By Mari Brown

Many employers, as a matter of practice, want their employees to sign noncompete agreements (or at the very least, employment agreements with noncompete provisions). Noncompetes are attractive to employers for their many potential upsides, and they grant employers a strong sense of security. The standard noncompete agreement will specify a period of time during which an employee or former employee cannot engage in business, directly or indirectly, that is in competition with their current or former employer.

However, despite appearing to be a silver bullet for loss of investment in employees, both large and small businesses must consider whether and to what extent noncompete agreements are enforceable (i.e., whether the agreement actually has a legal effect). Enforceability of noncompete agreements is often in doubt and varies by jurisdiction. For example, California has virtually banned noncompete agreements except in very limited cases, such as when business partners or members of an LLC mutually agree not to compete with the business once they leave or sell the business.

Here’s the unfortunate news for some business owners: the national trend is moving towards a more Californian system of noncompete agreements. For example, Washington State governor Jay Inslee signed a bill in May 2019 that bans noncompete agreements for employees below a certain income level ($100,000 for employees and $250,000 for independent contractors) and makes noncompete periods beyond 18 months after an employee’s termination presumptively unenforceable. Also in 2019, legislatures in Maine, New Hampshire, and Rhode Island passed laws limiting the enforceability of noncompete laws. Like Washington’s new regime, the laws passed in these three states ban noncompete agreements for workers below a given income level, though the precise income level varies by state.

Michigan may be the next state to join this trend. On August 29, 2019, Michigan House Representative Mari Manoogian introduced a bill that would put limitations on the enforceability of noncompete agreements within Michigan.

The Current State of the Law

In Michigan, state statutes currently govern noncompete agreements. The law as it stands says that a noncompete agreement is valid as long as:
1. It is reasonable as to its term, geographic area, and type of employment; and
2. It protects the employers reasonable competitive business practices.

The “reasonable in relationship to competitive business practices” prong to this test has been the subject of litigation. In Coates v. Bastian Brothers, the Michigan Court of Appeals announced that:

“To be reasonable in relation to an employer’s competitive business interest, a restrictive covenant 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.”

For business owners, this simply means that the agreements cannot be used to prevent employees from obtaining employment that use the same basic skills they learned in their job. Noncompete agreements that are tailored so that they prevent employees from unfairly using knowledge or skills learned at one job to compete against that employer will generally be enforceable. For example, a baker who hires an assistant could not enforce a noncompete against that employee if his tasks were limited to common, well-known baking duties. However, if the same baker hired an assistant and trained him to bake a special and difficult kind of cake in a way that no one was making the cake, and the employee attempted to work for the baker’s direct competitor making that special cake in the special way, the baker has a much better case for enforcing a noncompete.

As you can see from this brief overview, the current law in Michigan around noncompete agreements is fairly broad and governed by a reasonableness standard rather than more specific rules like those now in effect in Washington State. The proposed law in Michigan would transpose more specific rules on top of the existing reasonableness standard.

The Bill

Michigan’s proposed noncompete agreement bill makes four principal changes to the Michigan Antitrust Reform Act (MARA):
1. Advance written notice: Employers would be compelled to provide written notice of noncompete agreements that an employee is expected to sign before hiring the employee.
2. Unenforceable as to low-wage employees: Noncompete agreements would no longer apply to employees classified as “low wage,” meaning those who make less than $15.00 per hour or $31,200 per year. This is similar to the change in Washington State, though it is worth nothing that this is a much lower income threshold than the Washington law.
3. Limit on choice-of-law provisions: Certain choice-of-law provisions would invalidate noncompete agreements if those provisions negate other provisions of MARA.
4. Financial penalties. Employers that violate these noncompete rules would be subject to a civil fine of up to $5,000, assessment of attorney’s fees, and assessment of damages for lost wages of the employee.
For small businesses, many of which employ minimum wage workers, this change would render mean that going forward, many noncompete agreements they routinely have new employees sign would not be effective for new workers (though the bill would not void agreements already entered into). Businesses would also have to amend their noncompete practices to comply with the written notice requirement, which would increase operating costs.
The reasonableness standard codified in the current law would remain. This means that the noncompete agreements would still be subject to the two-prong test of the current law, with the added requirement that agreements meet the specifications of the new law.

It is too early to say whether this particular bill will become a law in the state of Michigan. However, noncompete reform is undoubtedly sweeping the nation and businesses may soon have to take a hard look at their existing agreements and model agreements to bring them up to compliance.

Given the fickle nature of these laws and the uncertainty inherent in reasonableness standards, as always the best defense is a good offense. Businesses should retain strong trade secrets practices so that even employees who cannot be subject to noncompete agreements cannot cause damage to their former employers when they move to new jobs.