Employers commonly require newly hired employees to sign a non-compete agreement as a condition of their employment. In this regard and under Michigan law, employers may obtain from an employee an agreement or covenant that protects an employer's reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business. MCL 445.774a(1).
Basics of Enforceable Non-compete Agreements under Michigan Law
Normally non-compete agreements are entered into at the beginning of the employment relationship. But what happens if a long-time, currently employed individual is required to enter into a non-compete agreement?
Before addressing this question, it is important to understand that to have an enforceable contract requires valid an element called "consideration," which is essentially "a bargained-for exchange." In other words, consideration consist of a benefit on one side, or a detriment suffered, or a service done on the other.
In the employment context, when an individual is offered employment, the job offer and corresponding acceptance serves as the bargained-for exchange between the employer and employee. In other words, as consideration for executing a non-competition agreement, the applicant is offered employment; Without signing the non-compete agreement, the individual would not have been employed.
In contrast, when a person already employed is asked to sign a non-compete agreement, the question becomes is continued employment sufficient consideration to have an enforceable non-compete agreement?
Continued Employment and Michigan Non-compete Law
Employers and their attorneys often refer to a case called QIS, Inc. v. Industrial Quality Control, Inc. (2004) to support the conclusion that continuation of employment is sufficient consideration to support a non-compete agreement. However, there is an argument to be made that the QIS decision is based on shaky legal ground. This is because the QIS decision relied on a federal case (Robert Half Int'l, Inc. v. Van Steenis (1991)) to support the conclusion that continued employment will support a non-compete agreement. But the Robert Half decision cited to Iowa law - not Michigan law - to support this conclusion.
This is not an academic concern. For example, a former colleague recently asked me my thoughts on non-compete agreements and continued employment (he bought lunch so I didn't mind sharing the above insight). Apparently, his client, a company, received an adverse arbitration decision in a dispute involving the enforceability of a non-compete agreement that was entered into after the employment relationship began. One of the cases the company relied upon was QIS.
The arbitrator, however, rejected the contention that continued employment was sufficient consideration to support a non-compete agreement. The arbitrator's decision did not illuminate the reasons, including the shortcomings of the QIS decision for this conclusion. Nonetheless, it does illustrate what should be at least concern on every company's radar screen when it comes to requiring current employees to sign new non-compete agreements.
I don't agree with the arbitrator's decision because I think the legal trend when it comes to non-compete agreements is that continued employment is sufficient consideration to support the agreement. But that doesn't change the result my friend's company got.
- Out of an abundance of caution I generally recommend that companies pay particular attention to the element of consideration when it comes to non-compete agreements. For example, we have come up with specific recommendations designed to eliminate an argument that the non-compete agreement is unenforceable for a lack of consideration.
- Also, as an aside, I am often not a fan of arbitration for various reasons, especially in employment matters. One such reason is because of "rogue" decisions like the one referenced above. Unlike a lawsuit, the arbitration decision is not likely to be subject to being corrected by of a motion for reconsideration or on appeal.
- From the perspective of a currently employed individual asked to sign a non-compete agreement, more often than not you be given the choice of signing it or being terminated. While this hardly seems like a "choice," if it is an employment at-will situation, i.e., there are no other employment contracts to consider, it is a choice that is lawful. For this reason, it is important to understand before signing the non-compete agreement what you are agreeing to and, if necessary, whether there are defenses against enforcing the restrictions ... perhaps a lack of consideration?
Jason Shinn is a Michigan attorney who focuses on non-compete law and litigation. He works with companies to draft enforceable non-compete and other employment agreements. He also has extensive experience representing employers and employees in pursuing or defending against non-compete lawsuits.