There is a certain type of contract that most people are familiar with but have little knowledge of. In fact many attorneys are not terribly familiar with the non-compete agreement. The non-compete can be a standalone agreement or, as is more common, it can be a clause in a much larger agreement. Regardless of the form that it comes in these agreements are complex and a fine line must be met.
The first thing that must be understood with a non-compete agreement is that these agreements are meant to protect a business. They are not meant to be so intimidating that an employee is stuck working for your business or else. There needs to be a legitimate proprietary interest that the agreement is meant to protect.
A common interest that is protectable would be a salesman’s customer list. While the salesman developed the list he did so as an employee of a business so the list is the property of the business. Thus, if the salesman was to leave the business and start or join a competing business he could use the customer list to steal customers from the business. The business wants to protect that proprietary information.
The next thing that must be considered with a non-compete is whether the scope, geographic range and duration are reasonable. This is a very subjective question and there are no specific rules that govern.
The scope of the agreement is what activities the person subject to non-compete would not be permitted to engage in. Going back to our salesman example, an agreement not permitting the salesman to engage in or work for any business that conducts sales is overly broad. An enforceable scope would be if he engaged in selling boats, he would not be permitted to engage in selling boats. He would still be able to sell cars, securities, houses or anything else.
The geographic range is the limit of the area which the person subject to the non-compete would not be able be able to compete in. This is often difficult to balance because the range must be limited enough to not hinder the employees ability to find work but at the same time broad enough to protect the businesses legitimate interest.
Things that will be considered in determining the geographic range are the location of the business, the nature of the business, customer locations, location and number of competitors in that area, and similar characteristics.
Duration is the length of time in which the limited activities cannot be engaged in. This is generally limited to a time period which would allow the business to reengaged its customers or clients and establish a connection to those customers or clients without the former employee. A farmer that buys fertilizer from a salesman engages with that salesman more often than a patient meets with his doctor. Thus a non-compete for the salesman would be shorter than that for the doctor.
There are many agreements that are greatly overbroad with the duration. Time periods of 5 years will never stand up in court. Generally non-competes in Michigan rarely extend beyond 24 months (and even those that go beyond 12 months have special circumstances).
There are other factors that will be considered including the consideration involved with the non-compete agreement and the nature of the agreement. A person selling a business and continues to receive payments from the purchaser will likely be subject to a more restrictive agreement than an employee that is terminated by a business.
If your business wants to use a non-compete agreement you should consult a small business attorney that can help craft an agreement that is tailored to your business. While Michigan Courts are permitted to reduce the terms of an agreement, if you use an overbroad agreement, you are putting the terms of that agreement in the hands of someone else. With a well drafted non-compete that is narrowly tailored, not only do you control it but you have a basis for the terms which will make it more likely to be enforced.
On the other side of that coin, if you are a former employee, do not let an overly broad non-competition agreement prevent you from making a living. Contact a business law attorney that can help advise you on what your rights are.