Noncompete Agreement Update Early-2017

Reasonableness was once a common misconception amongst commercial noncompetes. The Michigan Supreme Court in Innovation Ventures, LLC v Liquid Mfg LLC, 499 Mich 491 (2016) has resolved this confusion once and for all by making it clear, employee noncompetes must be reasonable to be valid, while commercial noncompetes are invalid only if they fail the “rule of reason” within the antitrust (a much higher standard).

Employee noncompetes must be reasonable: limited in “duration, geographical area, and the type of employment or line of business” (scope) and only so necessary as to protect the employer’s legitimate competitive interest (“competitive business interests”) MCL 445.774a. Reasonableness underscores the enforceability. This means from a lawyers perspective, drafting an enforceable employee noncompete is a challenge, it means you should not use a form, and the agreement should consider the particular employee and the particular interest being protected. The literal language of an agreement may not even define the enforceability of the noncompete. Employees have a general freedom to change employment and maximize the value of their labor (it sort-of violates public policy, for societal harm, to tie a productive employees hands behind their back).

Employee noncompetes should be standalone signed agreements (not in the handbook). Multi-jurisdicational employers should consider which state law will control (California and North Dakota prohibit certain noncompetes and Illinois requires a duration of employment). Will the employee be preforming services in other states from where the employer is located, where does the employee live (domicile)?

The noncompete must protect a legitimate business interest and competition is not a legitimate business interest. A reasonable geography could be a few miles, state, or world. Reasonable duration varies as well, a fast pace industry may only support a few months, where as a corporations long term strategy may be supported for years. And the restrictions are employment must be limited to only those jobs where the competitors could benefit from the employer’s proprietary information. Legal consideration is required in all noncompetes (value in exchange for covenant).

Commercial noncompetes may be broad and so long as they do not have an adverse impact on the competition in the relevant market they will generally be enforceable. More time is often spent on these noncompetes since the parties to the contract will consult with a lawyer and are sophisticated enough to consider the commercial implications of unreasonable terms.