Home > business, business law, litigation, startups > Michigan Business Law Update on Non-Competition Agreements.

Michigan Business Law Update on Non-Competition Agreements.

I received a question in response to a recent post on non-competition legislation. The question was: “are non-competition agreements unenforceable in Michigan?

I will give you the typical lawyer answer: “it depends“.

In theory, CNCs are enforceable in Michigan.

Under certain circumstances, they are not.

A February 18, 2016 unpublished Michigan Court of Appeals decision is helpful to illustrate when a CNC may be enforceable and when it may not be.

The Case:     Mid Mich. Med. Billing Service. v. Williams

Facts:

  • Plaintiff, Mid Michigan Billing Service, Inc. (“MMBS”) provides medical billing services in Flint, Michigan (another topic for another day).
  • Defendant, Lindsey Williams (“Williams”) was employed as an office manager for MMBS between 2002 and 2013″ Check out the opinion here. Mich. Med. Billing Serv. v. Williams, 2016 Mich. App. LEXIS 319, *1-2 (Mich. Ct. App. Feb. 18, 2016).
  • “One of Williams’ responsibilities was overseeing client relations.” (important detail).
  • Williams signed an employment agreement and employee handbook that contained a 12 month covenant not to compete, and not to solicit (indefinite).
  • In May 2013, Williams voluntarily left her employment with MMBS and began her own  medical billing business out of her home. One of her clients was a former client of MMBS.
  • On August 14, 2013, MMBS filed a complaint and motion for a preliminary injunction, alleging a breach of contract claim based on the noncompetition provisions in the employee handbook and the employment agreement.
  • In particular, MMBS alleged that Williams violated the terms of the noncompetition provisions by performing medical billing out of her home, by contacting and soliciting the business of MMBS’s clients, by performing “medical billing for one of [p]laintiff’s current clients,” by employing one or two former employees of plaintiff, and by inducing others to terminate their employment with plaintiff.

II. The Trial Court decision:

After trial, the Court ordered Williams, “to pay damages and enjoin[ed her from] from (1) “engaging in any conduct . . . competitive with a service provided by Plaintiff . . . within 50 miles of Plaintiff’s principal place of business . . . for a period of one year” from the entry of the September 10, 2013 interim order; and (2) “from obtaining employment, either directly or indirectly, from any current or previously contracted client of [plaintiff],” regardless of geographic distance or duration.” (Emphasis added). Id. pg 5-6.

Williams appealed. She did not challenge the fact that she signed the non-compete documents and agreed to be bound. Rather, Williams argued that the Judge failed to inquire and determine whether the restrictions were reasonable.

Question to ask yourself: Is it reasonable to limit a former employee of yours from soliciting your customers, past or present, forever? (hint…answer below).

III. The Court of Appeals: CNCs need to be Reasonable.

The Court of appeals found that “A Court must assess the reasonableness of a noncompetition clause if a party has challenged its enforceability.” Id. Citing Coates v Bastian Bros, Inc. 276 Mich App 498 (2007).

Whether or not a clause is reasonable and enforceable is a “fact specific inquiry”. Id.

The relevant question: “whether the noncompetition provision protects an employer’s “reasonable competitive business interest” in the context of [the employer’s] specific business.”  Medical Billing, supra. pg 8.

Reasonable  = more than merely preventing competition.

The Court goes on state that if a CNC is going to be “reasonable” “an employer’s business interest justifying a restrictive covenant must be greater than merely preventing competition.” Id. at pg 10.

Reasonable = prevent an employee’s unfair advantage.

In order to be reasonable the CNC “must protect against the employee’s gaining some unfair advantage in competition with the employer, but not prohibit the employee from using general knowledge or skill.” Id. citing Coates.

The Court held that MMBS could “place reasonable restrictions on [Williams’] use of plaintiff’s client information and relationships.”  However, the Court found it “unreasonable to permanently prohibit her from pursuing employment opportunities, directly from any…client of plaintiff.” Id.

The Court affirmed in part the trial court’s grant of the non-competition, but reversed on the issue of the non-solicitation, finding that it was not reasonable to permanently enjoin a former employee from soliciting customers of former employer.  (“restrictive covenant must be reasonable as between the parties, and it must not be specially injurious to the public.”) Id. at pg 12, citing Coates

.It is injurious to the public if, at some level, you do not let them choose who they can get services from.

Takeaways:

1. CNCs may generally be enforceable in Michigan.

2. CNCs must be reasonable.

3. Courts will reform a CNC to make them reasonable if they are not reasonable.

4.  It is reasonable to protect a former employee from using confidential information to gain an unfair advantage in competing.

5. It is not reasonable to prohibit a former employee from using “general knowledge or skill”.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

www.dwlawpc.com

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