In Defense of the Employment Non-Compete Agreement

On March 18, 2015, Crain’s Detroit published an article entitled “Laws on noncompete agreements hurt Michigan, new study says.”  The article argues that Michigan can reverse a drain of talent by banning non-competes.  This article comes on the heels of a bill proposal in the Michigan Legislature to limit non-compete agreements to business owners.

The study on non-competes itself seemingly has numerous flaws, such as the assumption that non-competes are the sole factor of why “inventors” would move to states without non-competes.  It also ignores the history of Silicon Valley as a technology destination, the availability of venture capital, and, the existing tech companies that give inventors a start before going out on their own.  This assumption ignores other social, economic, and demographic trends of Michigan’s talent drain.  For instance, many non-inventors leave Michigan for a myriad of reasons that do not relate to non-compete agreements.

But let’s assume that banning or restricting non-competes in Michigan would help keep “inventors” in the state.  The article focuses on employees and ignores the impact on job creators.  Businesses prefer to protect their interests with reasonable non-compete agreements to ensure that the investment made in employees will not lead to disaster when that employee bolts to a competitor with the company’s customer lists and product knowledge.  As the article points out, even with non-competes essentially unlawful in California, Apple and Google had agreed not to poach employees from each other.  Michigan needs to attract business to the State and businesses prefer the protections a non-compete can offer.

It is this reasonable balance of interests that makes Michigan’s non-compete law so beneficial.  The Crain’s article ignores the practical way Michigan’s non-compete statute operates.  Under Michigan’s law, a non-compete must be reasonable to be enforced.  This includes a realistic protection of business interests.  For instance, Jimmy John’s attempting to restrict its delivery personnel from competing simply will not be enforced since there is no business interest in doing so.  The “freaky-fast” delivery guy does not have the company’s customer list or knowledge of a secret Jimmy John’s recipe and therefore there is no basis to prevent competition.

On the other hand, a court will uphold a non-compete that protects an employer’s reasonable business interest and is still fair to the employee.  For example, consider a company that provides medical support services to hospitals.  Because the company spends a great deal of money to train its employees, it is known in the industry as producing high quality talent.  As such, competitors, rather than investing in their own training, often attempt to poach the company’s employees.  Thus, after investing a great deal of money in these employees, these employees would leave for a competitor and end up in the same hospital where they were working, but now competing against the company.  The imposition of a reasonable two-year non-compete that prevents these employees from competing at the same hospitals where they worked for the company is a reasonable way to help prevent damage to its business.  In this way, the employee is not prevented from working at any hospital, she just cannot turn around and compete at the same hospital where she worked for the company.  The company, in turn, has a reasonable protection from the investment it made in the employee. 

But Michigan non-compete law goes even further to protect employee interests.  The law expressly allows a Judge to rewrite, or “blue pencil,” a non-compete that is unfair.  Therefore, if a company were to try to enforce an unfair non-compete, a court could rewrite the unfair provisions in favor of the employee.

    

The current bill before the Michigan legislature to restrict non-competes is sold as a protection for workers.  But, in reality it would only hurt job creators and that is not good for workers.

Brett J. Miller is a principal attorney at the Kitch Law Firm in Detroit.  He specializes in labor and employment law and has litigated non-compete lawsuits and lectured on the subject.