Michigan Non-competition Agreement Law

Unlock Non-Compete Agreements: Keys to Escape

posted by Neil Klingshirn  |  Jan 22, 2010 4:31 PM [EST]  |  applies to Ohio

The Michigan Antitrust Reform Act  generally prohibits any "contract, combination, or conspiracy between 2 or more persons in restraint of, or to monopolize, trade or commerce." Mich. Comp. Laws § 445.772 (2002). However, the statute authorizes agreements not to compete as long as they are reasonable.  Hence, Michigan courts enforce restrictive covenants if they protect an employer's reasonable competitive business interests with restrictions that are reasonable in terms of duration, geographical scope, and the type of employment that is restricted. Additionally, a restrictive covenant must be reasonable as between the parties, and it must not be specially injurious to the public.

Mich. Comp. Laws § 445.774a(1) permits Reasonable Non-competes

Section 4(a)(1) of the Michigan Antitrust Reform Act provides:

An 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 of the employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a  court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.

Mich. Comp. Laws § 445.774a(1).

Consideration

Under Michigan’s pre-existing duty rule, doing what one is legally bound to do is not consideration for a new promise. Yerkovich v. AAA, 461 Mich. 732, 740-741 (Mich. 2000). This rule bars the modification of an existing contract when the purported consideration for the modification consists of the performance or promise to perform the existing agreement. Applying the pre-existing duty rule to a non-competition case, a Michigan appellate court noted that an agreement signed three weeks after the employee began her employment would not satisfy it. Virchow Krause & Co v. Schmidt, 2006 Mich. App. LEXIS 2052, 5-8 (Mich. Ct. App. June 27, 2006)

Legitimate Employer Business Interests

Reasonable covenants may protect legitimate interests such as:

  • trade secrets,
  • confidential information,
  • close contact with the employer's customers or customer lists, or
  • cost factors and pricing.

Kelsey-Hayes Co. v. Maleki, 765 F. Supp. 402, 407 (E.D. Mich. 1991). However, an employer may not reasonably prohibit an employee from using his or her general knowledge or skill.

Under Michigan law, an employer has a legitimate interest in preventing the anticompetitive use of confidential information. While an employee is entitled to unrestricted use of general information acquired during the course of his employment or information generally known in the trade or readily ascertainable, confidential information, including information regarding customers, constitutes property of the employer and may be protected by contract. Likewise, an employer has a reasonable business interest in protecting its good will and, specifically, in restricting its former employees from enticing away the employer's old customers. Michigan courts recognize that an employee who establishes client contacts and relationships as the result of the goodwill of his or her employer's business is in a position to unfairly appropriate that goodwill and thus unfairly compete with a former employer upon departure.

Reasonable Restrictions

In evaluating a non-competition clause for reasonableness, Michigan courts examine the clause's:

  • duration,
  • geographic scope, and
  • the type of employment prohibited.

See Mich. Comp. Laws § 445.774a(1).  They also consider the reasonableness of the competitive business interests justifying the clause. Whirlpool Corp. v. Burns, 457 F. Supp. 2d 806, 812 (W.D. Mich. 2006) ("The reasonableness of a covenant not to compete is not analyzed in the abstract, but in the context of the employer's particular business  interest and the function and knowledge of the particular employee."). This reasonableness inquiry is fact specific.

Duration and Geographic Scope

Michigan courts have not provided  bright line rules regarding duration. Rather, they "have upheld non-compete agreements covering time periods of six months to three years." Whirlpool, 457 F. Supp. 2d at 813. Michigan courts have similarly not imposed any strict limitation on the permissible geographic scope of non-compete agreements. Instead, they have indicated that a restriction that is not limited in its geographic scope is not necessarily unreasonable.  Instead, geographic limitations must be tailored so that the scope of the agreement is no greater than reasonably necessary to protect the employer's legitimate business interests. Superior Consulting Co., Inc. v. Walling, 851 F. Supp. 839, 847 (E.D. Mich. 1994).

Reasonableness of the Type of Business Restricted

Michigan courts determine the reasonableness of the type of business prohibited by examining the competitive business interests that the non-compete covenant protects.  Because a prohibition on all competition is in restraint of trade, an employer's business interest justifying a restrictive covenant must be greater than merely preventing competition. Thus, to be reasonable in relation to an employer's competitive business interest, 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.

Examples of Reasonable Restrictions

  • Coates v. Bastian Bros., Inc., 276 Mich. App. 498 (Mich. Ct. App. Aug. 30, 2007)  (upholding a non-compete provision prohibiting former general manager's employment with any of employer's competitors located within one hundred miles of any of employer's locations for a period of one year);
  • Rooyakker & Sitz PLLC v. Plante & Moran PLLC, 2007 Mich. App. LEXIS 1287 (Mich. Ct. App. May 15, 2007) (upholding a non-compete provision prohibiting accountant from rendering any of the services provided by his former firm to any of that firm's clients for a period of two years);
  • St. Clair Med., P.C. v.  Borgiel, 270 Mich. App. 260, 715 N.W.2d 914, 918 (Mich. Ct. App. 2006) (upholding  a non-compete clause prohibiting a physician from practicing medicine within seven miles of his former medical office for a period of one year)
  • In re Spradlin, 284 B.R. at 836 (upholding a non-compete clause prohibiting seller of furniture business from engaging in any office furniture business within a two-state area for a period of five years);
  • Lowry Computer Prods., Inc. v. Head, 984 F. Supp. 1111, 1116 (E.D. Mich. 1997) (upholding non-compete clause prohibiting sales agent of a computer hardware and software firm from working for any of firm's competitors for a period of one year);
  • Superior Consulting Co., Inc. v. Walling, 851 F. Supp. 839, 847 (E.D. Mich. 1994) (upholding non-compete clause prohibiting a former employee of a healthcare management consulting business from engaging in any healthcare information consulting business for a period of six months).

Examples of Unreasonable Restrictions

Michigan courts have not enforced covenants that have prevented the former employee from engaging in competition with the employer when the employee had no confidential information that would have given him an unfair competitive advantage.

  • Northern Mich. Title Co., 2005 Mich. App. LEXIS 733 (finding unreasonable a non-compete clause which completely prohibited former employees of title insurance company from engaging in the title insurance business for five years based on conclusion that nothing about employees' former employment would give them unfair advantage in competing for clients who had never given business to the employer in the first place);
  • A Complete Home Care Agency, Inc. v. Gutierrez, No. 246280, 2004 Mich. App. LEXIS 1839 (Mich. Ct. App. June 29, 2004) (unpublished) (upholding a lower court's determination that a covenant prohibiting a former nursing services employee from performing any kind of services, including  non-nursing services, for clients of former employer was unreasonably broad);
  • Whirlpool Corp. v. Burns, 457 F. Supp. 2d 806, 812 (W.D. Mich. 2006) (finding that employer had not demonstrated a likelihood of success in enforcing a non-compete clause prohibiting employment with firm's competitors when employer had not demonstrated that employee was likely to disclose or use to his advantage confidential information acquired while working for employer);
  • Frontier Corp. v. Telco Commc'ns Group, Inc., 965 F. Supp. 1200, 1208 (S.D. Indiana 1997) (applying Michigan law; finding unreasonable a non-compete clause prohibiting the solicitation of any of former employer's customers because it would prohibit solicitation of customers with whom employee had no contact, and therefore no competitive advantage);
  • Robert Half Int'l v. Van Steenis, 784 F. Supp. 1263, 1273-74 (E.D. Mich. 1991) (finding unreasonable the portion of a non-compete clause prohibiting former employee from competing within fifty miles of employer's Ann Arbor office because employee was never involved in the line of business engaged in by that office and thus did not gain any information from his employment that would facilitate his competing with employer in that line of business).

Physician Non-competition Agreements

Michigan non-competition agreement law states that an employer may protect an employer's reasonable competitive business interests, but its protection in terms of duration, geographical scope, and the type of employment or line of business must be reasonable. Additionally, a restrictive covenant must be reasonable as between the parties, and it must not be specially injurious to the public. Even so, Michigan courts do not prohibit physician non-competition agreements. Rather, in a medical setting, a restrictive covenant can protect against unfair competition by a physician.  More on Michigan Physician Non-competition Agreements.

Judicial Modifications of Non-competition Agreements

To the extent a court finds a non-competition agreement or covenant to be unreasonable in any respect, the court may limit the agreement to render it reasonable in light of the circumstances in which it was made and then specifically enforce the agreement as limited.

Mich. Comp. Laws § 445.774a(1).

Consequence of Breaching a Non-Competition Agreement

Breach by Employee

An employer who proves that an employee breached an enforceable non-competition clause can:

  • recover its lost profits;
  • obtain an injunction to prevent future violations; and
  • extend the duration of a breached non-competition restriction.

However, atrial court may extend a covenant not to compete beyond its stated expiration date as  an appropriate remedy for a breach of the agreement only in cases where:

  • the breaching party flouted the terms of the covenant not to compete;
  • the breach consisted of continuous and systematic activity, as opposed to an isolated transaction; and
  • it is not possible to determine monetary damages with any degree of certainty.

Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 2008 U.S. Dist. LEXIS 41482, 27-28 ( E.D. Mich. May 27, 2008)

Breach by Employer

A federal court applying Michigan law rejected an attempt to rescind a non-competition agreement based on the employer’s alleged material breaches of contract. The court held that rescission is “an action of an equitable nature in which a party seeks to be relieved of his obligations under a contract on the grounds of mutual mistake, fraud, impossibility, etc.” Since the party seeking rescission had “not alleged any legal duty, other than that created by the contract.” the court refused to rescind the agreement.  Fiddler Assocs. v. Hodder, 1997 U.S. Dist. LEXIS 6019 ( E.D. Mich. Apr. 21, 1997).

Trade Secrets Act

In addition to enforcing agreements that restrict competition to protect trade secrets, Michigan's trade secrets statute, codified at  Mich. Comp. Laws Chapter 445, protects trade secrets.  Specifically, Michigan’s Trade Secrets Act prohibits the misappropriation of trade secrets, whether an employee has agreed to protect trade secrets or not.  However, a non-competition agreement that also protects trade secrets could impose broader restrictions and allow greater damages than those in the Trade Secrets Act.

Assignment of Non-competition Agreements

Generally, Michigan law allows parties to assign (i.e., to sell or transfer) their contractual rights freely, unless the parties agreed to restrict the right to assign it.  Burkhardt v Bailey, 260 Mich. App. 636, 653; 680 N.W.2d 453 (2004).  However, parties cannot assign contracts of a personal nature, which contemplate personal association and services, without the consent of the other party. Personal contracts involve a personal trust in a party or the special skills and knowledge of a particular individual or group of individuals.

As applied to non-competition agreements, a Michigan appellate court held that:

  • employment as an accountant did not involve personal trust or special skills and knowledge, and
  • the language in the agreement did not call for the employee’s personal trust or use of her special skills and knowledge.

Accordingly, the court found that the non-competition agreement was not a personal contract and, was therefore freely assignable without the employee’s consent.

Virchow Krause & Co v. Schmidt, 2006 Mich. App. LEXIS 2052, 5-8 (Mich. Ct. App. June 27, 2006)


posted by Neil Klingshirn  |  Jan 22, 2010 4:31 PM [EST]  |  applies to Ohio

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