Understanding Noncompete RestrictionsNot many people would jump out of a plane and then worry about figuring out what to do about a parachute on the way down. But often times individuals take that approach when it comes to starting a new business or taking a job after having signed a non-compete agreement. And that lack of planning can prove costly and catastrophic.

A former employee learned this lesson the hard way after a Michigan Circuit Court judge issued an injunction preventing him from operating his new business. See Arko Exchange v. Mehmedovic, (PDF). Specifically, the judge ruled that the former employee violated his noncompete agreement when he started up a freight-hauling business that competed against his former employer. The employee also recruited truck drivers from his former employer for his new company.

Aladin Mehmedovic, the defendant, had formed his freight hauling company (Rocket Transport, LLC) on October 14, 2013. But on January 2, 2014, Mr. Mehmedovic signed a noncompete agreement with Arko Exchange LLC, also a freight-hauling company.

The agreement provided that during Mehmedovic’s  employment and for a period of two years from the date of termination, he would not compete with Arko within Michigan, Indiana, Illinois, and Ohio. The agreement also provided that Mehmedovic could not (1) “own, manage, operate, join, control, or be employed” with any other business like Arko; (2) induce Arko’s employees to end their employment; and (3) “engage or otherwise participate in business activity directly or indirectly competitive with Arko’s business.”

On January 23, 2015, Mr. Mehmedovic left Arko and hit the ground running with Rocket, including recruiting drivers from Arko. Arko responded with its lawsuit asserting, among other claims, a breach of the noncompete agreement Mr. Mehmedovic had previously entered into, seeking money damages and an injunction to keep Rocket from operating. The Court granted the injunction finding that there was a “substantial likelihood of irreparable harm” (the magic legal words necessary for issuing an injunction) if an injunction was not granted to stop Rocket’s recruiting practices.

The Take-Away for Employers and Employees.

From the employer’s perspective, this case illustrates two critical points when it comes to protecting the company against departing employees: Vigilance and Decisiveness. More specifically, the defendant former employee left Arko’s employment on January 23, 2015 and on February 16, 2015, Arko filed suit. That is a decent turn around time in the litigation world. It also indicates that someone at Arko was closely monitoring Mr. Mehmedovic’s departure and the company was ready to take action when it had evidence of Mr. Mehmedovic’s violation of the noncompete agreement and to otherwise support its claims.

In contrast, it is not uncommon for months to go by before an employer even realizes such issues have occurred and then more time is spent deciding what to do about it. That delay harms the company’s competitive interests and erodes arguments in favor of convincing a judge to issue an injunction in the first place. For these reasons, we’ve developed for our business clients a checklist of steps to take when an employee ends his or her employment, including steps to take if there is a noncompete restriction involved.

From the employee’s perspective, signing a noncompete restriction has consequences. And if you don’t understand what you can or cannot do under your noncompete agreement that is a problem that can turn into an expensive lawsuit. And in addition to litigation costs, consider the loss of the time and money invested in starting up the business in the first place. On this point, Mr. Mehmedovic was given three options to choose from by the judge:

  1. Divest himself of any ownership interest in the company;
  2. Move the business outside the geographic restriction area provided for under the agreement (Michigan Indiana and Ohio); or
  3. Shutdown the company.

Even if Mr. Mehmedovic’s noncompete restriction was “bullet-proof” in terms of restricting his post-employment obligations, how much better off would he have been knowing that before spending the time and money to start a new business only to be told you have three options – get rid of your interests, shut it down, or move it.

For more information about Michigan noncompete agreements, contact Michigan attorney Jason Shinn. Mr. Shinn works with both companies and individuals when it comes to drafting, negotiating, and enforcing noncompete agreements. He has litigated noncompete disputes in Michigan and federal courts on behalf of employers and individuals.