Michigan Noncompete Agreements - Making 2013 a Better Year for Your Business

New Year Baby.jpgBusiness owners had a lot to cry about when it came to 2012 Michigan court decisions addressing noncompete agreements.

But, as discussed below, a lot of this frustration arose out of poorly drafted noncompete agreements and failing to fully evaluate the relevant circumstances involving changing employment relationships before reducing those changes to written employment agreements. 

Landscape Forms v. Quinlan, (Oct. 2012): This case involved a number of legal issues arising out of a dispute between William Quinlan, who had been employed by LFI, a closely held Michigan corporation. During his employment, Quinlan obtained stock in LFI pursuant to an employee compensation plan, which also included noncompetition provisions forbidding LFI shareholders from competing with LFI for a period of five years after ceasing to be a shareholder. Quinlan was permitted to retain his stock when his employment with LFI ended, but he contended that the noncompetition provisions were unenforceable.

For Michigan business owners, this case should be carefully understood in relation to offering employees stock options or other company ownership interests and imposing future employment restrictions under a noncompete agreement.

This is because the court concluded that the noncompetition provision at issue was not an employer-employee agreement subject to Michigan's noncompete statute (MCL 455.774a). At first, this result may seem surprising because Quinlan originally became a stockholder based on his employment and could not have become a stockholder in any other way.

But the Court's conclusion was based on the wording of the noncompete restriction, which specifically provided they were made between the company and the shareholders not employees. Accordingly, an entirely different analysis was required with respect to enforcing the noncompete restriction at issue.

The Take-Away: Companies offering employee stock or other ownership interests need to carefully evaluate such transactions in their entirety. One such consideration is whether any noncompete restrictions will be based on an employee/employer relationship or based on company ownership. Generally speaking, there may be more strategic reasons for a company to base noncompet restrictions on shareholder/ownership status as opposed to the employee/employer relationship, including the potential for obtaining broader restrictions.  

Van Tol v. Woodward, (Oct. 2012): This noncompete arose out of a very common fact pattern: An individual and employer enters into one agreement with noncompete restrictions and then later both enter into a new agreement. The question often becomes what, if any, noncompete restrictions survive. 

To illustrate this point, John L. Woodward began working for Van Tol, Magennis & Lang, Inc. (Van Tol) as an insurance agent in 1996. In September 2004, Woodward signed a new employment agreement with Van Tol. In the 2004 employment agreement, Woodward agreed that he would not compete with Van Tol for a period of three years after leaving Van Tol's employ. 

In January 2009, Woodward entered into a "Stock Redemption Agreement" with Van Tol. The agreement contained the following paragraph:

Merger. It is understood and agreed that all understandings and agreements heretofore had between the parties hereto are merged in this contract which alone fully and completely expresses their agreement. This Agreement may not be changed or terminated orally.

Ultimately, the Court decided that because there was an ambiguity as to the scope of their agreement to nullify earlier agreements, including the covenant not to compete, further litigation was necessary to resolve these fact issues.

The Take-Away: The situation of employers and employees entering into multiple agreements over the life of an employment relationship is a common occurrence. This is especially important in the context of terminations and severance packages.

In this regard, I've had a noticable uptick in the number of matters where disputes arose concerned whether prior noncompete restrictions survived a severance agreement. In representing individuals in these situations, in almost every instance a negotiated resolution was reached where the employer ended up with less in terms of noncompete restrictions than had been originally drafted.  

To avoid the uncertainty and litigation costs, any time an employer or employee is entering into an agreement, careful consideration should be given to what prior agreements may have been reached and whether any such agreements are intended or not intended to survive or otherwise be left undisturbed.

For more information about Michigan noncompete law or , contact Jason M. Shinn, who regularly represents companies and individuals in responding to Michigan noncompete issues and noncompete lawsuits.

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