Noncompete Agreements Under Michigan Law: While Employee

Michigan Bar Journal December 2016

Commercial noncompetes are governed by the

antitrust rule of reason, not by the employment

reasonableness test

In Innovation Ventures, LLC v Liquid Manufacturing, LLC,

the Michigan Supreme Court held “that a commercial noncom-

pete provision must be evaluated for reasonableness under the

rule of reason.”

The trial court and the Court of Appeals had

held that a noncompete between businesses was governed by

the reasonableness test for employee noncompetes. The Su-

preme Court reversed, holding:

The Court of Appeals erred by applying the standard articu-

lated in MCL 445.774a, which is the proper framework to

evaluate the reasonableness of noncompete agreements be-

tween employees and employers. Instead, the Court should

have applied the rule of reason to evaluate the parties’ non-

compete agreement.

The Court explained that commercial noncompete agree-

ments are governed by MCL 445.772—the general contract

he Michigan Supreme Court recently dispelled the

common misperception that “reasonableness” is the

test for the validity of all noncompete agreements.

Reasonableness is the test only for employee noncompetes,

while commercial noncompetes are invalid only if they fail

the antitrust “rule of reason.”

As a practical matter, few noncompetes violate the more

exacting antitrust rule of reason, which requires an adverse

impact on competition in the relevant market, not just an un-

reasonable impact on a contracting party. The typical com-

mercial noncompete (with sellers of a business, independent

contractors, distributors, dealers, and franchisors) may be en-

forceable even if unreasonable to a contracting party.

By contrast, employee noncompetes in Michigan must be

reasonable, e.g., limited to the duration, geography, and scope

necessary to protect the employer’s legitimate competitive

interest. Drafting an enforceable employee noncompete is a

challenge. Using forms is ill-advised. The agreement should be

customized to the particular employee(s) and the employer’s

interest being protected.

Fast Facts:

Different tests govern

employee versus

commercial noncompetes.

Commercial noncompetes

can be valid even

if unreasonable.

Even an unreasonable

commercial noncompete

can be enforceable, as long

as it does not violate

antitrust law.

By Dennis M. Haffey and James F. Hermon

While Employee Noncompetes Must Be Reasonable,

Even Unreasonable Commercial Noncompetes May Be Valid

Noncompete Agreements

Under Michigan Law

December 2016 Michigan Bar Journal

provision of the Michigan Antitrust Reform Act—and that

“MCL 445.772 codiﬁed the rule of reason” by its language

modeled on the federal Sherman Antitrust Act: “A contract,

combination, or conspiracy between 2 or more persons in

restraint of, or to monopolize, trade or commerce in a rele-

vant market is unlawful.”

The Court directed lower courts to federal cases applying

the antitrust rule of reason:

[F]or evaluating a noncompete agreement between two busi-

ness entities,...MCL 445.784(2) instructs courts to look to

federal interpretation of comparable statutes.

The ruling in Innovation Ventures is consistent with the

Supreme Court’s enforcement of contracts literally—as funda-

mental to the freedom of contract—regardless of a contract’s

reasonableness. In Rory v Continental Insurance Company,

the Court held that “mere judicial assessment of ‘reasonable-

ness’ is an invalid basis upon which to refuse to enforce con-

tractual provisions,” because “[w]hen a court abrogates unam-

biguous contractual provisions based on its own independent

assessment of ‘reasonableness,’ the court undermines the par-

ties’ freedom of contract,” which is “the bedrock principle of

American contract law....”

Rule of reason requires more than unreasonable

impact on a party

To invalidate a contract under the antitrust rule of rea-

son requires more than an unreasonable impact on a party.

Generally, the rule requires that “the purportedly unlawful

contract...produced adverse anticompetitive effects within

relevant product and geographic markets.”

The antitrust laws

were passed for the protection of competition, not competi-

tors. The Supreme Court in Innovation Ventures noted that

the proper focus includes whether the noncompete “may

suppress or even destroy competition.”

Injury merely to the

plaintiff or a contracting party or single competitor does not

sufﬁce. Instead, “[t]he test under the rule of reason is whether

competition in the overall market has been harmed....”

To show that the market has been harmed, a defendant

must have market power.

This means that a defendant must

have a dominant market share with “the ability to raise prices

above those that would be charged in a competitive mar-

ket.”

A plaintiff must show “the market has suffered a reduc-

tion in output or an increase in consumer prices.”

The codiﬁcation of the rule of reason in MCL 445.772 con-

tains no special language for noncompetes. The Court did

cite some decisions in Innovation Ventures identifying cer-

tain rule of reason factors, but it would be unwise to assume

that those selected citations were an attempt to deﬁne a spe-

cial rule of reason requirement for noncompetes, rather than

illustrate that the requirements differ from the reasonable-

ness standard for employee noncompetes.

There are federal cases that apply the rule of reason to

commercial noncompete agreements and dismiss claims that

fail to prove an adverse impact on competition in the relevant

market. For example, in Lektro-Vend Corporation v Vendo

Company,

the court held that a claim to invalidate a com-

mercial noncompete agreement failed “because the plaintiffs

did not establish the required § 1 showing of adverse impact

upon competition in the relevant market... .”

Drafting enforceable employee noncompetes

is a challenge

The typical commercial noncompete agreement does not

involve the rule of reason factors—harm to competition in

a relevant market, market power, antitrust injury, etc.—and

thus is enforceable according to its literal scope, even if un-

reasonable to a contracting party. By contrast, literal language

does not deﬁne the enforceability of employee noncompetes,

which are used to protect employers’ competitive interests but

face legal restrictions to protect the freedom of employees to

change employment and maximize the value of their labor.

Effective drafters avoid cookie-cutter forms and instead cus-

tomize to the particular employer, employee, and competitive

interest to be protected. Here are ﬁve practice pointers.

Have a standalone, signed noncompete agreement

An agreement not to compete buried in an employee hand-

book risks being unenforceable. Handbooks are not always

signed by employees and often contain disclaimers stating

that they are not contracts but mere expressions of policy

that can be unilaterally changed by the employer. Disclaim-

ers help employers avoid breach of contract claims, but un-

dercut an employer’s ability to enforce a handbook provision

as a contract.

An agreement not to compete

buried in an employee handbook

risks being unenforceable.

Handbooks are not always signed

by employees and often contain

disclaimers stating that they are not

contracts but mere expressions of

policy that can be unilaterally

changed by the employer.

Michigan Bar Journal December 2016

Noncompete Agreements Under Michigan Law

As a practical matter, lawsuits to enforce noncompetes of-

ten are won or lost at the temporary restraining order or pre-

liminary injunction stage. The employer must prove a valid

noncompete agreement, and a genuine dispute over whether

there was knowing, mutual assent to terms buried in a hand-

book imperils the grant of injunctive relief.

Get a separate

signed agreement containing the noncompete provision.

Consider what state’s law governs

Noncompetes are creatures of state law, and enforceabil-

ity varies by state. For example, California

and North Da-

kota

prohibit enforcement of certain noncompetes. Illinois

requires a certain duration of employment before an em-

ployee is deemed to have business information sufﬁcient to

warrant a noncompete.

Other states have similarly unique

laws. A choice-of-law provision in the noncompete may help

determine which law applies but is no cure-all, as rules for

enforceability also vary by state.

Attorneys drafting employee noncompetes should con-

sider not just where the employer is located, but where the

employees live and work, which services they perform and

where, and which interests are being protected, as well as the

noncompete laws of the states that are likely candidates in a

dispute over which law applies.

Satisfy Michigan’s reasonableness requirements

When Michigan law applies, the drafting attorney should

include recitals and evidence that help satisfy MCL 445.774a,

which provides that an employee noncompete is enforceable if

it (1) protects the employer’s legitimate competitive business

interest; and (2) is reasonable as to duration, geography, and

type of prohibited employment or line of business. The non-

compete should specify the employer’s competitive industry,

the particular employee’s role, the conﬁdential information to

which the employee has access, and other support to argue

that a legitimate competitive business interest is protected.

Avoiding competition is not a legitimate business interest,

but protecting goodwill (e.g., in the purchase of a business)

and conﬁdential information (e.g., regarding customers) may

support a noncompete.

Reasonable geographic, temporal,

and occupational restrictions vary. Depending on the business,

a reasonable geographic scope can be a few miles, a metro-

politan area, a state, a country, or broader.

Reasonable dura-

tion similarly varies; technical information that quickly be-

comes obsolete does not justify the same duration as protecting

a corporation’s acquisition targets and strategies in a ﬁve-year

plan. Restricted employment may be limited to jobs for com-

petitors who can beneﬁt from the employer’s proprietary in-

formation, or broadly encompass all lines of business in which

the employer competes.

Customize the agreement to the employer and employee

The same noncompete may not work with every employer

or even all employees of the same employer. An engineer may

have technical information with a short shelf life but with

worldwide value to competitors, while a salesperson may be

limited to customers in a single city but armed with conﬁden-

tial information that could provide a competitive advantage

for years. The employer may have different noncompetes for

different employees, with different terms on duration, geog-

raphy, and scope.

Employers may resist having multiple forms of noncom-

petes because of cost and inconvenience, but may see the

value of a template designed for the employer’s business with

optional provisions easily customized to the particular em-

ployee and interest being protected.

Legal consideration must support the noncompete

Like any contract, a noncompete must be supported by

legal consideration. For a new employee, consideration may

be the job offer.

Seeking a new noncompete from an exist-

ing employee is more problematic. Continued employment of

an at-will employee may be consideration, but not for an em-

ployee terminable only for cause.

The Court in Innovation Ventures held that continuation

of the business relationship between two companies was suf-

ﬁcient consideration for their commercial noncompete, but

“decline[d] to address in this case whether failure of consid-

eration applies to at-will employees who sign a noncompete

agreement after an at-will employment has started.”

Relying solely on continued employment as consideration

presents risks. For example, will the employer terminate an

existing employee who refuses to sign a new noncompete?

December 2016 Michigan Bar Journal

7. Rory v Continental Ins Co, 473 Mich 457; 703 NW2d 23 (2005).

8. Id. at 468–470.

9. United States v Blue Cross Blue Shield, 809 F Supp 2d 665, 671

(ED Mich, 2011).

10. Innovation Ventures, 499 Mich at 514, quoting Bd of Trade of Chicago v

United States, 246 US 231, 238; 38 S Ct 242; 62 L Ed 683 (1918).

11. Hassan v Indep Practice Assocs, PC, 698 F Supp 679, 695 (ED Mich, 1988);

see also Care Heating & Cooling, Inc v American Standard, Inc, 427 F3d

1008, 1014–1015 (CA 6, 2005) (explaining that “a complaint alleging only

adverse effects suffered by an individual competitor cannot establish an

antitrust injury”).

12. Hand v Central Transp, Inc, 779 F2d 8, 11 (CA 6, 1985).

13. NCAA v Bd of Regents, 468 US 85, 109 n 38; 104 S Ct 2948;

82 L Ed 2d 70 (1984).

14. Sterling Merch, Inc v Nestlé, SA, 656 F3d 112, 121 (CA 1, 2011).

15. Lektro-Vend Corp v Vendo Co, 660 F2d 255 (CA 7, 1981).

16. Id. at 267. Lektro-Vend was cited with approval in Compton v Joseph Lepak,

DDS, PC, 154 Mich App 360, 368; 347 NW2d 311 (1987), and in

Perceptron, Inc v Sensor Adaptive Machines, Inc, 221 F3d 913, 918–920

(CA 6, 2000), which was cited with approval in Innovation Ventures,

499 Mich 491.

17. US Treasury Department, Non-compete Contracts: Economic Effects and Policy

Implications (March 2016), p 3 (noting that 18 percent of American workers, or

nearly 30 million people, are covered by noncompete agreements).

18. See Heurtebise v Reliable Bus Computers, 452 Mich 405; 550 NW2d 243

(1996); Smith v Chrysler Fin Corp, 101 F Supp 2d 534 (ED Mich, 2000)

(both holding unenforceable an arbitration policy contained in an employee

handbook subject to unilateral change by an employer).

19. Dana Ltd v Am Axle & Mfg Holdings, unpublished opinion of the US District

Court for the Western District of Michigan, issued August 19, 2003

(Docket No. 1:10-cv-450).

20. See Cal Bus & Prof Code § 1660; Edwards v Arthur Anderson,

44 Cal 4th 937, 189 P3d 285 (2005).

21. See ND Cent Code § 9-08-06; Warner & Co v Solberg, 2001 ND 156;

634 NW2d 65 (2001).

22. Fiﬁeld v Premier Dealer Svcs, Inc, 993 NE2d 938 (Ill App, 2013).

23. Malsberger, Covenants Not To Compete: A State-by-State Survey (9th ed)

(examining in detail each state’s law in this area is an indispensable resource

to the practitioner drafting and interpreting noncompete agreements).

24. Id.; see also Rooyakker & Sitz PLLC v Plante & Moran PLLC, 276 Mich App

146, 158; 742 NW2d 409 (2007).

25. Compare Robert Half Int’l Inc v Van Steenis, 784 F Supp 1263 (ED Mich,

1991) (ﬁnding 50-mile radius from Ann Arbor ofﬁce in salesperson

noncompete to be unreasonable when sales were not performed from

that location but were instead conducted from Troy and Southﬁeld), with

Superior Consulting Co v Williams, 851 F Supp 839 (ED Mich, 1994)

(enforcing worldwide noncompete after ﬁnding former employer’s business

was international in scope).

26. The Michigan statute contains an important “savings” clause: to the extent that a

covenant not to compete is found to be unreasonable, “a court may limit the

agreement to render it reasonable in light of the circumstances in which it was

made and speciﬁcally enforce the agreement as limited.” MCL 445.774a.

2 7. Lowry Computer Prods, Inc v Head, 984 F Supp 1111 (ED Mich, 1997).

But see Kelsey-Hayes Co v Maleki, 765 F Supp 402 (ED Mich, 1991),

vacated and dismissed following settlement, 889 F Supp 1583 (ED Mich,

1991) (ﬁnding lack of consideration when consideration for a two-year

noncompete was at-will hire).

28. Id.; see also QIS, Inc v Indus Quality Control, 262 Mich App 592; 686

NW2d 788 (2004) (noting that employees terminable only for just cause

under the auspices of a collective bargaining agreement cannot be issued

a noncompete as a condition of continued employment and have that

continued employment serve as consideration).

29. Innovation Ventures, 499 Mich at 511 n 12.

That may be acceptable when employees are easily replaced

or poor performers, but termination may be less attractive

when the refusing employee is a key engineer, salesperson,

executive, etc. Declining to terminate a refusing employee may

call into question the adequacy of the consideration for non-

competes with those employees who did sign.

One solution is to pay a new beneﬁt with the noncom-

pete, such as a raise, bonus, or promotion.

Conclusion

Employee noncompete agreements should not be based on

cookie-cutter forms because they may be enforceable only if

carefully drafted to comply with the governing state law which,

in Michigan, means reasonably limited to the duration, geog-

raphy, and scope of work necessary to protect an employer’s

legitimate competitive interest.

By contrast, commercial noncompetes in Michigan are gov-

erned by the antitrust rule of reason and may be enforceable

even if unreasonable to a contracting party. A typical com-

mercial noncompete will likely not violate the rule of reason

requirements of an adverse impact on competition in the

rele vant market, causing antitrust injury.

ENDNOTES

1. Innovation Ventures, LLC v Liquid Mfg LLC, 499 Mich 491, 512;

NW2d (2016).

2. Id.

3. Id. at 496.

4. Id. at 511–512.

5. MCL 445.772.

6. Innovation Ventures, 499 Mich at 513–514.

James F. Hermon is a member of Dykema

Gossett PLLC concentrating in counseling and

representing employers in disputes with em-

ployees. He has been repeatedly listed in The

Best Lawyers in America.

Dennis M. Haffey is a member of Dykema

Gossett PLLC concentrating in business litiga-

tion. He served for years as director of the

Dykema Litigation Department, is a Fellow

of the American College of Trial Lawyers, and

is repeatedly listed in The Best Lawyers in

America, Chambers USA: America’s Lead-

ing Lawyers for Business, and Michigan

Super Lawyers.