Don't Bet the Business

It is quite common for employment agreements to contain restrictive covenants barring various conduct, both during and after one’s employment.  These provisions typically govern the use, and possible misuse, of trade secrets and other proprietary information. 

They also commonly try to shield an employer from conduct detrimental to the employer’s business and competitive standing. Once illegal, so called “non-compete agreements” – restrictive covenants that bar competition by a former employer – are now not only permitted, they are a common part of a new employee’s first day paperwork. 

In understandably zealous efforts to protect one’s competitive standing when faced with possible competition by a former employee, employers can be tempted to overreach in the drafting of such contractual provisions.  This is often a mistake. MCL 445.774a(1) of the Michigan Antitrust Reform Act, MCL 445.771 et seq., provides:

An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business.  To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.

What this means is that an employer’s demand from its employees for a contractual promise not to complete if the employment relationship ends has limits. 

In Michigan, a non-compete agreement is enforceable if it protects the employer’s reasonable competitive business interests. The agreement also must be reasonable in duration, geographical scope, and line of business. This is not merely rhetoric. A non-compete agreement protects an employer’s reasonable competitive business interests if it prohibits “the employee’s gaining some unfair advantage in competition with the employer.” 

Agreements that attempt to block and employee from using general knowledge or skills acquired during the employment simply will not fly.  Rather, the employer’s aim should be to prevent the anti-competitive use of confidential information.  It also can be directed toward blocking the former employee from engaging in “close contact with the employer’s customers or customer lists, or cost factors and pricing.”  

In addition, actual competition by the former employee likely will need to be shown. A recent example of this is found in Huron Technology Corp v Albert E. Sparling, where the Michigan Court of Appeals agreed with the trial court when it found that a non-compete agreement that was otherwise reasonable in duration and geographical scope was nonetheless unenforceable because, in part, the language referencing the former employees involvement with “any products or service competitive with a product or service offered by the Company” was an unreasonably broad prohibition. 

The appellate court concluded that because the non-compete agreement prohibited the former employee from working for any business that was in remote competition with the plaintiff, it was unreasonably restrictive.  Put simply, the employer’s contract failed because it could not demonstrate that the former employee was actually competing as opposed to merely operating in the same market.

The moral of the story is that more is not always better.  Non-competition language should be tailored to protect legitimate business interests.  Where the competitive restriction is not reasonably tailored, and instead only renders a former employee unemployable without a showing of actual competition, don’t be surprised if a judge pulls out his or her big red pen and rewrites your contract.

Play it safe, be reasonable and craft non-compete provisions that protect against actual competition.  Measures that merely appear punitive toward former employees will not be enforced, and what the judge leaves you with might seem worse than having no agreement at all.