R.R. Co. v. Young, 162 Ind. 102, 69 N.E. 1003 (1904).
Loparex makes “release liner” products such as nametags with peel-off backings, window films, and roofing underlayment. The formulas involved in these products allegedly are trade secrets. Odders and Kerber were employees of that company who had in-depth knowledge of its confidential information. Both were subject to one-year non-compete agreements. Odders was discharged and went to work for MPI, a competitor of Loparex. Kerber resigned from Loparex and also commenced employment with MPI.
Loparex asked the Southern District of Indiana federal court to enjoin Odders and Kerber from working for MPI (initially, Loparex requested injunctive relief from MPI too, but later withdrew the request). Odders and Kerber denied wrongdoing and counterclaimed for damages, including attorneys’ fees, contending that their ex-employer violated the Indiana Blacklisting Statute, Ind. Code §22-5-3-2, by filing the lawsuit. The district court overruled Loparex’s motion to dismiss the counterclaim and granted summary judgment to Odders and Kerber on the company’s complaint. Then, the federal court certified three questions to the Indiana Supreme Court each of which that court now has answered in the negative: Does an ex-employer violate the Blacklisting Statute by suing to enforce non-competition agreements signed by former employees? Is the decision in Wabash R.R. Co. v. Young still good law? Are attorneys’ fees recoverable as compensatory damages in a suit for violating the Blacklisting Statute?
A number of states besides Indiana have blacklisting laws. The Supreme Court made specific reference to statutes in Arizona, Iowa, Kansas, North Carolina, Ohio, and Oklahoma. According to the court, the majority of cases arising under those statutes hold that the employer’s conduct, whatever it happened to be, was not prohibited, and the principle to be gleaned by from the few decisions against employers is that they incur liability only where they act “with the wrongful intent to inhibit or prevent [former] employees from obtaining future employment.” The court continued: “Simply put, a lawsuit — successful or not — to protect trade secrets or seeking to enforce a noncompetition agreement does not, on its own, fall within that scope.” The court added that filing baseless or sham actions to restrain employees’ subsequent employment may constitute common law torts such as malicious prosecution and abuse of process, and may violate Federal Rule of Civil Procedure 11 and state counterparts, and antitrust laws.
Turning to the Young decision, the court pointed out that the title of the Indiana Blacklisting Statute mentions protection of discharged employees but is silent regarding employees who resign. The law’s text, however, safeguards employees who leave their positions voluntarily as well as those who are fired. At the time Young was decided, in 1904, Article 4, Section 19, of the Indiana Constitution mandated that statutes “embrace but one subject and matters properly connected therewith; which shall be expressed in the title.” Because the title of the Blacklisting Statute made no reference to employees who resigned, in Young the Indiana Supreme Court invalidated the portion of the blacklisting statute that concerned them.
The holding in Young has been relied on many times since 1904, but in several other cases courts have found ways to distinguish it. According to the Supreme Court in Loparex, the rationale for the ruling in Young — whether it was right or wrong in 1904 — has been undermined by subsequent amendments to the Constitution and because “a good many cases analyzing challenges to statutes under Section 19 have employed a more accommodating approach than that taken in Young.” So, in response to the certified question, the Indiana Supreme Court held that Young “is no longer stare decisis on the question of whether an employee who voluntarily leaves her employment may pursue a claim under the Blacklisting Statute.”
The court had little trouble rejecting the proposition that an employee who prevails in a blacklisting case is entitled to attorneys’ fees as part of compensatory damages. After summarizing the American and British rules on attorneys’ fee awards, the Supreme Court held that “there is nothing about the language, history, or nature of Indiana’s Blacklisting Statute that points to anything other than application of the American Rule.”
Employers in Indiana, and perhaps other states with blacklisting laws, can breathe a bit easier now that the Indiana Supreme Court clearly has held that, under that state’s law, filing a lawsuit to enforce a non-competition agreement — whether the plaintiff is or is not successful, and whether the defendant is an employee who was fired or who resigned — does not constitute blacklisting.