Whether the purpose of an agreement is to retain work done by an employee, to protect confidential company information, or to preserve the business of customers, non-compete agreements are an important tool used by many businesses to protect themselves from the actions of a former employee or independent contractor. There is no doubt that a non-compete agreement can be a practical way to protect the interests of your business; however, the protection a non-compete can provide loses its benefit and can potentially harm the company if it is deemed unenforceable. Under Michigan law, a non-compete agreement must:
- Protect a reasonable competitive business interest;
- Be reasonable in duration, geographical area, and type of employment or line of business;
- Not be specifically injurious to the public; and
- If it contains a liquidated damages clause, that it be reasonable.
What Constitutes a Reasonable Competitive Business Interest?
The first objective of a valid non-compete agreement is to identify the business interest that needs to be protected. This means that “cookie cutter” non-competes will rarely work. Instead, the agreement should be narrowly tailored to protect the specific business interest, whether this be a trade secret, customer relationships, or something else specific to the business. Drafting specific non-competes that are tailored to specific circumstances will ensure that the non-compete is not overbroad, which would render it unenforceable.
Duration, Distance, and Scope of the Agreement
The duration, geographical area, and type of employment restricted under the non-compete must also be narrowly tailored to protect the business interest mentioned above. Reasonableness depends entirely upon the industry and the nature of the interest. Generally speaking, reasonable duration is somewhere between six months to years; however, if the business interest that is being protected warrants additional duration, it can extend to several years. Similarly, distance and scope are dependent on the industry and the interest seeking protection. For instance, it would be reasonable to restrict a doctor from practicing in pediatric care within Livingston County, but it will almost definitely be unreasonable to restrict a doctor from practicing at all within the state of Michigan. Again, reasonableness dictates an assessment on a case-by-case basis.
Non-Competes and Public Injury
Non-competes can be considered unenforceable even if they are reasonable as to the interest to be protected and as to the duration, area, and scope. This occurs when a non-compete, if enforced, would cause detriment to the public. For example, a non-compete that prohibits an oncologist from practicing in Livingston County for six months may be unenforceable for reason of public injury. It may be impractical or impossible for patients needing a very specific type of medical care to see another doctor in the area or to switch doctors in the middle of treatment. This is not true for most agreements; however, it is another pitfall to be aware of when drafting a non-compete.
Should I use a Liquidated Damages Clause?
Liquidated damages are an amount the parties designate during the formation of a contract if one of the parties breaches the contract. A liquidated damages clause, while not a necessary component of a valid non-compete, is a completely valid option if used properly. Liquidated damages clauses are often misused and are thus struck from the non-compete. First, a liquidated damages clause must be a reasonable assessment and not excessive given the injury suffered. Another way to put this is the purpose of the liquidated damages clause must not be to act as a penalty, but rather to be a reasonable assessment of damages to the business in the event of a breach. Additionally, these clauses have been enforced by Michigan courts only if damages are uncertain, difficult to ascertain, or purely speculative in nature. These provisions are most likely valid in employment situations, where the damage of an employee violating the non-compete is almost impossible to quantify.
The proper use of a non-compete agreement still remains an effective tool that a savvy business owner has at his or her disposal to protect the interest of their business. It is of great importance, however, to ensure that the document is prepared by a competent attorney. A non-compete is useless if it is unenforceable.