Korovesis and Fuhs: Defending non-compete agreements
Recently proposed legislation in Michigan, Washington and Massachusetts seeks to ban non-compete agreements.
A non-compete agreement is a contract between an employer under which the employee, in exchange for employment, agrees to not join a competitor of the employer and compete with them for a certain amount of time (typically one year) and in a certain area.
The primary goal of a non-compete agreement is to protect the legitimate business interests of the employer, including trade secrets and otherwise confidential information, customer relationships and company goodwill.
These types of agreements have continued to face a steady attack from a variety of circles in the business, legal, political and academic communities, including calls on state legislatures to ban or drastically limit their enforcement.
The effort to ban or limit non-compete agreements often relies on the premise that in the absence of such agreements, innovation and economic development flourish.
As appealing as that argument might seem, especially in a depressed economic environment, it ignores the positive effect of non-compete agreements. Reasonable non-compete agreements do protect legitimate business interests and can exist without impeding innovation. Non-compete agreements promote and cultivate innovation and serve a vital role in a knowledge-based economy by protecting entrepreneurs’ ideas, investments and goodwill. That is likely why nearly every state allows some form of restrictive covenant agreement.
California generally prohibits non-compete agreements and critics believe California is “flourishing” as a result. Notably absent from that discussion are the following facts:
■ California has the nation’s third highest unemployment rate according to the Bureau of Labor Statistics.
■ Business Insider ranked California as one of the worst states for small business in 2014, giving California an “F” for small-business friendliness.
By some measures, Michigan is doing much better than California:
■ For two consecutive years, Site Selection Magazine ranked Michigan among the top five states for major new corporate facilities and expansions.
■ Michigan is the most improved state of 2014 for facing challenges of 21st-century competition for jobs and business investment (American Economic Development Institute, July 2014).
■ Michigan’s venture capital community is outpacing the national trend, with 35 venture capital firms that manage $4 billion in capital (Michigan Economic Development Corp., July 2014).
Outside of the weather, why would anyone want to be like California?
Jimmy John’s sets a bad example
Critics of non-competes often cite the unreasonableness of Jimmy John’s asking its sandwich makers and delivery personnel to sign broad, two-year non-competes as an example. This is actually a good example of what would likely not be enforceable in Michigan. Given the 30-year case law history of “reasonableness” in Michigan, as well as the strong knowledge base of the Michigan business court judges and the federal bench, Jimmy John’s would have an extremely difficult time trying to enforce a non-compete against a sandwich maker in Michigan.
Critics of non-compete agreements also often fail to consider the potentially more significant effect on the former employer and its other employees if non-compete agreements were banned. If a former employee is allowed to immediately go to a direct competitor, take the former employer’s information or customer contacts and then directly compete with the former employer because there is no non-compete agreement in place or if only a non-solicit or non-disclosure agreement was in place, what protects a business and its other employees from that loss of business? Simply put, without adequate non-compete protection, a company could lose business or go out of business and numerous employees could potentially be out of work; hence, a negative economic impact.
Reasonable non-compete agreements promote and nurture innovation and serve to protect entrepreneurs’ ideas, investments, goodwill and other legitimate business concerns. They do not prevent individuals from earning a livelihood, they are not mandatory and the potential outlawing or limitation of such agreements fails to account for the potentially larger effect on business and other employees.
Non-compete agreements have played an important role in market economies for centuries and there is no legitimate basis to change the legal landscape in any state.
Phillip C. Korovesis is chair of the Trade-Secret and Non-Compete practice group at Butzel Long’s Detroit office.
Bernard J. Fuhs concentrates his practice in the areas of business and commercial litigation at Butzel Long’s Detroit office.