My former employer can't prevent me from working, right? Dissecting the Enforceability of a Noncompete Agreement
After an individual's employment is terminated and that individual begins working for a competitor or starts his or her own business, a common question asked by both the individual and the former employer is whether a noncompete agreement can be used to restrict one's post employment opportunities.
The short answer is ... well, there really is not a short answer because the enforceability of a noncompete agreement will depend upon any number of facts and circumstances.
Having said this (isn't it just like a lawyer to talk out of both sides of his mouth?) under Michigan law, noncompete agreements are enforceable as a matter of course, but such enforcement is subject to numerous requirements, some of which are discussed below.
Employers and Employees May Enter into Noncompete Agreements under Michigan Law.
Under the Michigan Antitrust Reform Act (MARA), MCL 445.771 et seq., an employer and employee are free to enter into an agreement to protect the employer’s “reasonable competitive business interests” and to prevent post employment competition by the employee, as long as the agreement is reasonable in duration, geographical scope, and the type of activity restrained. MCL 445.774a. The employer has the burden of showing the reasonableness of the noncompete agreement.
Dissecting What Makes a Noncompete Agreement Enforceable or Unenforceable
So let's dissect exactly what an employer or employee should consider in determining what impact a noncompete agreement will have on future employment opportunities and competitive interests.
- What is Protectable as a "competitive business interests?
Noncompetition agreements may be used to protect interests such as “trade secrets, confidential information, close contact with the employer’s customers or customer lists, or cost factors and pricing.” In essence, if something provides your business with an advantage over your competition, it should be a "competitive business interest" that is worth protecting.
- What is not Protectable as a "competitive business interest?
Noncompete agreements cannot, however, prohibit future use of an employee’s “general knowledge or skill.”
- The Scope of the Restriction Must be Reasonable.
The noncompete restrictions that must be "reasonable" generally involve geography and time, i.e., how long is the restriction in place? In this regard, the Devil is certainly in the details and it is those details that will drive the analysis to determine if a noncompete agreement will be upheld as reasonable or struck as unreasonable.
In dissecting those details, the following considerations will be critical to the analysis of the enforceability of a noncompete agreement:
- Broad Geographic Limitations May be Reasonable. The reasonableness of a geographic restriction will depend on the nature and scope of the employer’s business and the nature of the employee’s duties and responsibilities. Under some circumstances, an employer may be entitled to a global restriction to protect the employer’s reasonable competitive business interests. For instance, applying Michigan law, a worldwide noncompetition agreement has been considered “reasonable if the employer actually has legitimate business interests throughout the world.” In that case (Superior Consulting) the employer conducted business in 43 states and several foreign countries, which supported the court's conclusion that the noncompetition agreement's unlimited geographical scope to be reasonable.
- Broad Geographic Limitations May be Unreasonable. The geographic scope of In other cases, the courts have used their discretion to limit the geographical scope of an agreement to a rather small area. For example, in Robert Half Int’l, Inc v Van Steenis, 784 F Supp 1263 (ED Mich 1991), where the defendant provided the same services as his former employer, the court limited the geographical scope to a 50-mile radius of the former employer’s offices.
- The Duration of a Noncompete Agreement Must Be Reasonable. Similar to geography, the reasonableness of a time restriction in a noncompete agreement will depend upon the facts and circumstances involved. While each situation should be independently assessed, as a general rule of thumb, six months to a year will often be upheld as reasonable. But again, there is no science to this determination and there will often be circumstances that permit this time to be expanded.
Noncompete agreements involve an area of law that both employers and employees should not leave to chance because there are significant ramifications to both. Further, noncompete law is very specialized and often very fact intensive when it comes to the enforceability of a noncompete agreement and knowledge of how the law may apply to your particular situation or industry is critical for drafting an enforceable noncompete agreement.
In addition to the legal issues discussed above, drafting a noncompete agreement that is likely to be upheld requires careful attention to its practical application. For example, a noncompete agreement drafted too broadly that effectively eliminates an individual from being able to work in any capacity has little chance of being enforced.
For more information about drafting enforceable noncompete agreements, please contact Jason Shinn. Also, see What Happens When a Noncompete Agreement is Violated? A Blueprint for Noncompete Litigation, for more information about enforcing or defending against a noncompete lawsuit.