Handcuff InnovationThe Wall Street Journal, by Aruna Viswanatha, recently asked whether Noncompete Agreements Hobble Junior Employees. Spoiler alert — they do. According to the Journal:

Noncompete agreements—common in computing and engineering jobs, where proprietary technology can be at stake—are spreading to other industries and stretching further down the corporate ladder. Labor-law experts say some employers appear to be using them to prevent turnover among rookie employees they have spent time and money training.

This conclusion is consistent in Michigan. In 1985 after Michigan repealed its statutory ban against enforcing non-compete restrictions, the mobility of Michigan workers dropped by 8.1% according to research from Josh Lerner and Scott Stern. See Non-compete Agreements: Barriers to Entry… and Exit? Their research found:

Michigan workers with highly specialized skills were twice as likely to remain loyal to their employers following the implementation of non-compete enforceability. This result is likely due to the difficulty workers with specialized skills experience in finding work within their industry, as opportunities to use those skills are explicitly foreclosed by non-compete agreements.

Of further note, based on research we discussed back in September 2013, noncompete restrictions also impede innovation in addition to employee mobility. See “Noncompete Agreements – A Hurdle to Employment and Innovation.”

Legitimate reasons for using noncompete agreements

Under a non-compete restriction, an employee agrees not to work for a competitor or to start a competing business for a period after the employment terminates – often whether by resignation or termination. Such restrictions are intended to allow companies to protect their business interests, including confidential information such as trade secrets and customer identities.

These limitations often apply to specific lines of business, are limited to defined geographic areas, and for particular time periods. Noncompetition are subject to state law, which means restrictions in one state may not be enforced in another. Accordingly, it is critical for companies to review state law to determine what types of restrictions will be enforced.

However, common to almost every state that enforces noncompete restrictions is that they must reasonable. Making this determination involves an assessment of factors, e.g., whether the provision is necessary and reasonably tailored to protect the employer’s business or goodwill.

Criticisms when it comes to noncompete agreements

We certainly encourage our business clients to have in place appropriately drafted noncompete restrictions. This is because they serve an important and legitimate role in protecting a company’s competitive interest. But even so, such protection is not without criticism or cost. Here are two significant issues we routinely see:

  • Non-compete restrictions are often abusively over-inclusive. What this means is that noncompete restrictions frequently are not limited to training and skills an employer provides to an employee during his or her employment. Instead, the restrictions limit an employee from using any prior relevant skills or experience obtained through previous employment, training, or education. We routinely represent individuals or companies that have hired individuals who have decades of experience or extensive education that are unrelated to the employer seeking to enforce the noncompete restriction. While certainly unfair, this is often legally acceptable.
  • Non-compete restrictions often favor larger companies to the detriment of individuals, start-ups, and smaller companies. This is because the cost of enforcement or defending against litigation may be prohibitive. This often results in settlements of less than meritorious claims or electing to forego enforcement of an otherwise legitimate and enforceable noncompete agreement. There are strategies to minimize this cost or to counter-claim in the hopes of recouping some measure of damages, but there will always be some investment of time and money needed to defend or pursue noncompete related litigation.

Despite these criticisms, noncompetes should be in every employer’s toolbox when it comes to protecting competitive interests. But companies need to take care in drafting restrictions that protect legitimate competitive interests and contain restrictions that will likely be enforceable and that are appropriate for the circumstances.

If not, we’ve seen time-and-time again, judges are not going to enforce noncompete agreements that do not meet these threshold requirements. See Focusing on Legitimate Business Interests Still Key to Enforcing Non-compete Agreements (Wayne County Circuit Court denied enforcement of noncompete restriction), Enforcing a Noncompete Agreement Takes More Than Bluffing (Oakland County Circuit Court denied injunctive relief against former employee in noncompete lawsuit), and CEO’s “Reckless Texting” Wrecks Lawsuit to Enforce Noncompete Agreement (Saginaw County Circuit Court denied injunctive relief against former employee in noncompete dispute).

For more information about Michigan noncompete law and the enforcement of noncompete restrictions, contact attorney Jason Shinn. He routinely represents individuals and companies in all aspects of noncompete law – from drafting, negotiating, enforcing, and defending against noncompete lawsuits.