Non-compete Contracts as a Tool for Protecting Competitive Edge

We live in a highly competitive world where highly paid executives and business persons have easy access to trade, market, and consumer information. Unlike before, these executives and other employees are highly mobile, with the ability to easily move between firms, markets,and even competitors. The problem for the companies who operate within these markets is the danger that this mobility poses to their efforts to best their competition - a danger that can often be minimized through non-compete agreements. As of late, Michigan courts and the Michigan legislature have tried to deal with the realities of our 21rst century marketplace in dealing with the enforceability of non-compete agreements, and have expanded upon the rights of companies to utilize such agreements.

In Michigan, the validity of non-compete agreements is governed by section 4a of the Michigan Antitrust Reform Act, a statute passed by the Legislature in 1987, as well as the many cases interpreting that statute. Together, the statute and the case law set forth the parameters defining those agreements that are enforceable and those that are not. The statute seeks to strike a compromise between the protection of an employer’s competitive business interests and an employee’s right to earn a living. As such, courts interpreting non-compete agreements focus their analysis in four areas:

* The agreement must protect a company’s reasonable competitive business interest. Among the factors in determining whether the agreement protects a reasonable competitive business interest are the employee’s position in the company, compensation paid to that employee and the level and amount of specific competitive information acquired during employment, which may include such areas as trade secrets or special training conferred on the employee.

* The agreement must be reasonable as to the length of time the employee is prohibited from working in the line of business. Again, each case is 'fact sepcific' and numerous factors are analyzed in determine what is a reasonable length fort non-compete contract.

* The agreement must be reasonable as to the geographic area the employer seeks to prevent the employee from working in. While the employee’s immediate area of employment would most likely be upheld as a reasonable territorial restriction, wider restrictions require a greater showing that the agreement seeks to protect the employer’s reasonable competitive business interest.

* The agreement’s restrictions on the type of employment or line of business must be reasonable. Courts will look less favorably on deliberately vague, over-reaching or “blanket” agreements.

The enforcement of con-compete contracts in Michigan courts mainly occur on a case-by-case basis, with remedies that include the issuing of restraining orders or injunctions and the awarding of monetary damages.

To businesses who may be interested in utilizing non-compete agreements, it is important to note that even if one condition of a non-compete agreement is deemed unenforceable, it does not void the remainder of the agreement - leaving the rest of the contract valid and enforceable. Businesses of all types, especially those with multi-state operations, must also understand that the rules for non-compete agreements vary from state to state. What’s enforceable in Michigan may not be in one of our neighbor states. Moreover, in order to effectively face a dispute arising from a non-compete agreement, employers should not delay in acting on known breaches of such agreements. The longer an employer delays between the discovery of unlawful competition and pursuit of a legal remedy, the weaker becomes the employer’s request for injunctive relief.

Like any contract, non-compete agreements define the expectations of each party and are subject to negotiations, depending upon the bargaining strength of the parties. Employers should have legal counsel help draft these agreements to ensure that they meet the employer’s expectations and are enforceable. Employees, on the other hand, should review such agreements carefully to ensure that they understand the restrictions on future employment should they ever leave the company.

Also, be sure to remind those leaving your company of their legal obligations during any exit interview. In this way, employers will strike a favorable, yet serious business tone, while best ensuring that any non-compete agreement can be enforced, should the need arise. In an instance in which a breach is realized, a threat letter is usually the first step to ensure the parties abide by non-compete terms and avoid litigation.