In today’s business climate, employers often find it necessary to have some type of contractual provision limiting the ability of their current and former employees to solicit the employer’s customers or to engage in the same line of business. These “non-compete” agreements are either signed independently or are incorporated into the employment agreements themselves.
In Michigan, courts have found a public interest in enforcing reasonably drafted non-competes. Generally, non-competes are upheld if their limitations are reasonable in duration and geographic coverage, and narrowly define the type of business activities that are prohibited. However, courts are less sympathetic where the coverage of the non-compete is too broad or where the non-compete is designed to punish the former employee.
A typical non-compete provides that, for a period of one to three years, the employee will not engage in any competitive business nor accept employment with any competitor of the company. Depending on the industry and other circumstances, non-competes lasting longer than one year may be declared unreasonable or overly burdensome to the employee.
If a non-compete is found to be unreasonable in any aspect, the agreement is not automatically invalid. By statute, courts have the power to modify the non-compete and specifically enforce the agreement as amended. Furthermore, courts have the power to extend the duration of the non-compete in appropriate circumstances. In a case earlier this year, a court found that, where an employee violated the terms of a non-compete, it was free to extend the duration of the agreement as a remedy.
Non-competes often do not specify limits on their geographical coverage. Where the non-compete has unlimited coverage, a court may choose to impose a reasonable limitation rather than declare the non-compete invalid altogether. An employer should limit the non-compete’s geographic scope so that a court does not arbitrarily decide what is reasonable.
Courts are far more likely to enforce a non-compete that only limits specific activities as opposed to any employment within the given industry. Where the agreement limits only direct competition with the employer’s products within the industry, it is likely to be considered reasonable. However, the non-compete will be strictly construed against the employer and any ambiguities will be decided in the employee’s favor. This is important to consider when defining the prohibited activities.
In addition to non-competes, many employment agreements contain “nondisclosure covenants” prohibiting employees from using confidential or proprietary information of the company. These covenants apply to information that is not publicly known and upon which the company has spent considerable time, money or effort in developing, including customer lists.
Even absent a geographical limit, covenants restricting the solicitation of customers may be enforced where the employer has developed goodwill through the employee’s efforts. Although nondisclosure provisions may not prohibit the employee from engaging in a competitive business, they may preclude the employee from immediately soliciting a business’s suppliers and customers.
A carefully drafted non-compete can provide a company with a valuable tool in the continued success of its operations. By addressing these issues at the outset of the employer-employee relationship, a company can be confident that its non-competes will be enforceable should the need arise.