On July 2, 2018, we defended against a motion for a preliminary injunction on behalf of our clients. Our clients were sued for allegedly breaching their non-compete agreements with their former employer and related claims.
As is often the case in non-compete litigation, numerous factual and legal issues were up for grabs when it came to obtaining injunctive relief. See What Happens When a Noncompete Agreement is Violated? A Blueprint for Noncompete Litigation. And how these matters were ultimately resolved provides critical insights for employers and individuals involved in these disputes.
Background of the Lawsuit
The Plaintiff, an insurance agency, tried to enforce its non-compete agreements against two former sales agents. One non-compete agreement prohibited the agent from working for or as a competitor within Michigan; the other banned the agent from the same, but it was limited to a 65-mile radius from Plaintiff’s office. Both non-compete restrictions broadly extended to any insurance products, rather than limited to particular lines (e.g., auto, life, property, casualty, hazard, and business).
There was no serious dispute that if the non-compete agreements were enforced per their express terms that the Defendants’ business would be shut-down; their business marketed and sold insurance products in Michigan, and it was located within miles of their former employer’s office.
Lessons from the Preliminary Injunction Hearing.
So with this backdrop, here are a few insights to consider:
- The first point, employers must properly draft and take care in handling the circumstances leading up to ending the employment relationship and enforcing a non-compete agreement. Here, among the points we successfully argued was that the state-wide ban was overbroad and, therefore not reasonable. The best evidence for this argument was the Plaintiff’s other, less restrictive non-compete restriction limiting competition within 65 miles of its office. Also, the Plaintiff had classified Defendants as “independent contractors,” not employees, which has significant legal consequences when it comes to enforcing non-compete restrictions under Michigan law.
- Second, before leaving your employer to start a competing company or to join a competitor, understand what, if any non-compete restrictions or other obligations you may have. Simply put, it makes no sense to invest in starting a new business or joining a new company only to discover such actions are contractually prohibited.
- Third, while noncompete agreements are enforceable in Michigan and other states if specific threshold requirements are met, judges have broad discretion in determining what that enforcement will ultimately look like. Here, our defense was admittedly aided by an experienced judge (Hon. Christopher P. Yates) who took the time to understand the factual and legal issues, the business interests in the matter, and how the competitive interests affected consumers. Unfortunately, not all judges will take such a reasoned approach or conduct the analysis beyond whether a non-compete agreement was entered into by the parties.
Returning to our case, while the judge entered injunctive relief, it was significantly less restrictive than what the Plaintiff sought or that was required under the non-compete agreements. For instance, Defendants could continue operating their business at its current location, which was just miles from Plaintiff’s office. Further, Defendants could market and sell a broad array of insurance products, except for a single insurance product Plaintiff described as a niche product it specialized in.
But even this restriction was limited to a 65-mile radius from Plaintiff’s office with a “big” lake comprising a large portion of this restricted geography. Thus, Defendants could sell Plaintiff’s niche product as long as it was selling to customers outside of the 65-mile radius.
This suit is not over, but this result makes for a good foundation to build upon. This is because non-compete lawsuits often turn on the success or failure at the preliminary injunction phase. Here, after the litigation dust settled, Plaintiff was left with far less than what the express language of its non-compete agreements provided. And Defendants were left with restrictions they could work with while the litigation continues.
For more information about this article, drafting noncompete agreements or litigating the breach of a non-compete restriction, contact Attorney Jason Shinn.
Since 2001, Jason has worked with companies and individuals in addressing non-compete law. This experience includes representing companies pursuing breaches of their post-employment restrictions and individuals sued for allegedly breaching their noncompete obligations.