Noncompete Hurdle to Innovation.jpgNoncompete agreements and other restrictive covenants are customarily found in employment agreements and provided for in the sale of a business.

In the employment context, companies simply do not want a former employee to take its business and set up shop or to go work for a competitor. In connection with the sale of a business, the buyer does not want the seller competing with the buyer who has paid for the business.

In each situation, there are certainly legitimate business interests to be protected and justifications for enforcing a noncompete agreement. But outside these immediate stakeholders – employees and employers – does society benefit from having noncompete agreements enforced?

The answer to this question probably depends upon your perspective. And having the benefit of representing both companies and individuals in noncompete disputes, I can certainly appreciate the diverging views on both sides of the question. But there is scholarly evidence that outside of these immediate stakeholders, enforcement of noncompete agreements hinders innovation.

Specifically, a 2011 report (Non-Compete Covenants: Incentives to Innovate or Impediments to Growth (May 28, 2009)) by a management professors Olav Sorenson and Sampsa Samila found evidence that the enforcement of noncompete agreements impeded innovation. The authors noted: 

… [T]he enforcement of non-compete clauses significantly impedes entrepreneurship and regional growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to regions in states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict them has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment.

Perhaps in response to such findings, Michigan legislation has been introduced in the last couple of years that restricted the use of “afterthought” non-compete agreements, i.e., noncompete agreements entered into after an individual begins employment. However, that legislation stalled and there is no indication on the legislative horizon that it will be revived.   

Old Controversy, Same Contention 

Controversy and contention over the use and enforcement of noncompete agreements dates back to the early eighteenth century. Bishara, Norman and Martin, Kenneth J. and Thomas, Randall S., When Do CEOs Have Covenants Not to Compete in Their Employment Contracts? (October 18, 2012) (citing the 1711 case of Mitchel v. Reynolds, (1711) 24 Eng. Rep. 347 (Q.B.); I P. Wms. 181).

While under current Michigan law there is no controversy as to whether noncompete agreements can be enforced, the use and enforcement of noncompete agreements is no less contentious. And when it comes to contention, a multitude of issues can and often will be at issue in a dispute over a noncompete agreement. But enforcing or challenging the enforceability of a noncompete agreement under Michigan law invariably boils down to four issues: 

  1. Does the agreement protect a legitimate business interest?
  2. Is the duration reasonable?
  3. Is the geographical restriction reasonable?
  4. Is the type of employment or line of work restriction reasonable?

The challenge for both employers and individuals, however, is identifying and organizing the facts within the framework of these issues to build a defensible position. And similar to Mr. Shakespeare’s observation that “the devil can cite Scripture for his purpose,” individuals and employers will often find support for their respective positions within the noncompete agreement and the employment relationship when it comes to the enforceability of a noncompete agreement.  

For more information about Michigan noncompete law or to speak with a noncompete attorney, contact Jason M. Shinn. He has drafted and negotiated noncompete agreements on behalf of employers and individuals since 2001. Mr. Shinn has also negotiated pre-lawsuit resolutions to noncompete disputes and, when necessary litigated the enforceability of noncompete agreements in Ohio, Michigan, and federal courts.