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Non-Compete Agreements: The Good, the Bad and the Unknown

On Behalf of | Sep 15, 2015 | Business, Employment Law |

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You’re a skilled professional. You’ve been educated and trained, and you have a reputation for success amongst your peers. You’re ready to take the next step – perhaps branch out on your own or join a competitor. You tell your employer that you’re leaving, and they hand you a document that you may or may not remember signing. It’s a noncompete agreement, and it says that you cannot engage in certain work, in a certain location and for a certain period of time – often for months if not years. You may ask, what now? The answer is likely to include some good news, some bad news, and a measure of the unknown.

Why are non-compete agreements popular?

This article “Companies Compete but Won’t Let Their Workers Do the Same” is a thoughtful piece and there is much I agree with, especially in regard to lower wage workers and the depressing effect of non-competes on wages. But the author fails to note the real reason why non-competes are popular: companies invest in their employees in developing relationships with customers and in learning technology. Smaller companies that don’t have non-competes for key personnel are difficult to sell. And companies take a real risk that employees will simply learn from the experience of a job and hand a customer list on a platter to the competitor. So in the absence of a non-compete, many companies won’t invest or trust their employees. That can slow the growth of companies.

Moreover, in some states, companies pay employees to sign a non-compete. In the Midwest, companies don’t need to do that. That is wrong. Companies should pay a premium for workers limiting post-job options.

But California is hardly the panacea the author claims. I have represented many employees who have been threatened with aggressive approaches to trade secrets violations by their former California employer. In other words, when the former employer can’t use a non-compete, they find other paths.

Are non-competes over-used?  Undoubtedly.

Should the public and Congress take notice?  Yes.

Should they be eliminated?  No.

The good news

Not all noncompete agreements are enforceable and there are limits on what an employer can do. Noncompete agreements are contracts that employers use to restrain the ability of employees to compete with them while they are employed and for a period of time after the employee separates. Every state regulates whether these agreements are enforceable and, if so, under what circumstances. In Michigan, while such agreements are disfavored, they are enforceable – if they are reasonable. Under the Michigan Antitrust Reform Act, MCL 445.774a, the agreement must protect an employer’s reasonable competitive business interests (such as preventing a competitor’s use or access to proprietary information), and the restriction must be reasonable as to how long it is in force, the geographical area in which it applies, and the type of business restrained. If it is not reasonable, the courts may still enforce it, although the judge may re-write the agreement’s terms to make it reasonable. Thus, if you have a noncompete agreement, you may challenge its enforceability under MCL 445.774a. Also, because a noncompete agreement is a contract, you may challenge its enforceability if it fails to meet other contract requirements, including for lack of consideration.

The bad news

Because reasonable noncompete agreements are enforceable, you may be limited in your ability to work, at least for a period of time. Violating a noncompete agreement may cause your former employer to sue you. In doing so, the employer may not only seek injunctive relief, that is, ask the court to keep you from doing something, such as working for your new employer, competing, or working in certain geographical areas; the employer may also seek money damages, particularly if he or she believes that your violation cost them business or profits. It is not uncommon for noncompete litigation to include other, related claims against the employee, including breach of confidentiality and non-disclosure agreements, tortious interference with business relationships and contracts, and misappropriation of trade secrets. Employers may also seek to sue your new employer if there is reason to believe they were complicit in or benefitted from the violation. As you may imagine, this type of litigation can be very expensive and very stressful. For these reasons, ignoring a noncompete agreement, even if you think it is unenforceable or unfair, is not encouraged.

The unknown

Unfortunately, the determination of whether a noncompete agreement is enforceable as written is very case-specific. What may be reasonable in one industry, may not be reasonable in another. What may be necessary to protect one business’s competitive interests, may not be necessary for another. Therefore, there are no hard and fast rules about what is reasonable in duration, or geographical scope, or the line of business restrained. As observed in the case of Whirlpool Corp. v. Burns, “[c]ourts have upheld non-compete agreements covering time periods of six months to three years.” 457 F. Supp. 2d 806, 813 (W.D. Mich. 2006). More recently, in June 2015, the Michigan Court of Appeals found a five-year noncompete period to be reasonable under the circumstances. See Best Team Ever, Inc. v. Prentice, No. 319026, 2015 Mich. App. LEXIS 1296 (June 23, 2015). Likewise, the determination of a reasonable geographic scope is very fact-dependent. For example, in Superior Consulting Co. v. Walling, the Court observed that an agreement with no geographical limitations “can be reasonable if the employer actually has legitimate business interests throughout the world.” 851 F. Supp. 839, 847 (E.D. Mich. 1994). However, in Robert Half Int’l, Inc. v. Van Steenis, the Court found it unreasonable to restrain the employee from competing within 50 miles of his former employer’s Ann Arbor office. 784 F. Supp. 1263, 1273 (E.D. Mich. 1991). As these cases demonstrate, the determination whether a noncompete is enforceable will involve a close consideration of many factors, including the industry involved, the competitive landscape, the employer’s business interests, and the employee’s specific circumstances.

So, back to the question – you have a noncompete agreement, what now? First, don’t panic. Second, don’t ignore it. Consult with an attorney who can help you determine its enforceability and help you identify your options. Likewise, if you are presented with a noncompete agreement, review it with an attorney before you sign it so that you fully understand exactly what you are signing up for.