Author(s): William J. Brickley, Tom Paxton

Commercial Law is a newsletter devoted to commercial law issues and published by Garan Lucow Miller, P.C.
This newsletter examines non- competition agreements between employers and employees and their enforceability.

NON-COMPETITION AGREEMENTS

With the shortage in the labor market, non-competition agreements, between employers and employees, have come under scrutiny. This can arise in two circumstances: First, where an employer is attempting to have new and existing employees sign non-competition agreements to prevent them from working for competitors. And, second, where an employer attempts to hire an employee from a competitor who has a non- competition agreement with the existing employer. This article analyzes Michigan law regarding these agreements.

The pertinent Michigan statute is MCL 445.774a, which authorizes a non-competition clause in an employment contract. The statute has few specifics but allows the clauses to the extent that they are “reasonable”. If the clause is found to be “unreasonable”, the statute authorizes the court to limit the agreement by, in essence, redrafting it so that it is reasonable under the circumstances in which it was made.
Courts examine many factors in deciding whether a non- competition agreement is “reasonable”. Some are set forth in the statute. Others have developed by the courts in “interpreting” the statute. Generally the more specific the non-competition agreement, the more likely it will be enforced by a court.

DURATION – The length of time a person is restricted from competing is a significant factor in the statute and the case law. Courts have upheld agreements limiting employment for as much as one year. The reasonableness of the length of time will often depend upon the particular industry. For example a one- year restriction prohibiting non- competition in a business where the technology is changing rapidly would probably be found unreasonable because in effect the individual would be unemployable for a much longer period of time due to having to “catch-up” with the various changes.

GEOGRAPHIC AREA – This again is very industry specific. If the employee’s ties, contacts and dealings all involve a client base within 30 to 50 miles, it is unlikely that a court would uphold an agreement that applied statewide or nationwide. On the other hand, nationwide and/or international businesses may find it necessary to contain much broader geographical areas within their non-competition clauses if in fact the business
and the employee’s job is truly statewide, nationwide or even international.

LINE OF BUSINESS – Very broad descriptions of areas of work or a type of business are generally viewed as unreasonable. A computer programmer who inputs information on anti-lock braking systems would not be prohibited from working for another employer in the automotive industry working on front-end suspensions. At the same time a more specific description of the type of work restricted most probably would be found reasonable by a court.

INFORMATION POSSESSED – Most courts will not uphold a non-competition agreement that prohibits a person from using their general knowledge, skill or other information acquired through generalized training or experience working for an employer. More specific information, however, can be prevented from being disclosed. This could include client lists, profit margins, pricing schemes, trade secrets, business plans and other similar information. (To the extent the agreement pertains to “trade secrets”, Michigan’s Uniform Trade Secrets Act, MCL 445.1901 et seq, governs enforcement of such an agreement. This will be a subject of a future COMMFAX article.) Usually if the information the employee possesses is something specific to that company, an agreement to prohibit its use would be enforceable. On the other hand, information which can be obtained outside the company through legal and diligent efforts would not be subject to a use restriction.

CONSIDERATION – Pay and benefits received by an employee is another factor the courts review. This is particularly so when the other factors are more restrictive. The courts want to make sure that if somebody has bargained away their right to work within the industry for a specific period of time, they have been properly compensated for that restriction. In essence, the more a person is being paid, the more willing the courts are to enforce a non-competition agreement.

REASON FOR DEPARTURE – Although not a major factor, it is one factor that some courts look to in deciding the reasonableness of a non-competition agreement. If an employer has found an employee to be inept, some courts may find no danger is posed to the employer if this incompetent person goes and works for a competitor. On the other hand, an employee that is leaving voluntarily to seek a higher compensation package is more likely to have a court enforce the non-competition agreement in favor of the employer.

ABILITY TO WORK ELSEWHERE
- Courts are very reluctant to enforce a non-competition agreement if it prohibits an employee from working elsewhere. As a result, one factor that many courts examine is the employability or transferability of the employee’s skills to other industries or lines of work.

REMEDIES – One of the questions most frequently asked is what to do if an employee leaves and is potentially violating the non-competition agreement that exists. The courts have often-times honored an employer’s request and entered an injunction prohibiting the employee in certain ways. This could include prohibiting the employee from working for their new employer, limiting the type of work that could be performed, or limiting the geographic area where the employee can perform.

Questions regarding non- competition agreements may be directed to Bill Brickley, the author of this article, at GLM ’s Grand Blanc office at (810) 695- 3700 or Tom Paxton at GLM’s Detroit office at (313) 446-1530.