Under Michigan law, noncompetition agreements (sometimes referred to as covenants not to compete or restrictive covenants) are generally enforceable as long as the restriction is reasonable as to subject matter, geographical scope, and duration.
But recently proposed legislation would significantly limit Michigan’s noncompete law, which is found in Michigan’s Antitrust Reform Act (MARA), MCL 445.771 et seq.
Specifically, the proposed noncompete amendment (S.B. 0786) reads as follows:
An employer shall not require and a Court shall not enforce an agreement or covenant under this section as a condition of employment if the employer did not inform the employee of the requirement at or before the time of the initial offer of employment.
This proposed amendment would apply only to agreements entered into after the effective date of the amendment.
Criticisms of the Proposed Noncompete Legislation
As proposed, both employers and employees should be concerned about limiting the enforcement of noncompete agreements. Consider for example the following:
First, the proposed amendment is overly restrictive in that employers get one shot at the beginning of the employment relationship to obtain an enforceable noncompete agreement. This may lead employers to simply require noncompete agreements for all new hires, irrespective of the actual position.
Second, the proposed noncompete legislation does not make any exceptions for situations where an employee is hired into one position not subject to a noncompete agreement but is later promoted within the company into a position that is covered by a noncompete agreement.
For example, a noncompete agreement may not be necessary for a person hired to simply perform administrative work/data processing in a sales office. But an employer would likely want that employee to agree to a noncompete agreement if he or she is later promoted to a sales position where there is direct access to customers, highly confidential pricing information, product or service development, customer databases, marketing information, etc.
Under this scenario and the proposed legislation, an employer may bypass internal promotions and look to hire a new employee who could then enter into the required noncompete agreement?
Improving the Proposed Amendment Noncompete Legislation
I spoke with a representative from Senator Rocca’s office (who was very helpful and knowledgeable) about the motivation for the noncompete legislation. In sum, Senator Rocca’s focus for proposing this amendment is to protect individual employees with little to no leverage after being hired who are then asked to enter into a noncompete agreement.
But rather than handcuffing both employees and employers, I would rather see an amendment that simply specifies the consideration that is required for a noncompete agreement obtained post hire to be enforceable.
In this regard, Michigan, like most jurisdictions, routinely enforce noncompetition agreement signed by newly hired employees because employment alone is sufficient consideration for the noncompetition commitment.
But the enforceability of noncompete agreements entered into by individuals already employed and later asked to sign a noncompete agreement in exchange for only continued employment is not so clear under Michigan law.
This is because Michigan’s highest court has not addressed this issue. And lower courts have done so only in unpublished opinions, which have have no precedential effect under the Michigan Court Rules (See MCR 7.215(C)(1)).
As to those unpublished opinions, Michigan Courts have concluded that continued employment is sufficient consideration to support the validity of a noncompetition agreement. See Camshaft Mach Co v Rose, No 114314 (Mar 7, 1990). Camshaft involved an at-will employee who was already employed and later was required to sign a noncompetition agreement. The employee received nothing other than continued employment in exchange for signing. One year later the employee resigned and joined a competitor in violation of the noncompete agreement, which resulted in litigation and eventual court opinion that the noncompete agreement was enforceable.
Based on my experience in representing both employers and employees in noncompete legal issues, imposing an outright ban on enforcing noncompete agreements after the initial hire will not benefit either employers and employees.
Instead, both sides would be better served with a clear delineation as to the circumstances of when a post hire noncompetition agreement will be enforceable. Regardless of whether it is legislatively determined that continued employment will be sufficient or if some other additional consideration will be required, e.g., a one time payment, a promotion, or other benefit, at least both employers and employees will have the certainty that is presently lacking under current Michigan noncompete jurisprudence.
The proposed legislation has been referred to the Economic Development Committee and we will continue to monitor it.