Some Michigan employers use the tactic of attaching non-compete agreements to offers of employment. A non-compete agreement is a covenant that prohibits an employee from working for certain competitors over a given period of time after the employment relationship with the current employer ends.
When an employee signs a non-compete agreement, it provides a distinct advantage to the employer. The non-compete contract limits the employer’s competition by restricting the future employment options of those employees who have intimate knowledge of how the employer’s business works.
Non-competes protect employers from having their employees (and thus, their practices) poached by competitors; however, these agreements also allow the employer to control its former employees’ options long after they sever ties with the company. It has been argued from a public policy perspective that noncompetes violate the time-honored traditions of free enterprise and the right to make a living. That’s why non-competes are controversial; some states don’t allow them at all.
Michigan courts have a history of enforcing non-competes that are “reasonable.” But what constitutes a “reasonable” non-compete agreement?
The courts seem to equate “reasonable” with having a balance between the employer’s business interests and the employee’s right to work and earn a living in his/her trade. There are generally four factors to be considered in determining the reasonableness of a non-compete agreement in Michigan, and the courts can be exceptionally critical in enforcing a non-compete under any of these four criteria:
- Line of business/type of employment – a reasonable non-compete may prohibit a former employee from working in a specific industry subset, but if the non-compete language prohibits a former employee from working for a competitor in any capacity, even in a position wholly unrelated to the employee’s former work, the courts would likely rule against it.
- Geographical area – in order to be found reasonable, a non-compete cannot limit a former employee’s ability to work over too large an area. For example, it would not be reasonable for a non-compete to prohibit a former employee from working in a completely different market—one that isn’t served by the former employer.
- Duration of enforcement – Michigan courts have consistently deemed one year to a reasonable life of a non-compete, and have never ruled in favor of anything over three years. Anything in-between is a roll of the dice.
- Competitive business interest/intellectual property to be protected – a non-compete that simply protects an employer from competition would not be deemed reasonable in court. The employer, in enforcing the agreement, must be protecting itself from some sort of unfair advantage in competition, stemming from the skills and knowledge the employee gained at the former employer’s expense.
In a recent Michigan case, the court sided with the employee. Specifically, in Huron Technology Corp. v. Sparling (09/11/2014), the trial court found that the non-compete agreement, although reasonable in duration and geographic scope, was unenforceable as a matter of law because it did not protect the employer’s reasonable competitive business interests and was an unreasonably broad prohibition on type of employment for the employee.
The former employer appealed this decision, but the Court of Appeals agreed with the trial court’s decision. The Court acknowledged that Michigan courts have upheld similar language as reasonably prohibiting employment with a similar/competing business; yet, it found this case different because the non-compete language was too broad. In violation of the first criterion listed above, it prohibited the former employee from working for a competitor in any capacity, even in a position wholly unrelated to the employee’s former work. The Court also found that this specific non-compete violated the fourth criterion above, as the employer didn’t make a reasonable case for protecting its competitive business interests.
This decision was a wake-up call to employers, most of whom have since fine-tuned their non-compete language so that it will (likely) pass the courts’ “reasonable” test. Even so, it’s very clear from case law that one size doesn’t fit all when it comes to non-compete agreements; each is unique in its strengths and weaknesses.
If you are being asked to sign a non-compete agreement as a condition of employment, or are concerned about one you have already signed, you may want to enlist the help of an experienced employment law attorney. In either situation, a lawyer can advise you how to best protect your own interests.
