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Non-Compete Contracts and What Employers Should Know

Non-compete contracts are agreements signed by an employee or contractor that obliges them to abstain from engaging in certain employment within a certain geographic area for a certain period of time after they quit or are fired. A non-solicitation contract is an agreement that keeps an employee or contractor from contacting and/or soliciting an employer's customers and/or remaining employees for a certain period of time after they quit or are fired.

Understanding the complex nature of non-compete and non-solicitation agreements can only be fully accomplished if they are interpreted from both the perspective of the employee and the employer. This article will address non-compete and non-solicitation agreements from the employers point of view.

In 1987, the Michigan Legislature passed Section 4(a) of the Anti-Trust Reform Act, which declared that it is the public policy in the State of Michigan to enforce reasonable non-competition and non-solicitation provisions in employment contracts. Prior to this statute, non-compete and non-solicitation agreements were generally disfavored, and thus not enforced, in Michigan courts. Judges viewed them as generally non-competitive and potentially as anti-trust violations in that they restricted free trade. Since the passage of the 1987 Statute, Judges are now instructed by the Michigan legislature to enforce non-compete agreements to the extent that they are reasonable in terms of geography, scope, duration, and other terms.

If a company is interested in utilizing non-compete and non-solicitation agreements, most importantly, they must be aware that it is not possible to simply have people sign these agreements for the sole purpose of stopping them from obtaining other employment, even from a direct competitor. In the State of Michigan it is well settled that only a legitimate business interest may be protected by a non-competition or non-solicitation agreement. If the sole purpose of such an agreement is to avoid ordinary competition, it is unreasonable and unenforceable in a court of law. This means that if the agreement is ever challenged in court, the most important question, which will be posed from the Judge to the employer, is "What is the legitimate business purpose that is served by this non-compete agreement?" So what is a legitimate business purpose that merits the use of such agreements? A legitimate business purpose can be any number of things ranging from:

1. Protecting legitimate trade secrets. This is information held by a company which is not generally known or available to the public, provides a strategic advantage in the market and is actively protected by the company;

2. Protecting confidential information. This is information which may not reach trade secret status but is still protected at a significant level by the company and which gives the company a competitive advantage. Confidential information might include company strategy information, internal communications concerning pricing or market strategy, long term plans of the company in the areas of marketing, pricing, deployment, development or other issues;

3. Protecting an investment in an employee or consultant in terms of special training or development. If a company send an employee to special training, or provides internal training which represents a cost to the company, courts are often willing to protect that investment by enforcing non-compete contracts; and

4. Protecting other business interests such as loss of clients, good will, reputation, seeing that contracts with clients continue, and referral sources.

What becomes clear is that the higher up the "food chain" an employee is at a company, the more willing courts are to enforce non-compete agreements. This is often because upper level employees are typically exposed to more confidential, trade secret, strategic and other information that gives a company a competitive advantage in the market place and would cost the company greatly if received by a competitor.

The lower down the food chain an employee is, the less likely a court is to enforce non-compete and non-solicitation terms simply because of the inverse - they are unlikely to come in contact with sensitive information that would greatly harm a company's competitive advantage.

Adverse to the hesitance of Michigan courts to enforce non-compete and non-solicitation agreements when they are between employees and employers, courts are very willing to enforce broad and comprehensive non-compete terms on company owners who sell their company to a new owner. Courts recognize that part of the consideration of a company purchase is to preclude the prior owner from then directly competing against the new owner in the marketplace.

Other factors which affect a courts willingness to enforce a non-compete include whether or not additional consideration was provided to the employee as part of the non-compete arrangement. While additional money is not required by courts in order to make non-competes enforceable, I typically advise companies who are very serious about their non-compete agreements to do something by way of additional consideration in order to increase the likelihood that the non-compete will be enforced.

If a former employee or consultant challenges a non-compete in court, the best thing an employer can be is very proactive in providing the detail that shows the court that a legitimate business purpose is being protected. However, a big change since 1987 is that a non-compete agreement that is found to be too vague or broad cannot simply be stricken, as was often done prior to the revised statute referenced above.

This change in normal policy comes from the statute, in that it requires the court to, in effect, re-draft the non-compete to a scope, which is, in fact, reasonable in terms of scope, duration, and geographic region. While some employers anticipate such a "weak" decision by drafting extremely broad non-competes on the premise that the worst that can happen is that the court will re-draft the document to a more reasonable scope, I typically advise employers to avoid this approach. If your non-compete is ever attacked in court, you may draw the Judge if you have forced a clearly unreasonable non-compete onto an employee who had little or no choice but to sign. Employers who draft extremely broad and unreasonable non-compete provisions sometimes find themselves with less protection once the court has re-drafted the contract, then if they had simply taken a more reasonable approach on the front end.

Perhaps the most common question I receive from employers is whether they can force a current employee to sign a non-compete. The answer is that Michigan courts will typically enforce non-compete agreements signed by employees, even if the only consideration is continued employment. Thus, at any point during the employer/consultant relationship, an employer may request or even demand that an employee sign a non-compete agreement in order to keep their job.

One of the most important things for any employer to consider in developing a non-compete or non-solicitation program for their employee base is that they cannot selectively enforce those agreements once signed. One of the most common defenses by employees who have signed non-compete agreements is that the employer never enforced those contracts against the other employees who left. Any employer that is serious about its non-compete program, must be vigilant as employees leave the company and make sure that they are sending threat letters and taking judicial action if the contract provisions are being violated.

Some employers don't feel comfortable in asking their employees to sign non-compete provisions and, quite honestly, some employees have the leverage to avoid signing them altogether. For this class of employers, I almost always recommend that they at least obtain a non-solicitation agreement, which will preclude an employee from raiding the company best remaining employees and customers if they should leave.


About the Author: Enrico Schaefer is the founding attorney of Traverse Legal, PLC, a law firm specializing in non-compete, trade secret, confidentiality matters and also in minority shareholder rights litigation.