Michigan Court Cuts Down Non-Compete Agreement

noncompete agreementAbraham Lincoln once noted that if he had six hours to chop down a tree, he would spend the first four sharpening the axe. For employers, that sort of up-front attention to details is especially important when it comes to non-compete agreements. Otherwise, as a recent Michigan Court of Appeals illustrates, the only thing likely to be cut down is the employer’s noncompete agreement and any chance of enforcing it against a former employee.

Specifically, in Huron Technology Corp. v Sparling (9/11/2014) the Plaintiff (the former employer) sued Defendant (the former sales employee) for allegedly breaching a noncompete agreement. The plaintiff sought to enforce the non-compete agreement after the Defendant resigned from Plaintiff and went to work for another company in the same industry.

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 plaintiff’s reasonable competitive business interests and was an unreasonably broad prohibition on field of employment. The former employer appealed this decision.

The Court of Appeals agreed with the trial court’s decision. The Court acknowledged that while Michigan courts have upheld similar language as reasonably prohibiting employment with another business that provides the same product or services as a former employer, the current case was different enough in that the post-employment restriction was actually broader than previously enforced noncompete agreements.

By way of example, the Court cherry-picked the case of Coates v Bastian Bros, Inc, (2007). In that case the noncompete agreement was enforced. But the Court distinguished Coates because the non-compete restriction only prohibited a former employee from working for “any enterprise in competition with the Company” meaning a business that, considered in its entirety, was in competition with the former employer.

In contrast, the Court took the position that the restriction in Huron Technology’s noncompete agreement encompassed a significantly broader range of businesses in that the Defendant was prohibited from working for a business that offers a single product or service that is “competitive” with any product or service offered by the Plaintiff, regardless of whether the business is an actual competition with the former employer. In other words, the Court made the call that this restriction meant that the Defendant in Huron Technology was prohibited from working for any business that was in “remote competition with” Plaintiff and that was unreasonably restrictive. Clear as mud, right?

The Take-Away for Employers and Employees

Going back to President Lincoln, this decision should be a wake-up call for employers to sharpen their employment agreements, i.e., carefully review and (probably) update their noncompete agreements. In this regard, it is a mistake for employers to assume they can simply recite the general rule that under Michigan law a noncompete agreement is enforceable if it is within an area code of protecting the employer’s reasonable competitive business interest, and it is reasonable in duration; geographical scope; and line of business. With this in mind, a few points are worth remembering:

  • First, an employer’s reasonable competitive business interest does not include protecting against the employee’s general knowledge and skill acquired during the employment.
  • Second, Courts are often exceptionally critical when it comes to enforcing a noncompete restriction. And it is not uncommon for courts to go out of their way to not enforce a non-compete restriction. For example, in reaching its decision, at one point in the Huron Technology decision the Michigan State Court of Appeals cited to a Michigan Federal District Court case, which in turn cited to Iowa law in support of a legal conclusion as to why Huron Technology’s non-compete restriction was not enforceable. For this reason, if a non-compete restriction is important to the success of your business then make the investment to have it properly drafted.
  • Third, and building on the preceding point, the Huron Technology case illustrates that a non-compete restriction is not a “one-size fits all” situation. Instead, noncompete restrictions need to be carefully drafted for your particular business situation in terms of the industry and employee position. What may be enforceable in one industry or for one position may not be in another situation.

Contact attorney Jason Shinn for more information about Michigan non-compete law, including drafting and enforcing noncompete restrictions.

Should My Business Use an Arbitration Agreement for Employment Disputes?

Employment Dispute ArbitrationA frequent question that employers have when it comes to employment contracts and policies is whether the company should use an arbitration procedure for resolving disputes.

While there is not a “right or wrong” answer to this question, I tend to recommend employers reconsider using arbitration for resolving employment disputes. Two important factors for recommending against employer required arbitration resolutions programs are as follows:

Initial Cost of Arbitration vs. Court Proceedings

When an employer is sued in state or federal court there is no court fee imposed on the employer at the outset.

In contrast, employers relying on arbitration often rely upon the American Arbitration Association (AAA) for administering the procedure. Under AAA’s Employment Arbitration Rules and Mediation Procedures, employers are looking at fees that range from $1,350 to $1,800 for responding to an employee’s claim and $1,550 to $2,000 for initiating a claim against an employee.

In judicial proceedings, neither side pays for a judge’s time. That is not true for arbitration. Again, under the AAA’s Employment Arbitration Rules and Mediation Procedures, hearing day fees are charged as follows:

  • For each day of hearing held before a single arbitrator, an administrative fee of $350 is payable by the employer.
  • For each day of hearing held before a multi-arbitrator panel, an administrative fee of $500 is payable by the employer.

In the big picture, these costs may make sense. But these are costs, nonetheless, that need to be factored into an employer-required employment arbitration program.

Arbitrators vs. (Run-away) Juries

One of the most common reasons to choose arbitration over judicial proceedings is to avoid a jury trial. Or more specifically, the avoidance of a potentially plaintiff-friendly, and overly-generous jury.

In contrast, arbitrations are usually heard by a single arbitrator or three-arbitrator panel who often have substantial knowledge and experience in the area of employment law. Certainly not a guarantee an employer will receive a favorable decision, but the belief that arbitrators tend to be both more predictable in decision-making and reasonable in awarding damages than juries can provide a warm and fuzzy feeling to employers.

But this concern overlooks reality; very few civil cases are actually tried before a jury. For example Hon. Denny Chin noted that in the twelve-month period ending September 30, 2011, only 1.1% of civil cases—all civil cases in the country—reached trial, both jury and nonjury. See Summary Judgment in Employment Discrimination Cases: A Judge’s Perspective (2013). Summary judgment – a motion filed to dispose of all or part of a case – has become one of the most common ways to resolve employment discrimination cases, which eliminates a jury from deciding the matter. 

In sum, analysis of federal case law shows that employees who sue over discrimination lose at a higher rate in federal court than other types of plaintiffs and they judges are more likely to dismiss their cases.

Conclusion

Considering whether to implement a system requiring the arbitration of employment disputes will depend upon your company’s particular circumstances, goals, and historical HR risk-management issues. In weighing the advantages and disadvantages of employment arbitration, the two considerations discussed above are among the many that employers will need to consider. 

For more information about investigating and responding to employment disputes, including drafting employment disputes policies and procedures, contact attorney Jason Shinn. Mr. Shinn is a Michigan employment attorney who has collaborated with a range of employers since 2001 to address employment law compliance issues, as well as defending those clients in state and federal courts. 

Proposed Changes Affecting Employment at Michigan Home Help Care Agencies

Regulations and Red Tape When it comes to establishing basic terms and conditions of employment, such as hiring someone as an independent contractor or as a W-2 employee, business owners generally enjoy significant leeway. But this could change for certain Michigan businesses providing home help care services under proposed changes by the Michigan Department of Community Health (MDCH). This is because the MDCH is proposing to radically intrude into a company’s employment operations by prohibiting the hiring of independent contractors and restricting the hiring of certain family members.

Specifically, the MDCH in a notice of proposed policy changes bulletin advised that the following restrictions will be implemented beginning October 2, 2014:

  • No Independent Contractors – The use of contract employees (1099 subcontractors) will no longer be allowed in the Home Help program. Thirty days prior to this deadline, MDCH will notify the beneficiaries served by the agency, the beneficiaries’ DHS Adult Services Specialists and the provider agencies so that beneficiaries can make alternative arrangements, if necessary.
  • Restricted Use of Family Members - Members of a beneficiary’s immediate family (parents, adult children or siblings) will not be able to provide Home Help services to the beneficiary as an employee of an agency. A beneficiary’s family members (excluding legally responsible adults) can provide services to that beneficiary as individual Home Help workers.

The deadline for submitting a response to these proposed changes is August 31, 2014. As noted above, if these changes are implemented, they would become effective October 2, 2014.

For background purposes, the Home Help program is administered by the MDCH in cooperation with the Michigan Department of Human Services (DHS). The Home Help program provides in-home personal care services to individuals who need hands-on assistance with Activities of Daily Living (ADLs) and assistance with Instrumental Activities of Daily Living (IADLs). MDCH is responsible for approving agency providers for participation in the program.

A number of our law firm clients would be affected by these proposed changes and we are currently evaluating the appropriate response and possible legal challenges if the regulations are actually implemented. If you are a home help care service provider with questions about this article or these proposed regulations, feel free to contact attorney Jason Shinn.

Common Mistakes that Derail Enforcement of a Noncompete Agreement

Common Mistakes that Derail Noncompete AgreementsOur law firm was recently hired to represent clients – former employees – being sued for allegedly violating a noncompete agreement, trade secret misappropriation, and other business related claims.

As is typical with these sorts of cases, the Plaintiff, the former employer, was seeking injunctive relief in the form of a temporary restraining order (TRO) to shut-down the former employees’ competing business. Our law firm filed an opposition to the Plaintiff’s motion for TRO and argued the motion before the judge.

After the legal dust settled, the judge agreed with our position that a TRO should not be issued and “strongly” encouraged Plaintiff to consider settling due to issues we raised about the noncompete agreement. While the case is far from over, winning this initial TRO “battle” goes a long way towards winning the noncompete war. 

Common Mistakes in Enforcing a Noncompete Agreement

Each noncompete and business dispute is certainly unique, but our law firm’s recent defense against the above noncompete violation relied upon common fact patterns in such disputes. And these issues should be a cautionary tale for employers and individuals.

  • First, noncompete agreements need to be consistent within the agreement itself and also in the larger context of other employment agreements and policies. This point is especially critical for employers who, under basic contract law, should expect to have any ambiguity construed against the employer. 
  • Second, noncompete agreements are going to be enforceable only to the extent they are reasonable. And what is reasonable in one business context is not necessarily reasonable in another.

In our experience, this is a point of frustration for both employers implementing a non-compete agreement or advising entrepreneurs looking to start a competing business; Both want a bright-line conclusion of whether the noncompete agreement is or is not enforceable.

Seldom will an attorney be able to give such a conclusion. Our response to this issue, however, is to provide a client with a range of potential outcomes, identify where the client is comfortable in terms of being on this range, and then working to understand  the clients business to maximize the factors for enforcing a noncompete agreement or distancing and/or distinguishing why the new business or former employee is not in violation of the noncompete agreement.

For more information about Michigan noncompete law, as well as drafting, enforcing, or defending against a noncompete violation, contact attorney Jason Shinn. Since 2001, his practice has focused on noncompete legal issues involving both employers and employees.

Michigan Experiments with Business Courts

Michigan Noncompete LawsuitsIt is not often that the legal system and innovation are used (positively) in the same sentence.

However, Michigan has implemented a statewide innovative “business court” system to handle legal disputes that fall into a number of categories associated with business matters.

I’m currently sitting in Wayne County Circuit Court’s Business Court for a breach of contract, non-compete, and related claims. This court includes Detroit and surrounding metro areas. The Michigan Supreme Court appointed Judge Daniel Ryan, Judge Susan Borman, and Judge Brian Sullivan as the designated Business Court Judges for Wayne County.

A few of the requirements for business court cases in general include:

  • All Business Court cases must be eFiled and will be assigned by blind draw to one of these judges.
  • If the case involves a business or commercial dispute as defined in the Business Court Act, MCL 600.8031, pursuant to MCR 2.112(O), parties must verify that the case is subject to being assigned to the Business Court. Breaches of noncompete and employment agreements fall into this category.
  • When filing a Business Court case, the party filing a complaint must give written notice with the initial pleading that the case qualifies for the Business Court. 
  • Parties are required to attach a Notice of Assignment to the Business Court form to the complaint (or responsive pleading if the case qualifies for the Business Court but was not noticed as such in the initial complaint, or if the counterclaim qualifies the case as a Business Court case.
  • Effective September 1, 2014, if a Business Court case is not identified as such using the Notice of Assignment or otherwise verified, and it is later identified as such, a sanction of up to $100 may be assessed after a hearing pursuant to MCR 2.114 as set forth in the Business Court Eligibility/Show Cause Order.

For more information on what criteria to use in determining whether a case qualifies as a business Court Case see this link – Notice of Business Court Implementation. For more on the Wayne County Circuit Court’s E-Filing Guidelines, please see Wayne County Circuit Court’s website.

Closing Thoughts on Michigan Business Courts

My law firm has represented clients in all three major Metro Detroit Business Courts: Wayne County, Oakland County, and Macomb County. These matters involved non-compete disputes, breach of contract claims, and related business disputes.

Based on this experience, the common focus businesses will find is on early settlement discussions and an expedited (comparatively speaking) litigation schedule. For example, in one noncompete dispute pending in Wayne County Circuit Court, the judge ordered dispositive motions presenting any questions of law to be filed prior to a settlement conference that was scheduled shortly after the complaint and answer being filed. While such an aggressive approach is not always successful, it was in this instance in that the case settled for something close to nuisance value and an amount well short of the cost of conducting discovery.

In another business court case in Oakland County, the parties were given a shortened discovery schedule and the case settled at mediation approximately 8 months later – a time frame equivalent to a competitive 100 yard dash time.

Litigants in business courts will also find that judges are more active in trying to resolve discovery disputes. In another matter, in Macomb County Circuit Court, our judge told the attorneys that before any motions could be filed, to first contact his office with the intent being to first try and resolve the matter without the need for preparing, filing, and appearing at a hearing on the motion.

Responding to Employee Absences Following Historic Metro Detroit Flood

Natural Disaster and Employment Leave of Absences

Flooded Metro Detroit Highway

This past week Metro Detroit was hit with a record rainstorm. After it was all said and done, many of the area freeways and streets were literally underwater and homes and basements were flooded with water and sewage.

It was also days before some of the affected roads were fully reopened. An understatement to say it was not a good day for the “D.”

What is also not good following a natural disaster like this is not understanding how employment laws may be implicated. For example, in Lane v. Pontiac Osteopathic Hosp., (2010), a case filed in the Eastern District of Michigan, an employee claimed it was medically necessary to clean the flooded basement because his mother had hepatitis and the stagnant water was a “breeding ground for the disease.” 

In response, the the employee took off eight days of work without prior employer approval. He conceded that four of the days were “probably” not covered by the applicable employment statute (the Family Medical and Leave Act). But the employee claimed three days should have been covered because he was working to clean up flooding at his mother’s home.

The court, however, disagreed and concluded that the absence was not medically necessary. In this regard, plaintiff had previously obtained medical certification showing that he needed to assist his mother with meals and to transport her to doctor’s appointments. But that certification did not extend to the clean up activities due to the flooding and, therefore, was not covered by his statement of medical necessity.

The court also believed that the plaintiff employee’s leave did not qualify for FMLA leave because there was no showing that his mother’s basement had to be immediately cleaned for her basic medical, hygienic, or safety needs and that he had to do it because she could not. Accordingly, the court granted summary judgment on the employee’s FMLA interference claim.

Closing Thoughts

Employers, especially small businesses, are often torn between two competing interests: Employers often want to help their employees to recover following a natural disaster. But this motivation can run up against the reality of running a business, e.g., business continuity and continued revenue. 

But by planning ahead and recognizing the responsibilities under the applicable employment laws following a natural disaster, employers can help employees to understand what options exist and do not exist. An important step for employers to take is making sure to provide employees with information on how to report to work following an emergency. It is equally important, however, for employees to make sure to communicate with their employers and understand their options. 

With this information, both employees and employers will be in a better position to respond when disaster strikes, while at the same time minimizing exposure to liability and helping employees to recover. 

Discrimination Lawsuits Aren’t Rorschach Tests – They Should Not Be Subject to Interpretation

Employment DiscriminationThe Michigan Court of Appeals sent a strong message that employment lawsuits should not be analogous to a Rorschach test, i.e., subject to interpretation.

Instead, there are certain fundamental pleading requirements that must be alleged in order to state a claim; Failing to follow these requirements may result in a dismissal of the claim. The decision also highlights an important distinction between race-based discrimination and a hostile work environment based on race.

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Mismanaged Human Resources Can Derail Your Start-up Company

HR Issues derail start-ups Human resources and overall HR risk management is critical to any company’s success. Unfortunately, these matters often take a back-seat at start-up companies focused on getting to market. But overlooking HR issues is a surefire way to disrupt the business rather than the market.

This all too common story line recently played out at GitHub, a San Francisco-based start-up. As reported by the Wall Street Journal (by Evelyn Rusli) an unnamed employee using an anonymous messaging app sent a company wide message that, “The self proclaimed Queen of GitHub is leaving her throne. The masses cheer.” Shortly thereafter, the “Queen” a/k/a Julie Ann Horvath, unloaded a barrage of allegations that GitHub was a hotbed of gender based harassment. Among these allegations:

  • She felt harassed by the president, Preston-Werner, and his wife who was not a GitHub employee;
  • A developer altered/deleted software code Ms. Horvath developed in retaliation for rejecting the developer’s romantic advances;
  • GitHub generally fostered a hostile work environment towards women. 

These allegations made their way into the Twittersphere resulting in a 24,000 followers of Ms. Horvath boycotting GitHub. And the incident lead to the company’s president stepping down amid criticism that Ms. Horvath’s situation was mishandled.

The Take-Away

I recently finished up an employment investigation matter with a lot of similarities to the GitHub matter. The lesson to be learned from both is that human resource management is not a one-time event. It is a dynamic process. It is no longer sufficient to hand out a handbook to new employees and call it a day. Or wait for someone to come forward with a complaint. This is a recipe for disaster. 

Instead, HR management – whether at a startup or an established company – requires a proactive approach. And it requires a dedicated skill-set as opposed to handing it off to an administrative assistant or payroll manager with the expectation that he or she can become an HR expert on the fly.

Is Your Non-compete Agreement Enforceable? Not Without a “Reasonable Competitive Interest”

Non-compete agreementSticking feathers up your butt, does not make you a chicken.

Tyler Durden, Fight Club

Under Michigan law, one required element for having an enforceable non-compete agreement is a “reasonable competitive business interest.” But, like the chicken quote, business owners can’t expect to just stick the phrase “reasonable competitive business interest” into an employee agreement and, without more, expect to have an enforceable non-compete agreement.

A recent example illustrates this point: I was defense counsel  in defending against allegations that a former employee breached the employer’s non-compete agreement and the successor employer had tortiously interfered with the non-compete agreement by hiring the former employee. A major defense was that the plaintiff did not have a protectable reasonable competitive business interest.

Specifically, the plaintiff claimed that certain internal forms and agreements it used in the business were trade secrets, confidential, and proprietary to the plaintiff.  Many of these forms were provided to customers and other third parties without any restrictions.

Additionally, during the course of the litigation, we discovered that a company affiliated with the plaintiff and unrelated to the defendants had actually posted on the Internet many of the very forms at issue in the litigation. In other words, how could there be a “reasonable competitive business interest” to protect if the information was already freely available? 

This is certainly the Cliff-note version of what was actually complex litigation. But the end result speaks for itself: Plaintiff’s lawsuit, which had asked for $860,000 plus early on in the case, ended up settling for $8,500. And as part of the settlement, the former employee’s non-compete was voided in its entirety. 

Conclusion

There are many issues that need to be addressed when it comes to drafting an effective and enforceable non-compete agreement. But without a reasonable competitive business interest, an employer is going to have problems enforcing a non-compete agreement.

In addressing what makes for a protectable competitive business interest, examples include detailed customer list, confidential information, trade secrets, and business goodwill. The key, however, is to tailor your company’s non-compete agreement to the business interests that allow the company to be competitive. 

For more information about drafting and enforcing non-compete agreements, as well as defending against claims non-compete violations, contact attorney Jason Shinn.

Mr. Shinn routinely works with employers to draft enforceable non-compete agreements and since 2001 he has represented employers and individuals in non-compete disputes

Extending Family and Medical Leave Act to Same-Sex Couples?

Changes-Ahead.jpgThe U.S. Department of Labor (DOL) is accepting comments on extending coverage of the federal Family and Medical Leave Act (FMLA) to same-sex couples.

This extension is in response to the Supreme Court ruling that federal benefits cannot be limited based on a definition of marriage as a union between one man and one woman, which was reached last year in United States v. Windsor, 133 S. Ct. 2675 (2013). That case found the federal Defense of Marriage Act’s definition of marriage unconstitutional for treating same and opposite-sex couples differently under federal law.

The full text of the Notice of Proposed Rulemaking (NPRM) and additional information about the procedure for submitting comments is available at this link to DOL’s website.  Comments must be received on or before August 11, 2014.

Under the FMLA, eligible employees are entitled to unpaid leave for family, medical and military-related reasons. However, an employee in a same-sex marriage may not be eligible to take FMLA leave to care for a partner, a partner’s child or a partner’s parent with a serious health condition. This would change under the DOL’s proposed rule in that same-sex marriages are given equal access to FMLA benefits currently enjoyed by opposite-sex marriages.

Interestingly, in determining the legal status of “marriages” and qualification for leave benefits under the FMLA, the DOL’s proposed rule adheres to state law where the couple was married and not their current state of residence. The DOL’s reasoning for this determination is to ensure equal protection for all valid marriages under federal law. The rule change provides married same-sex partners with leave to care for a spouse or a child or parent of the employee’s spouse.

For more information about and complying with the FMLA, contact employment attorney Jason Shinn.

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