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Mar 2007
23
March 23, 2007

Non-Compete Agreement: Not Your Ordinary Contract

Virtually every employer with employees who have access to a customer list or other sensitive information has those employees sign a non-compete agreement. This is certainly true in the accounting field where customer lists, preferences, and other types of information are very important to the firm servicing those customers. These agreements typically restrict the employee from working for a competitor for a certain length of time in a certain geographic area. They also typically contain a clause restricting the employee from calling on the employer’s customers for a certain period of time.

Although non-compete agreements are quite common, both employers and employees often fail to understand their ramifications. Employers tend to believe that if they have a non-compete in place it will prohibit employees from working for a competitor. But unlike typical contracts, if a non-compete agreement is breached, it is not at all clear that a court will enforce its provisions.

In Michigan, non-compete agreements in the employment context were illegal until 1985, when the legislature passed the Michigan Anti-Trust Reform Act (MARA). MARA allows employers to obtain from an employee an agreement that prohibits that employee from working for a competitor as long as it protects an employer's reasonable competitive business interests and is reasonable as to its duration and geographical area. Given these conditions, it is simply not enough for an employer to show that an employee has signed a non-compete agreement and that it has been breached. Rather, unlike "normal" contracts, MARA adds another crucial layer of analysis—does the agreement protect the employer’s reasonable competitive business interest?

Enforcement of the Rules

This is a very fact-specific analysis. Often times, determining whether a non-compete agreement will be enforced depends on the judge. But there are a few rules of thumb. Judges typically do not like prohibiting people from working. They want to know whether the employee is actually competing against the former employer unfairly. Most often, an employer must show that the goodwill it has built up with its customers is now being used to its disadvantage.

For example, those firms that are customer-driven and whose success is based on the strength of customer relations spend considerable resources on their employees to nurture those relations. When an employee leaves, the employer needs a certain period of time to have a replacement forge a new relationship with the customers. If the former employee interferes with that process by soliciting those customers (based on the relationship the employer paid to establish), most judges will find that to be unfair. Under these circumstances, if the agreement is reasonable in the other respects mandated by MARA, it will likely be enforced. However, without any evidence of unfair activity on the employee’s part, it is difficult to enforce a non-compete agreement. This is true even where the employee has technically violated it by going to work for a competitor.

On the other hand, employees often mistakenly believe that their non-compete agreement won’t "really" be enforced. They must also understand that they cannot leave their employment in a way that is unfair – such as by taking customer lists or soliciting customers after they leave. Most judges will not hesitate to enforce non-compete agreements under those circumstances, which may put the employee out of work for a year or more.

Understanding how non-compete agreements are typically enforced will allow both employers and employees to avoid disputes and prepare for an orderly transition if an employee decides to leave. An employer wants its agreements enforced, and an employee does not want to be put out of work. Given the risk to both sides, this is incentive enough to resolve potential disputes.

About the Author

Edward J. Bardelli is a partner at Warner Norcross & Judd LLP, one of the largest law firms in Michigan. He concentrates his practice in litigation, with a particular emphasis on employment issues, non-compete agreements and trade secrets. He can be reached at ebardelli@wnj.com.

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