1. You are a business owner and have key people in your business with access to your client base and confidential information
2. You are starting up a business relationship with, or adding additional business partners
3. You are on the other side of either 1. Or 2. (you are the key person or prospective business partner)
As a preliminary matter, I would always recommend consulting with an attorney when either considering presenting a non-compete, or when presented with one.
a. Non-Competes in General
First, non-competition agreements are, in general, enforceable under Michigan law.
Mich. Compiled Laws § 445.774a states:
“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…is found to be unreasonable…a court may limit the agreement.”
b. What Makes a Non-Compete Enforceable
Therefore, in Michigan, a non-compete is enforceable if:
1. It protects an employer’s reasonable business interest (confidential information obtained during the employment relationship)
2. It is reasonable in duration;
3. It is reasonable in geographical area; and
4. It is reasonable as to the line of business.
When either presenting a non-compete to a potential employee, or if reviewing a non-compete presented by an employer, you should consider these above factors.
c. How do you determine what is “reasonable”?
I think the next obvious question that you might be asking yourself is: How do I know what is reasonable in ANY of those categories?
This simple answer is – ask your attorney.
Reasonable is typically a “factual inquiry”. It will depend upon the circumstances of each situation. Appellate Courts have given us some pretty good guidelines though.
1. Reasonable business interest – this must relate to some confidential information. If the employee does not or will not possess confidential information, than a non-compete will not be enforced.
2. Reasonable in duration – Courts have typically held that 6 months to a year is reasonable in employee non-competes. Non-competes with business partners, courts have held, generally, up to 5 years is reasonable.
3. Reasonable in geographical area – this must be related to were the business territory is located. If the business is only county-wide, then a state-wide prohibition would likely be held unreasonable.
4. It is reasonable as to the line of business – the non-compete must be narrow in scope to the actual line of business. Simply put, a business owner shouldn’t be entitled to restrict a former employee from working in a field that will not harm the business owner’s business.
d. What happens if a non-compete is violated?
The rights of an aggrieved party include obtaining an injunction from a court, as well as damages, disgorgement of profits, and other related damages. The specific language that the parties agree on in the non-compete can also determine what damages an aggrieved party is entitled to.
e. Conclusion
Covenants not to compete are enforceable in Michigan. However, they are strictly construed, and must be narrowly tailored to protect a business owners reasonable business interest. Both of these reasons should give cause of anyone presented with a non-compete to consult an attorney about the best way to handle entering into such agreements.