Simon PLC Attorneys & Counselors – August 2021 Memorandum
ENFORCEMENT OF MICHIGAN NON-COMPETE AGREEMENTS
Bloomfield Hills, Michigan – Many employers require their employees to sign a contract preventing the employees from leaving and going to work for a competitor. These may be separate agreements or part of a larger employment contract, included as a “noncompete clause” or “covenant not to compete.”
The pandemic has upended the labor market and affected employment trends in many ways. As employees take new positions and employers struggle to fill them, noncompete clauses are in the news. Employers maintain that noncompete agreements protect their proprietary and confidential information from ending up in the hands of their competitors. Employees argue they should be free to work wherever and for whomever they want. The Biden administration has ordered the Federal Trade Commission to curtail the unfair use of such agreements and to develop ways to ban or limit them. A new rule curbing their use, but not banning them completely, is likely.
Although covenants not to compete are generally unenforceable in some states, in Michigan, they are allowed with reasonable limitations. Michigan has codified reasonable noncompete agreements between employers and employees in the Michigan Antitrust Reform Act. Although a contract “in restraint of, or to monopolize, trade or commerce in a relevant market is unlawful,” (see MCL 455.772) “[a]n employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination . . . (if it) is reasonable as to its duration, geographical area, and the type of employment or line of business.” (See MCL 445.477a(1) emphasis added). Perhaps most significant is the permission the same statute expressly provides to a court to “limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.” (See MCL 445.774(a)(2)).
The Michigan Court of Appeals, in St Clair Medical, PC v Borgiel, 270 Mich App 260, 266 (2006), found that “to be reasonable . . ., a restrictive covenant must protect against the employee’s gaining some unfair advantage in competition with the employer, but not prohibit the employee from using general knowledge or skill.” See also Coates v Bastian Bros, Inc, 276 Mich App 498, 507 (2007), holding that such covenants are “only enforceable to the extent they are reasonable.”
Judge Martha Anderson of the Oakland County Business Court recently acknowledged the Court’s ability to impose a “durational limitation” on an open-ended noncompete clause that rendered it reasonable. However, the appropriate durational limitation was proposed by the Plaintiff former employer, and the former employee’s motion for summary disposition was denied as it related to the noncompete clause and a correlating agreement prohibiting the solicitation of the former employer’s business. (See Paragon Leadership International, Inc v Christine Fietsam et al, Oakland County Circuit Court Case No. 20-181483-CB, Opinion and Order Granting in Part & Denying in Part Defendants’ Motion for Partial Summary Disposition, 07/19/21).
In the same vein, Judge Michael Warren, also of the Oakland County Business Court, recently ruled in favor of the former employer in granting its motion for preliminary injunctive relief preventing a former employee from taking a competitor’s offer. He found that the four factors required to impose such relief–the public interest (“Public policy . . . favors a free market for employees and employers to engage involuntary contractual arrangements”), the harms of denying or granting the relief, a strong likelihood of prevailing on the merits, and irreparable harm to the employer—all favored the employer’s request for a preliminary injunction. The employee had been a highly compensated senior executive officer at Visteon. He had access to and responsibility for a large amount of confidential and proprietary information. He acknowledged that he entered into enforceable agreements with Visteon, starting with a non-compete and non-solicitation agreement in 2015 for which he received $150,000 as consideration. In the following years, up through and including 2021, he entered enforceable stock option agreements, restricted stock unit grant agreements, and performance stock agreements. His receipt of consideration for agreeing to limit his competition and solicitation of business for a period of eighteen months post-employment was not disputed. He left Visteon on July 1, 2021 and immediately began working for a direct competitor that had been acknowledged as a competitor by each party in governmental filings.
The competitor requested that Visteon let him out of his noncompete. Visteon declined and initiated the lawsuit for injunctive relief. The new employer and its new employee argued that he didn’t have that much responsibility after all, his role had been diminished, and the new company had agreed to modify his role during the first eighteen months (the length of the noncompete) to avoid certain aspects of the business. However, Visteon prevailed. (Visteon Corporation v Matthew Cole, et al, Oakland County Circuit Court Case No. 21-188888-CB, Opinion and Order Granting Preliminary Injunction, 07/22/21).
If your organization needs advice or assistance in drafting, interpreting, or enforcing a noncompete agreement, contact us at Simon PLC Attorneys & Counselors. Our attorneys are experienced at documenting transactions and counseling businesses. We can help you create language that both protects your interests and passes legal muster.
N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.