If my practice is any indication, employers' use of non-competition and non-solicitation agreements in West Michigan is on the rise. And that appears to be part of a national trend. In 2013, the Wall Street Journal reported a "more than 60% rise over the past decade in the number of departing employees who are getting sued by their former bosses for breaching the agreements."
What is a Non-Competition Agreement?
Non-competition or non-compete agreements may be stand-alone documents or the provisions may be included in an employment agreement or an employee handbook. The agreements typically state the employer's property, including customer lists, marketing material, and other documents are confidential and proprietary and that the employee is forbidden from using the information after the employee departs from his job.
The agreement usually sets forth a period during which the departing employees may not work for a competitor of the former employer and a geographic area within which the restriction applies. For example: Employee shall not become employed by, consult with or own any portion of any business that competes with ABC company in widget making business. This restriction applies during employee's employment with ABC company and for two years following the termination of employee's employment.
What is a Non-Solicitation Agreement?
Non-solicitation agreements are often included with a non-competition agreement in an employment agreement. A non-solicitation agreement states that the employee will not reach out to or "solicit" the customers that the employee has worked with while employed by the company. There is usually no geographic or time restriction on the non-solicitation provisions. Together, non-compete and non-solicitation agreements are classified by courts as "restrictive covenants."
Are Restrictive Covenants Enforceable in Michigan?
Covenants not to compete in Michigan are regulated by a statute: MCL 445.774(a). That statute permits the enforcement of a non-compete agreement so long as the agreement (1) protects a legitimate business interest of the employer, and (2) is reasonable as to its duration, geographical area and the type of employment or line of business. To the extent that a non-competition agreement is found to be unreasonable in any respect, the court may re-write the agreement in order to render it reasonable and specifically enforce the agreement as limited.
In general, agreements for a term of one year or less have been enforced by Michigan courts. Courts have also approved some non-competes with a duration of two years or longer.
Appellate cases have also addressed the meaning of a "legitimate business interest of the employer." The courts generally agree that an employer's business interest that will justify a restrictive covenant in an employment contract must be something greater than mere competition, since prohibition on all competition is a restraint of trade. The courts look to see whether, by working for a competitor, an employee would gain some unfair advantage by using confidential or trade secret information to the benefit of his new employers. See, Kelsey-Hayes Co v Maleki, 765 F Supp 402 (ED Mich 1991), vacated pursuant to settlement, 889 F Supp 1583 (ED Mich 1991). Limitations on working in any capacity for a competitor of a former employer have also been struck down as too broad to be enforceable under Michigan law. See, Superior Consulting Co, Inc v Walling, 851 F Supp 839 (ED Mich 1994).
Should I Refuse to Sign a Non-compete Agreement if my New Or Current Employer Tries to Make me Sign One?
Unless you are a "just cause" employee (most employees are not), your employer can make your new employment or continued employment contingent upon signing a non-compete agreement. In other words, you can be fired or not hired unless you are willing to sign the agreement. This means that you should seriously consider your options before you decide to sign such an agreement. Consider these factors: First, your bargaining leverage will never be higher than before you agree to take a new job. So find out if there will be a non-compete before you accept the offer. You may wish to reconsider the offer if it comes with a non-compete. Second, push back if presented with a non-compete. Find out why the employer requires one. If the concern is that you will quit and take the customers that the employer has already developed, suggest that the non-compete be converted to a non-solicitation agreement and that any customers that you already have a relationship with are carved out of the agreement. Or suggest that the agreement be revised so it does not apply if you are terminated from your employment by the employer.
What if I Receive a Cease and Desist Letter?
Before filing a lawsuit to prevent you from working for a competitor, employers usually have their lawyers send the former employee a letter that demands the employee quit the new job and agree to follow the terms of the non-compete agreement. If you receive such a letter, get advice from a lawyer with experience in this area of the law. You should find out how to respond to the letter, when and what to tell your new employer about the letter, and what the next steps may be if you refuse your former employer's demands. Find out what litigation may cost if you decide to fight the enforcement of the non-compete.