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