Non-Competition Agreements Are Under Attack

April 9, 2015

A Michigan Legislator is attempting to stop employers from enforcing reasonable non-competition agreements against most individuals.

Non-competition agreements, generally speaking, are contracts that temporarily prevent former employees from working for nearby competitors. Michigan law used to prohibit most such agreements, deeming them illegal restraints of trade. That changed in 1985, when the Michigan Legislature amended the Michigan Antitrust Reform Act. The 1985 amendment expressly authorized employers to bind employees to noncompetition agreements, provided they protect an employer’s “reasonable competitive business interests” and are reasonable as to duration, geographical area and type of employment or line of business. See Mich. Comp. Laws §445.771a.

The 1985 amendment inspired many employers to create employment agreements containing non-competition clauses. These clauses provide many businesses an important, if not critical protection against unfair competition. Courts generally enforce such agreements, provided they satisfy the statutory reasonableness requirements.

The law might change again. Representative Peter J. Lucido, a Republican from Macomb County, recently introduced a bill that, if passed, will dramatically limit the use of non-competes in Michigan. Specifically, House Bill 4198, as currently styled, will eliminate employers’ statutory right to bind employees and contractors to non-competition agreements, and void existing non-competes with employees, contract laborers and most individuals. The bill will allow reasonable non-competes only in connection with the sale of a business, and only against the owners, principals or officers of the business being sold.

The Bill is in the early stages of the legislative process, but it is worth following because of its potential impact. The bill could limit, or completely eliminate, a key means by which employers protect themselves against unfair competition.

Employers currently relying on non-competition clauses should consider protecting themselves through other means, such as with non-solicitation and confidentiality agreements. Such clauses are arguably not affected by House Bill 4198.

Contributed by Jeff Steele, Senior Counsel at Clark Hill, LLC.

View the on-demand webinar “HR’s Role in Keeping Secrets: How to Protect Confidential Information”, with Jeffrey Steele.