Foundation BlocksCrain’s Detroit, by Dustin Walsh, reported last week that this year marks the 30 year anniversary of arguably the most significant Michigan court opinion concerning non-compete agreements. See “30 Years Later, A Noncompete Ruling has Been Forged into Law.” The case referenced in this article comes from a January 17, 1985 Michigan Supreme Court decision in favor of employers who sought to restrict former employees from using client and business information after ending their employment.

The case actually involved two separate cases that were consolidated on appeal: Follmer Rudzewicz & Co. v. Kosco and Nolta-Quail-Sauer and Associates v Roche (1985). Kosco, the defendant former employee, was an accountant and in the other case, Roche was an insurance agent. Kosco’s employment agreement involved a three year limitation and Roche’s had a five year limitation period. Essentially both contracts required the former employees to pay a certain amount if they serviced their employer’s former customers within a three year time period following termination for Koche and five years for Kosco. The presumption underlying these provisions was that the former employees had access to their former employers’ confidential client information and presumably used such information to acquire the employers’ former customers.

At the time the Follmer case was decided, Michigan law considered all agreements where a person, co-partnership or corporation agreed not to engage in any employment or business, whether reasonable or unreasonable as against public policy and illegal and void. MCL 445.761. The defendant former employees claimed that this statute voided their post-employment restrictions. The Michigan Supreme Court disagreed and reasoned:

[T]he contractual provisions are not violative of the statute relied on by the defendants … The challenged contractual provisions seek to protect the employers from the use by their employees of information acquired in the course of their employment. While an employee is entitled to the unrestricted use of general information acquired during the course of his employment or information generally known in the trade or readily ascertainable, confidential information, including information regarding customers, constitutes property of the employer  and may be protected by contract  … An agreement requiring an employee to pay for using confidential information in obtaining the patronage of his employer’s customers does not violate the statute.

In essence, the Follmer/Nolta-Quail decision held the restrictions did not literally prohibit competition by a former employee but instead extracted some type of compensation or imposed some type of forfeiture on a former employee engaging in such competition based on the assumption that the former employee is paying for the value of the employer’s confidential information.

A few years later on December 28, 1987 the legislature enacted Michigan’s current non-compete law (MCL 445.774a) to clarify the legality of non-competition agreements in Michigan. The statute provides as follows:

An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.

Since Michigan enacted its non-compete statute, such restrictions have become commonplace in almost every employment relationship. And certain such restrictions are understandable where a manager or employee could exploit a company’s confidential, trade secret, or proprietary information by jumping to a competitor. However, the use of non-compete restrictions can deteriorate into the absurd. Consider for example that the Jimmy John’s sandwich franchise routinely requires its low-wage sandwich makers and delivery drivers sign non-compete restrictions. See Jimmy John’s Makes Low-Wage Workers Sign ‘Oppressive’ Noncompete Agreements. Or consider Miller, Canfield, Paddock & Stone’s Christopher Trebilcock who believes the Jimmy John’s noncompete is a legitimate way for large companies to protect against competitors using “proprietary information.” In fact, Mr. Trebilcock believes that non-compete agreements can be legitimate for a company’s janitor: “A janitor, for example, can cause just as much trouble as a CEO because they have access to information — there could be documents with sensitive material on desks or in the trash.” Noncompetes Aren’t Just for High-level Executives Anymore (subscription required).

Closing Thoughts

It’s easy to question the wisdom of companies like Jimmy John’s or attorneys advocating the use of non-compete agreements for every employee in the organization regardless of where they are in the corporate hierarchy. Research suggest that such use has a negative impact on innovation (See Noncompete Agreements – A Hurdle to Employment and Innovation?). In fact, one Michigan legislature has recently proposed a bill that would significantly scale back the enforceability of non-compete agreements. The proposed legislation is an extreme response. But based on our experience representing non-compete lawsuits filed against former administrative assistants, back-office phone schedulers, and other entry level positions far removed from the sort of executive, management, or sales positions where non-compete agreements often make strategic and business sense, it is no wonder why politicians feel compelled to limit the adverse effect non-compete agreements have on innovation.

This doesn’t mean, however, that employers should not have non-compete agreements with their employees. Instead we encourage our business clients to use non-compete agreements but in a smart and strategic manner rather than indiscriminately. There are many reasons for taking a smart non-compete approach, including avoiding the expense of enforcing prospective violations against former employees who are not likely to pose a meaningful threat to the business and concerns about selective enforcement. See for example, Enforcing Noncompete Agreements: How to Avoid Wasting A+ Resources on the C- Employee.

In sum, non-competes are critical to business, but it is equally important to have a smart non-compete strategy tailored to your business instead of an across the board non-compete policy; The difference between the two is analogous to checkers and chess.

For more information about Michigan non-compete law, contact attorney Jason Shinn. Mr. Shinn routinely consults with employers about drafting and enforcing non-compete agreements. He also often collaborates with individuals to evaluate their obligations and rights under a non-compete agreements, including in relation to starting a business or taking a position with a competitor.