Non-compete agreements are intended to prevent unfair competition. But they often create unfair advantages against employees and start-ups. And these unfair advantages adversely affect individuals and the overall economy. At least that is the take-away from a recent op-ed in the New York Times.
Noncompete Restrictions and the Economy
Specifically, Prof. Orly Lobel wrote in Companies Compete but Won’t Let Their Workers Do the Same,
Noncompete agreements, like other anticompetitive practices, poison our economy in larger, less tangible ways. There is strong data showing they reduce employee motivation, entrepreneurship, and sharing of knowledge, the fundamental building blocks of innovation and economic growth.
In support, Professor Lobel cites to research from the Treasury Department:
The evidence shows wages in states that enforce noncompetes are 10 percent lower than in states that restrict their use. The Treasury Department concluded in its recent report that ‘by reducing workers’ job options, noncompete agreements force workers to accept lower wages in their current jobs, and may sometimes induce workers to leave their occupations entirely, forgoing accumulated human capital.’
Noncompete Agreements in Michigan
In Michigan, like many states, non-compete agreements may be enforceable if certain threshold requirements are met. Among these requirements:
- It must be reasonable as to its duration, geographical scope, and the type of employment or line of business restricted.
- The enforceability of a noncompete must protect against the employee’s gaining some unfair advantage in competition with the employer. However, the restrictions cannot prohibit the employee from using general knowledge or skill.
- It must protect an employer’s reasonable competitive business interests.
In addition to the concerns raised by Professor Lobel, it should also be noted that former employers seldom need to actually establish these elements in order to prevent an individual from working for a competitor. Instead, it is often enough to send what is called a “cease and desist” letter to the individual and new employer that threatens to sue to enforce the post-employment restrictions. This, in turn, frequently results in termination or an unpaid leave to (hopefully) resolve the noncompete dispute. Thus, even where the enforceability of the noncompete agreement is questionable, a company can prevent the individual from working.
For example, we represented an engineer in a noncompete dispute. The engineer’s employer was closing the office in the state where the engineer worked. He was given the option to relocate him and his family to another state. Instead, he chose to accept a position with a state college. But the employer sought to enforce its non-compete restrictions to prevent this employment. Ultimately, the judge agreed with our position that the non-compete was not likely to be violated by accepting the college position. But by that time, the college had hired another engineer for the position.
This example shows how employees can win a non-compete dispute while still losing. Other issues remained to be resolved in that example, but, unfortunately, the employment opportunity was gone.
A modest Proposal to Revise Michigan’s Noncompete Law
In our experience representing employers and individuals in non-compete disputes, we believe such post-employment restrictions – if used appropriately – have a legitimate and important purpose. But all too often companies or their attorneys often overreach.
In those instances, Michigan would do well to revise its non-compete statute to include a bad-faith provision. Michigan’s trade secret statute already contains a provision that allows a defendant to recover attorney’s fees if a trade secret misappropriation claim was brought in bad faith. Adding a similar provision to Michigan’s noncompete statute could deter frivolous non-compete disputes or provide some measure of recovery to an individual subject to such a lawsuit.