noncompete agreement

Earlier this week I had the opportunity to take in an oral argument on a motion to dismiss filed in a non-compete lawsuit filed in Wayne County Circuit Court’s business court (yes, this is what I do in my free time and yes I’m a nerd when it comes noncompete law). The argument was heard by Wayne Circuit Court’s newest business court judge, Hon. Lita Popke. Her analysis and ruling offer important considerations for both business owners and their former employees when it comes to the enforcement of non-compete restrictions.

Background of the Non-compete Lawsuit

BHB Investment Holdings, LLC d/b/a Goldfish Swim School of Farmington Hills, operated a swim school in Farmington Hills, Michigan. It filed its lawsuit against its former employee, a twenty-something former swimming instructor, and his new employer, Aqua Tots Canton, LLC. The individual defendant had signed a one-year noncompete restriction that prohibited him from working within so many miles of the plaintiff. Goldfish had terminated the defendant who then began working for Aqua Tots, which was within the restricted geographic radius and line of business. Before working for plaintiff, the former employee swam competitively in high school and to some extent in college.

As previously noted here, non-competition restrictions prohibit an employee from going to work for a competitor of a former employer. However, non-competition restrictions are often carefully and critically scrutinized by Michigan Judges because they restrain trade. For this reason, in analyzing the enforceability of noncompetition provisions, a judge focuses on balancing the protection of the legitimate business interests of the employer against the public policy prohibiting restraints of trade.

The Judge’s analysis at the hearing made many important points relevant to enforcing non-compete restrictions. Here are two points that stood out:

  1. First, it was evident from Judge Popke’s questions and comments that she had spent time reviewing the briefs and exhibits. And this level of preparation made it clear that an employer hoping to enforce a noncompete agreement cannot expect to just show up with a signed noncompete agreement and expect to have the court rubber stamp it for enforcement. In this regard, Goldfish claimed it had a legitimate business interest in restricting its former employee from working for Aqua Tots and from using Goldfish’s 40+ page swimming instructional manual. Goldfish emphasized it considered the manual, its customer list, and its swimming strokes to be proprietary and confidential (swim strokes like “monkey arms”). But Goldfish failed to offer any evidence that it’s former employee took Goldfish’s instruction manual or customer list. It also could not show it had lost any customers. Conceding this point, Goldfish next argued that its former employee’s access to and knowledge of the instructional materials made it inevitable that he would use the “confidential” materials for the benefit of his new employer. This argument was also quickly shot down as Judge Popke noted that the swim strokes taught by Goldfish – whether called something unique or not – were the same strokes taught at any other swim school. Further, any parent sitting through their child’s class would be exposed to the instructional materials, including the “proprietary” swim strokes used by Goldfish. In other words, once taught to the kids, this information was in the “public domain.”
  2. Second, the Court then turned to whether Goldfish’s non-compete restriction protected a legitimate business interest as required under Michigan non-compete law. The short answer was “no.” Specifically, Judge Popke noted that Goldfish had hired the defendant employee for his considerable competitive swimming experience. In other words, the employee brought his expertise to Goldfish, not the other way around. As such, Goldfish was merely seeking to restrict its former minimum-wage employee from using his skills to earn a living.

For these reasons and other reasons stated on the record, the court granted the motion to dismiss Goldfish’s lawsuit to enforce its noncompete agreement, noting that under the facts presented, it was not even a “close call” when it came to enforcing the post-employment restrictions.

Take Aways about Enforcing Non-compete Restrictions

In listening to the oral argument, it was clear that Judge Popke was not overtly hostile towards non-compete restrictions or their intended use, noting that such agreements will be enforced pursuant to Michigan law. But Goldfish’s problem was it did not pay close attention to that law with respect to supporting its claim. Employers frequently make this mistake (See Enforcing a Noncompete Agreement Takes More Than Bluffing).

In fact, in numerous instances we have challenged non-compete restrictions by focusing on the purported business interest to be protected by the non-compete agreement. For example, this strategy recently paid off in a non-compete lawsuit filed in July 2015 in Oakland County Circuit Court. In that case, we defended a former IT professional sued by his former employer, HTC Global Services, Inc. The IT professional had been recruited and eventually hired by HTC Global’s customer, State Farm. HTC Global claimed this direct hire violated its standard non-compete restriction.

We argued in court filings, however, that the non-compete restriction did not protect a legitimate business interest as required under Michigan non-compete law (MCL 445.774a) because HTC Global’s former employee was not working for a competitor but, instead, HTC Global’s customer. Multiple instances from Plaintiff’s corporate representative’s deposition testimony supported this argument. In sum:

Again, I’m saying that while he was with State Farm, he also gained knowledge and everything of HTC.  So working at a competitor at that same client, we would be concerned of what was being shared(Defendant’s Supplemental Opposition to HTC Global’s Motion for Preliminary Injunction) (empasis added).

In other words, the stated “legitimate business interest” HTC Global sought to protect was preventing its employees from working for a competitor to the disadvantage of HTC Global. However, in this instance, the customer made the decision to recruit and directly hire HTC’s former employee. And under those circumstances, HTC only sought to restrict its former employee from working for a company that did not compete against HTC Global and from using his considerable IT related education, skills, and knowledge.

The judge initially assigned to this non-compete dispute had denied HTC Global’s motion for preliminary injunction, which was later scheduled for an evidentiary hearing. However, after making the above arguments and a week before the evidentiary hearing was to take place, HTC Global agreed to settle on favorable terms. But had this matter gone forward, we were confident that the evidence supported a finding that HTC Global’s non-compete restriction would have been found unreasonable because it did not protect a reasonable competitive interest under the circumstances presented.

For more information about enforcing or disputing non-compete restrictions, contact Michigan attorney Jason Shinn. Mr. Shinn routinely represents both companies and individuals in non-compete lawsuits. This litigation experience also allows Jason to collaborate effectively with employers in drafting non-compete agreements tailored to business needs and minimizing the risks that such post-employment restrictions will not later be enforceable.