In April 2024, the Federal Trade Commission is expected to announce a new rule banning noncompetition agreements. In the meantime, and, in case the rule is not implemented, we wanted to remind clients about the current state of the law.
Protectible Business Interests
The American Medical Association discourages noncompetition agreements. However, such agreements are enforceable in most states, including Michigan. Generally, restrictive covenants or “noncompetes” are enforceable in Michigan if they are supported by adequate consideration, such as compensation, employment, or continued employment.
Protectable Interests
Under Michigan law, noncompete agreements are enforceable if the agreement protects an employer’s reasonable competitive business interests. Nearly 20 years ago, in St Clair Medical PC v Borgiel, the Michigan Court of Appeals held that in a medical practice, a noncompete can protect against unfair competition by preventing the loss of patients to departing physicians, protecting an employer’s investment in specialized training of a physician, or protecting an employer’s confidential business information or patient lists. See Case Illustration below.
Case Illustration
Dr. Borgiel signed a noncompete agreement which, upon termination, prevented him from working for another family practice within seven miles of St. Clair Medical’s two family practice offices for one year, even though he did not spend much time at one of the offices. The Court enforced the noncompete agreement and reasoned that these restrictions protected the employer’s reasonable competitive business interests by ensuring it could retain patients and regain goodwill with patients after the doctor’s departure. The Court also found that the restrictions were reasonable in prohibiting a departing doctor from using patient contacts gained during his 20-month employment to unfair advantage in competition with the former employer.
Reasonable Restrictions
For a noncompete agreement to be enforceable, the restrictions need to be reasonable in terms of duration, geographic area, and scope of employment. Overly broad restrictions are more likely to be deemed unenforceable by Michigan courts.
Duration. Michigan courts have upheld duration restrictions ranging from 6 months to 3 years. However, courts are more likely to find shorter duration periods more reasonable.
Geographic Area. The scope of a practice will determine what geographic area is reasonable. Courts are more likely to uphold larger geographical areas in less densely populated such as rural areas or the Upper Peninsula because there are fewer physicians and specialists.
Scope of Employment. The scope of restrictions in a noncompete agreement should be limited to the field of practice or specialty. For example, while a specialist might be restricted from competing in the same specialty, restricting them from general practice would not be reasonable.
Berry Moorman P.C. has a proven track record of guiding physicians, dentists and other healthcare professionals, as well as medical and dental practices, through the nuances of enforceability of noncompete agreements in Michigan.
