Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Michigan

Michigan law allows non-competition agreements provided that they are reasonable in terms of duration and geographic scope and the type of employment or line of business being restricted.  If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee’s ability to work.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Michigan courts have determined that the offer of initial employment or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.

Reasonableness in Time and Geographic Scope

Examples of non-compete agreements that Michigan courts have found to be reasonable include:

• A 1-year restriction with no geographic limit barring a former salesperson from accepting employment with any competitor in the “highly competitive” field of selling computer hardware, software and supplies for barcode data collection systems.
• A 3-year, statewide restriction on independent sales representatives formerly employed by a window replacement company.
• A 1-year restriction on a physician from practicing within 7 miles of any office of former employer is reasonable because it protects the former employer’s interest in retaining patient goodwill.
• A 6-month restriction with no geographic limit where the employer had serviced clients in all 50 states where the restriction was limited to the specific type of work the former employees provided tot he former employer.

The courts have found restrictive covenants unreasonable in these situations:

• A 5-year restriction on several title insurance business employees from engaging in the “title insurance business.”  The geographic restriction was only one Michigan county but the court determined that this restriction was not protecting a legitimate business interest.  It was only protecting the former employer from fair competition.
• A 1-year covenant with no geographic limit, barring former long-distance telephone service sales representatives from soliciting any of the former employer’s customers, not just those customers she had serviced.
• A restriction with no geographic limit barring a former salesperson from competing with the former employer “with respect to any product or service for which the former employee had responsibility” during the last five years of employment with the company because it would bar the former employee from selling home appliances anywhere in the world for one year, even if such sales did not involve any of the same customers or the use of any confidential information.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.