A recent Michigan Court of Appeals Opinion dealt a serious blow to the enforcement of noncompete agreements. The Opinion invalidated a common provision found in such agreements and it illustrates that courts will closely scrutinize noncompete agreements for any weak links that may limit or otherwise invalidate these agreements.

Overview of Non-compete Agreements

Employers commonly require employees to enter into an agreement referred to as a covenant-not-to-compete, restrictive covenant, or simply a non-compete agreement as a means to protect the employer’s reasonable competitive interests.

In the employment setting, these agreements generally require an employee to agree not to pursue a similar profession or line of work in competition against the employer. It is also common for a restrictive covenant to contain provisions that kick in when an employee leaves employment. Examples include restrictions on soliciting customers, hiring current employees, and to not use or disclose certain information of the former employer.

Michigan has a specific statute that covers the enforceability of non-compete agreements between employers and employees. (MCL §445.774a). Under this statute, one requirement for a non-compete agreement to be enforceable is that it must be “reasonable as to its duration, geographical area, and the type of employment or line of business.”

Michigan Court Invalidates Non-compete Agreement Provision

A common provision in non-compete agreements, however, was invalidated by a Michigan Court of Appeals panel. Specifically, in Teachout Sec Servs v Thomas (2010), the Court addressed the following provision: “Employee acknowledges that the covenants and agreements … are reasonable and required for the reasonable protection of Teachout and its respective relationships to customers …”

The Court concluded that this contractual stipulation as to the “reasonableness” of the contract terms between the employee and employer was not binding. The Court reached this decision despite acknowledging that under Michigan law it is presumed that contracts voluntarily entered into are legal, valid, and enforceable as written. Instead, the Court noted that non-compete agreements “are disfavored as restraints of commerce and are only enforceable to the extent they are reasonable.” (p. 6). The Court reasoned that it was, therefore, appropriate to bypass the presumption that contracts are enforceable as written and look behind the curtain to determine for itself if the agreement was actually reasonable. The Court concluded that it was not, and invalidated the non-compete agreement.

The Take Away

The Teachout Court, however, concluded that this contractual acknowledgement of reasonableness did not prevent the Court from playing “Monday morning quarterback” to determine for itself if the agreement was actually reasonable. In so doing, the Court agreed with the trial court’s granting the defendant employees summary disposition, i.e., judgment in their favor.

The Teachout decision addressed a number of important issues involving Michigan non-compete law, including the importance of strategy in pursuing these claims (I don’t think the former employer helped its cause by suing the individuals under the circumstances, but give me a call and I’ll share my two-cents on this point). But one key take-way for employers is that it should be assumed a non-compete agreement will be subject to “Monday morning quarterbacking” by a court to determine for itself if the agreement was actually reasonable.

It is, therefore, critical for employers to carefully review their non-compete agreements to make sure there are no weak links. In this regard, Michigan Courts will generally evaluate four aspects of the parties agreement to determine its enforceability:

The employer’s reasonable competitive business interests; The duration of the limitation on competition; The geographic area in which the employee is restricted from competing; and The type of employment or line of business in which the employee is restricted from competing.

For employees, it is equally critical to understand what restrictions you are agreeing to by signing a non-compete agreement. Certainly in the current economic environment employees may have little choice but to accept a job with whatever conditions are attached to the position. But it is still important to understand the full-scope of those conditions and how they apply to your future career plans.