Eliminate Non-Competes In Michigan?: HB 4198

Non-compete clauses are often found in employment contracts, whereby the employee normally agrees not to enter into or start a similar business or profession that competes against the employer. From the employer/business owner perspective, non-compete clauses protect a business’s trade secrets and confidential information by preventing employees from quitting one company and working for a competing business, where that employee might be tempted to exploit the trade secrets and confidential information from his/her (now) previous employer. The majority of states recognize and enforce non-compete clauses, with only one state, California, completely rejecting non-compete clauses in all but a few circumstances. The Michigan legislature is now considering whether non-compete clauses, which are typically enforced as long as they are reasonable in scope and protect a legitimate business interest, should be made statutorily unenforceable.

In a 1984 decision, the Michigan Supreme Court laid the foundation for the enforcement of non-compete clauses in employment agreements. Follmer, Rudzewicz & Co., P.C. v. Kosco, 420 Mich. 394 (1984). The Court ruled that if former employers could show that their former employees “had access to confidential information which provides [the employee] with an unusual opportunity to obtain patronage of particular clients of his former employer,” then a contractual provision that protects these former employers by restricting the former employee from where he can work is enforceable, as long as the time frame and geographic scope are “reasonable.” Id. at 407-08. This decision paved the groundwork for the Michigan Legislature to enforce non-compete clauses through the Michigan Antitrust Reform Act (M.C.L. § 445.774a) and Michigan Uniform Trade Secrets Act (M.C.L. § 445.1901 et seq.).

Even though Michigan has enforced non-compete clauses for the past 30 years, one Michigan State Representative, Peter Lucido, is trying to change the way Michigan treats non-compete clauses. On February 12, 2015, Lucido introduced House Bill No. 4198 – a bill that would amend § 445.774a by making non-compete clauses enforceable against only owners, principals, or executives of a business; non-compete clauses with all other employees would be void. HB 4198, 2015 Leg. 2015-2016 (Mich. 2015); Michigan House Journal. 98th Leg. sess., 12 February 2015, 137. After the bill’s first reading in the House, it was referred to the Committee on Commerce and Trade. Id. While Lucido seems adamant that “noncompete agreements [are] oppressive to workers,” Lucido remains the bill’s only sponsor. Dustin Walsh, House bill would ban noncompete agreements in Michigan, CRAIN’S DETROIT BUSINESS, Mar. 22, 2015. Without co-sponsors, it will be hard for the bill to gain traction. Even Chamber of Commerce and Trade’s director of health and human resources, Wendy Block, stated that “‘courts generally work to strike a fair balance when a noncompete is challenged . . . . We believe [Lucido’s] legislation is an overreaction to extreme examples.’” Id. Furthermore, the “Michigan Chamber of Commerce told Crain’s it would lobby against the bill if it gains momentum in the House.” Id.  With no co-sponsors, and with little in the way of support from other House members, it appears the bill will die in the Committee on Commerce and Trade.

Non-compete provisions in contracts (including employment contracts), when appropriately drafted, protect the legitimate interests of business owners.  Their continued enforcement by courts is crucial to maintaining a stable business environment.  However, business owners should be careful to draft provisions that are meant to do more than merely stifle competition, and should ensure that noncompetes are reasonable in scope and duration.  Should you have questions about the enforceability of a noncompete provision or agreement, you may contact Briar Siljander or Catherine Riesterer at 810-227-3103.

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