Non-Competes, Are They Legal?

Regularly, I have business clients tell me with confidence, “I don’t need to worry about hiring this new employee even though she has a non-compete with her former employer. Those agreements aren’t enforceable anyway.” Just as often, employers complain, “He can’t go to work for my competition! He has a non-compete agreement with me.” Who is right? At the risk of sounding like a lawyer, I have to say, “It depends.”

Covenants not to compete (non-compete agreements) are contractual arrangements in which one party (typically either an employee or a business seller) agrees that he will not engage in certain competitive activity to the detriment of the other party for some specified period of time. In some jurisdictions, like California, state law prohibits this type of agreement in the employment context. Other jurisdictions, including Michigan, expressly permit non-compete agreements by statute. However, even where they are permitted, these agreements are typically subject to certain “reasonableness” standards. The Michigan statute, for example, provides: “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.”

In practice, this means that any given covenant not to compete is presumed to be enforceable but it is also subject to attack under a claim that it is not “reasonable.”

Because non-competes are legally permissible, employers should take advantage of the opportunity to protect their business interests by seeking reasonable non-compete commitments with their employees. To minimize the risk of a challenge, employers need to exercise restraint and craft restrictions – especially as to duration and geographic scope – as narrowly as possible. Additionally, employers should be leery of hiring an employee from a competitor if that employee previously signed a non-compete agreement with the competitor.

On the flip side, when an employer believes a former employee is violating her non-compete agreement, it must evaluate the cost of enforcement against
the actual harm it expects to suffer. To gain any meaningful benefit, employers typically will need to file a lawsuit quickly and ask the court for some sort of preliminary injunctive relief. This means legal costs will be compressed and accelerated as attorneys ramp up for what is effectively a trial within a trial at the hearing for the preliminary injunction.

My advice? Take a cautious approach. If you are considering hiring a new employee who already has a non-compete agreement with her former employer, do not assume that the agreement won’t be enforced or that the former employer will not drag you into court to fight over it. If you are the former employer, and you wish to take action to enforce the agreement, you need to do a cost benefit analysis to ensure that the benefits of enforcement justify the cost of getting there. If you do not have non-compete agreements in place with your sales and management staff, you should. And if you do, conduct a full review to make sure they have in fact been signed and that they have been tailored narrowly to satisfy reasonableness requirements under the law.

Categories: Now You Know It

Recent Blog Posts

Take a Breath

On the Record

Joint Effort