Abraham Lincoln once noted that if he had six hours to chop down a tree, he would spend the first four sharpening the axe. For employers, that sort of up-front attention to details is especially important when it comes to non-compete agreements. Otherwise, as a recent Michigan Court of Appeals illustrates, the only thing likely to be cut down is the employer’s noncompete agreement and any chance of enforcing it against a former employee.
Specifically, in Huron Technology Corp. v Sparling (9/11/2014) the Plaintiff (the former employer) sued Defendant (the former sales employee) for allegedly breaching a noncompete agreement. The plaintiff sought to enforce the non-compete agreement after the Defendant resigned from Plaintiff and went to work for another company in the same industry.
The trial court found that the non-compete agreement, although reasonable in duration and geographic scope, was unenforceable as a matter of law because it did not protect plaintiff’s reasonable competitive business interests and was an unreasonably broad prohibition on field of employment. The former employer appealed this decision.
The Court of Appeals agreed with the trial court’s decision. The Court acknowledged that while Michigan courts have upheld similar language as reasonably prohibiting employment with another business that provides the same product or services as a former employer, the current case was different enough in that the post-employment restriction was actually broader than previously enforced noncompete agreements.
By way of example, the Court cherry-picked the case of Coates v Bastian Bros, Inc, (2007). In that case the noncompete agreement was enforced. But the Court distinguished Coates because the non-compete restriction only prohibited a former employee from working for “any enterprise in competition with the Company” meaning a business that, considered in its entirety, was in competition with the former employer.
In contrast, the Court took the position that the restriction in Huron Technology’s noncompete agreement encompassed a significantly broader range of businesses in that the Defendant was prohibited from working for a business that offers a single product or service that is “competitive” with any product or service offered by the Plaintiff, regardless of whether the business is an actual competition with the former employer. In other words, the Court made the call that this restriction meant that the Defendant in Huron Technology was prohibited from working for any business that was in “remote competition with” Plaintiff and that was unreasonably restrictive. Clear as mud, right?
The Take-Away for Employers and Employees
Going back to President Lincoln, this decision should be a wake-up call for employers to sharpen their employment agreements, i.e., carefully review and (probably) update their noncompete agreements. In this regard, it is a mistake for employers to assume they can simply recite the general rule that under Michigan law a noncompete agreement is enforceable if it is within an area code of protecting the employer’s reasonable competitive business interest, and it is reasonable in duration; geographical scope; and line of business. With this in mind, a few points are worth remembering:
- First, an employer’s reasonable competitive business interest does not include protecting against the employee’s general knowledge and skill acquired during the employment.
- Second, Courts are often exceptionally critical when it comes to enforcing a noncompete restriction. And it is not uncommon for courts to go out of their way to not enforce a non-compete restriction. For example, in reaching its decision, at one point in the Huron Technology decision the Michigan State Court of Appeals cited to a Michigan Federal District Court case, which in turn cited to Iowa law in support of a legal conclusion as to why Huron Technology’s non-compete restriction was not enforceable. For this reason, if a non-compete restriction is important to the success of your business then make the investment to have it properly drafted.
- Third, and building on the preceding point, the Huron Technology case illustrates that a non-compete restriction is not a “one-size fits all” situation. Instead, noncompete restrictions need to be carefully drafted for your particular business situation in terms of the industry and employee position. What may be enforceable in one industry or for one position may not be in another situation.