Michigan is one of a few states that allow non-competition agreements and uphold these agreements quite frequently. As such, it is important that people understand what these agreements do and what challenges these agreements may face.
What Is a Non-Compete Agreement?
A non-competition agreement or “non-compete” is an agreement between an employer and an employee that the employee will not directly compete with the employer for a certain period of time. This typically means that an employee cannot be employed by, maintain an ownership interest with, or be otherwise engaged with a competitor of the contracting employer.
Generally, these agreements exist during the time the employee is employed with the employer and extend for a year or more after the employee leaves their employment.
The basic terms of a non-compete concern the geographic location for which the employee is restricted, the duration of the agreement, and the scope of work the employee is prevented from doing.
What Is the Purpose of a Non-Compete Agreement?
Non-compete agreements are designed to prevent an employee from competing with an employer during or after their employment. Employers justify the need for these agreements since the employee learns certain information about their employer while employed, obtain goodwill with customers while employed, or gain certain skills while employed that the employee would not have received but for their employment. Michigan courts have stated that employers have a legitimate interest in this information and/or goodwill and, as a result, can prevent an employee from using this information.
How Are Non-Compete Agreements Challenged?
As described above, non-competes generally concern three topics: geographic location, duration, and scope. These are the three most common areas litigated when a party challenges the reasonableness of a non-compete.
Non-competes limit the location where an employee can compete. The distance listed in an agreement will be evaluated by a judge to determine if it is actually reasonable to protect an employer’s legitimate business interest. While there is no set rule for proper distance, there are common themes seen through Michigan case law that can provide people guidance.
For example, a veterinarian practice that limits an employee from working for another veterinarian, or establishing their own practice, within five miles will likely be held to be reasonable. On the other hand, the court would likely restrict an agreement that limited the veterinarian from practicing in the entire state of Michigan.
All non-competes contain language regarding how long the agreement will be in effect. Most non-competes contain language that state the agreement is in effect while the employee is employed and for a certain number of years after their employment ends. It is the duration after employment that is fought in court.
Again, there is no hardline rule as to what duration is reasonable to protect an employer’s legitimate business interest. However, courts have generally followed the rule that one year is reasonable, three years is rarely reasonable, and two years is dependent on the facts. Courts have, however, upheld agreements for durations longer than three years. Further, the court can extend the duration of a non-compete, especially if the former employee violates the agreement during the term stated.
The scope of the non-compete concerns the scope of employment of the employer and the type of business/work they are preventing the employee from conducting. The reasonableness of this term will require an analysis of the line of business of the former employer and the new employer. As such, the definition given in the agreement should be broad enough only to protect the legitimate business interests of the employer and should not unduly impair the employee’s ability to earn a living.
It is important to note that if a court rules that any area of the agreement is invalid or too restrictive, the court can revoke the agreement. In the alternative, the court can tailor the agreement to make the terms reasonable. The latter option would leave the agreement in place with different terms. Further, most non-competes remain in effect regardless of if an employee resigned or is terminated.
The attorneys at Grewal Law PLLC are skilled in reviewing, drafting, and litigating non-compete agreements. We are happy to review your agreement and make sure that your rights are protected. Call (888) 211-5798 to schedule your free consultation today!