Most business owners, at one time or another, ponder whether a noncompete agreement is a good idea. A noncompete, or covenant not to compete, is an agreement between an employer and their employee(s) that prevents the employee from working for certain competitors of the employer for a given time period once the employment ends. From the businesses perspective, a noncompete works to protect the business. An employee who obtains vital information about a business’s operations, such as its intellectual property, wants to protect that information. If the business has a proprietary method of making widgets that provides a competitive advantage over its rivals, the business wants to ensure that its methodologies are not then provided to other widget makers when employees leave.
Noncompetes have had a rocky road through Michigan courts. In 2015, a proposal was briefly floated that would ban noncompetes. Additionally, Michigan courts have a history of skepticism about the depth and scope of noncompete agreements. Thus, it is critical when drafting a noncompete for an employer, or reviewing a noncompete that an employee is being asked to sign, to understand what is allowed in a noncompete.
Under Michigan law, a noncompete agreement must be reasonable. This reasonableness standard balances the business interests of the employer versus the employee’s right to work and to earn a living. Courts generally look to four factors when evaluating whether a noncompete is reasonable: 1) the type of business conducted by the employer, 2) geographical scope of the noncompete, 3) the duration of the noncompete, and 4) the business interest(s) sought to be protected by the noncompete (the reasonable competitive business interest test).
Reasonable Competitive Business
The first three factors are mostly straightforward. For example, a noncompete with a duration of three years is unlikely to stand up in court. A noncompete with a duration of six months is more likely to withstand scrutiny. Much of the litigation involving noncompetes stems from the employer’s attempt to protect its reasonable competitive business interests. This evaluation is very fact-specific, since it considers the specific set of skills the employee possesses, the work the employee had done with the prior employer, confidential information, employer-provided specific training, and other similar aspects of the employer/employee relationship.
Courts have a long history of closely analyzing the reasonable competitive business interest(s) sought to be protected. For example, in a 2014 Michigan case, the court sided with the employee in finding that a noncompete was too broad since it prevented the employee from working for any competitor in virtually any employment capacity, and that the employer had failed to provide a reasonable business competitive business interest requiring protection under the noncompete.
Drafting a noncompete
If you are an employer considering a noncompete, many factors need to be considered. Given the reluctance of courts to enforce overly broad noncompetes, a one-size-fits-all approach will not work. A noncompete must be narrowly tailored specifically for the employer’s business interest and the employee’s line of work.
Signing a noncompete
If you are an employee asked to sign a noncompete, a careful review is necessary. Even if a noncompete- or portions of a noncompete- are unlikely to stand up in court, it is important to consider what impact the noncompete would have on the employee’s ability to work. The duration of the noncompete is one such consideration. A six-month duration is likely to withstand any legal scrutiny, and thus the employee must consider whether this time period is acceptable. Can the employee fulfill the noncompete requirements for six months while also being able to pay their bills? A noncompete is written in the best interests of the employer, and thus the employee must tread carefully.
If you are an employer considering a noncompete or need a review of a current noncompete, or you are an employee facing a noncompete or currently subject to one, please contact contact Benjamin Long of Schmidt & Long.