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Employment Law

Non-Compete Agreements: What You Need to Know

Non-compete agreements continue to be used frequently in Michigan. Michigan courts regularly enforce non-compete agreements, with certain exceptions.

Why do non-compete agreements exist?

To ensure that employees don’t become an unfair competitive threat in the geographic area they previously serviced after their employment has been terminated;

  • To make it more difficult for competitors to unfairly obtain knowledge of one’s business practices by hiring away employees;
  • When a business is sold, to ensure that the seller does not form a rival company that would unfairly undermine the buyer’s business plans for the acquired business;
  • To ensure that franchise buyers adhere to territorial guidelines so as not to impinge on sales of other franchise operators.

Non-compete agreements are often required during hiring of employees, or when business partnerships are formed.

Michigan courts will not enforce non-compete agreements that are unreasonable or where the threat of damage to business interests is not adequately defined.  To be “reasonable”, the non-compete agreements cannot exceed what is necessary to protect the legitimate business interests of the business or employer.  Non-competes may only protect against unfair competition, not all competition.

Michigan Courts take into account many factors in determining what is “reasonable”. These include:

  •  the degree to which the restrictions in the non-compete would interfere with the ability of the employee to use his talents and earn a living;
  • the geographic scope of the restrictions;
  • the duration of the restrictions (usually three years or less is acceptable)
  • the severity of the penalties for breaching the non-compete agreement;
  • the degree to which the business interests of the enforcing party would be harmed if the non-compete were not enforced.

The bottom line is courts will evaluate non-compete agreements individually based on the unique facts presented in each case. A party that is unable to show that it is protecting a legitimate and significant business interest in a reasonable way runs the risk of having the non-compete re-written by the Court or declared void altogether.

By: John Mucha III, Member, Dawda, Mann, Mulcahy & Sadler, PLC