Non-Compete Agreement (Part 1 of 2)

Non-Compete Agreement (Part 1 of 2)

An Introduction to Non-Compete Agreements (Part 1 of 2)

[This is the first part of a two-part article. This first installment will cover the basic definition of a non-compete agreement, the fact that such agreements are enforceable in Indiana and Michigan, and why you as an employer or business owner should care. The second installment will expand on enforceability issues under Indiana and Michigan law and provide some basic fact patterns where such an agreement might be more or less likely to be enforced by a court.]

If you own or operate a business and have employees, you have likely come into contact, in one way or another, with what is often referred to generically as a “non-compete agreement.” As a business manager who either has current employees or any plans to have employees in the future, it is important that you understand what a non-compete agreement is, what a non-compete agreement can and cannot do for your business, and how your current or future employee’s non-compete agreement with a former employer could create significant legal issues for your business even though your business is not a party to that agreement.

Although often referred to by the generic phrase “non-compete agreement,” in our experience when the typical business person comes to us to discuss a non-compete agreement they often have in mind an agreement which encompasses a number of different restrictions on the employee’s activity both during the term of his employment and after the termination of his employment. These restrictions may be included as part of an employment agreement, as provisions in an employee handbook, or in a separate agreement dedicated solely to that purpose. These restrictions potentially include separate covenants against competition with the business of the employer, solicitation of some or all of the business’s customers, solicitation of some or all of the business’s other employees, solicitation of some or all of the business suppliers, and separate covenants to maintain the confidentiality of and not to disclose to third parties certain confidential or proprietary information that may have been available to the employee as a result of his or her employment. These various non-competition, non-solicitation, and confidentiality obligations are often described in the agreement as being limited in some fashion as to the scope of the restricted activity, the geographic scope of the limitation, and the length of time the limitation will remain in effect after the termination of the employee’s employment.

In addition to the typical employee non-compete agreement described above, there is another main type of non-compete agreement that many business owners may encounter either when they buy their business or sell their business. This is often referred to as a “non-compete agreement ancillary to the sale of a business.” Although the line between these two types of non-compete agreements can sometimes be blurry, the non-compete agreement ancillary to the sale of a business is typically entered into by the owners of the business in connection with the sale of the business to another party, and is provided by the selling owners for the benefit and protection of the new owners.

The single most important reason you should be aware of and at least minimally knowledgeable about non-compete agreements is this: Non-compete agreements if properly drafted and used in the appropriate factual circumstances, are enforceable in both Indiana and Michigan. This applies to both traditional employee non-compete agreements and to non-compete agreements ancillary to the sale of a business.

The fact that these agreements are enforceable in Indiana and Michigan may come as a surprise to some of you. We sometimes hear from business owners that such agreements are a “waste of time” and aren’t worth the paper they are written on, and consequently, many business owners may make one of two mistakes. First, the business owner may fail to have the business’s employees sign non-compete agreements even when doing so could well be appropriate for the employer’s facts and circumstances, be an important protection for the business, and even add significant value to the business for purposes of a future sale or other transfer of the business at some point down the line. Second, the business owner may fail to properly consider and respond when the owner becomes aware that a current employee or a prospective future employee is a party to a non-compete agreement with the current or prospective employee’s former employer.

In the first instance, the business owner may have missed out on a relatively inexpensive opportunity to put in place reasonable and necessary protections against its employees’ future conduct and may subsequently suffer significant damage to its business from conduct of a former employee that could have been avoided or reduced. In the second instance, the business owner may miss an opportunity to avoid becoming entangled in potentially expensive and time-consuming litigation initiated by the former employer against both the employee and the business owner as a result of the employee’s violation of his obligations to his former employer under his non-compete agreement.

As I’ve noted, non-compete agreements are enforceable in Indiana and Michigan, but only to the extent that they are being enforced in appropriate factual circumstances and have been drafted so that their restrictions are as narrow as reasonably necessary to protect the business’s legitimate interests. In Part 2 of this article, I’ll discuss some of the elements of enforceability of non-compete agreements in greater detail and will also provide some hypothetical fact patterns where non-compete agreements might be more or less likely to be enforced by a court.

Print PDF-Part 1 (3 pages)

Read Introduction to Non-Compete Agreements (Part 2 of 2).

Eric W. Seigel, Business Counsel, Partner, Tuesley Hall Konopa, LLP

Author: Eric W. Seigel is a business lawyer and partner at Tuesley Hall Konopa, LLP. He helps his business clients with day-to-day business law needs, contract review and negotiation, business acquisitions and sales, and exit and succession planning. He is licensed to practice in Indiana and Michigan.

You can contact Eric by calling 574.232.35378 or by email eseigel@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
Non-Compete Agreement (Part 1 of 2)

Non-Compete Agreements (Part 2 of 2)

An Introduction to Non-Compete Agreements (Part 2 of 2)

[This is the second part of a two-part article. The first installment addressed the basic definition of a non-compete agreement, the fact that such agreements are enforceable in Indiana and Michigan, and why you as an employer or business owner should care about such agreements. This second installment will expand on enforceability issues under Indiana and Michigan law and provide some basic fact patterns where such an agreement might be more or less likely to be enforced by a court.]

In Part 1 of this article, we noted that non-compete agreements are enforceable in Indiana and Michigan, but only to the extent that they are being enforced in appropriate factual circumstances and have been drafted so that their restrictions are as narrow as reasonably necessary to protect the business’s legitimate interests.

In Indiana and Michigan, non-compete provisions are considered to be restraints on trade, and accordingly courts in both states will consider them to be valid and enforceable only in limited circumstances. As a result, the enforceability of any particular non-compete provision is very dependent on both the exact language of the non-compete provision and the exact facts and circumstances surrounding the employer and employee, their relationship during the term of employment and the nature of the employee’s conduct and activities after the termination of that employment.

In general, in order to be enforceable a non-compete provision must be reasonable with respect to the employer, the employee, and the public interest. In determining whether or not a non-compete provision is reasonable, courts will generally consider whether the employer has legitimate interests to protect in the context of the applicable non-compete provision’s restrictions on the employee’s right to practice his trade or profession over a period of time and within a certain geographical location. In order to be enforceable, the non-compete restrictions, including the scope of the restricted activity, the length of time the restriction lasts, and the geographic area to which the restriction applies, must generally all be determined to be both reasonable and necessary to protect the employer’s legitimate business interests under the particular facts and circumstance of the case (including the specific facts and circumstances of the employer, the specific employee, and the specific post-termination conduct and activities of the employee).

Michigan and Indiana law differ in at least one very important respect when it comes to the interpretation and enforcement of non-compete provisions. Indiana courts subscribe to the “blue pencil doctrine.” Under this doctrine, if an Indiana court finds a provision of a non-compete agreement to be unreasonable, the court will only strike-through and delete language from the provision, but will not add any language to the provision. If the court cannot revise the agreement in this manner to make the provision reasonable, then the court will most likely not enforce that provision of the agreement. Michigan courts, on the other hand, apply a different standard based on Michigan statutory and case law. Under Michigan law, if the covenant is unreasonable in any respect, the court may limit its terms in order to render it reasonable in light of the circumstances in which it was made and specifically enforce it. Michigan courts do not limit themselves to only deleting language from the unreasonable provision but also permit themselves latitude to add or change the language to make the provision enforceable.

The following is a fact pattern describing a relatively common scenario for a company’s employment and development of a salesperson. That fact pattern is followed by examples of two different non-compete agreements the company might want that employee to sign, one of which would most likely be enforceable if carefully drafted and the other of which would most likely not be enforceable.

Fact Pattern:
Acme Company (“Acme”) employs Wiley Coyote (“Coyote”) as a salesperson to sell Acme’s product line. Acme provides Coyote with sales training, establishes Coyote’s sales territory as the entire State of Indiana, and introduces Coyote to Acme’s customers for the product line in that sales territory. Acme encourages and facilitates Coyote’s establishment of good personal relationships with the primary purchasing contacts at each of the customers for the product line in Coyote’s territory. During Coyote’s employment, Coyote makes sales to Acme’s customers throughout all of Indiana but does not make sales to any of Acme’s customers outside of Indiana.

Likely Enforceable:
At the outset of Acme’s employment of Coyote, Acme has Coyote sign a non-compete agreement. The non-compete agreement provides that during the term of Coyote’s employment and for a period of one year after the termination of employment by Coyote for any reason or by Acme for cause, Coyote will not solicit any of Acme’s existing customers in Indiana that were served by Coyote during his employment by Acme. This restriction is further limited to solicitations of those customers for the purpose of causing them to become customers of any business that provides products or services similar to Acme’s within Indiana. After Coyote works for Acme for two years, he notifies Acme that he is leaving Acme to become a salesperson for Beta Company (“Beta”), a direct regional competitor of Acme, selling a directly competing product line to the same customer base in Indiana. Acme will most likely be successful in enforcing its non-compete agreement against Coyote and, if necessary, against Beta, to prohibit Coyote from soliciting for Beta any of Acme’s customers in Indiana that were served by Coyote during his employment by Acme.

Likely NOT Enforceable:
At the outset of Acme’s employment of Coyote, Acme does not have Coyote sign a non-compete agreement. Two years later, however, Acme requires that Coyote sign a non-compete agreement as a condition of his continued employment. The non-compete agreement provides that during the term of Coyote’s employment and for a period of three years after the termination of that employment by Acme or Coyote for any reason, Coyote will not work in any capacity for any company that directly or indirectly competes with Acme anywhere in the states of Indiana, Illinois, Michigan, and Ohio in regard to any product or service provided by Acme. Six months after Coyote signs the non-compete agreement, Acme terminates Coyote’s employment without cause. Needing to make a living and provide for his family, Coyote is able to secure a job with Beta in a non-sales capacity at one of Beta’s plant locations across the state line in Michigan. If Acme were to seek to enforce the non-compete agreement against Coyote or Beta, to prohibit Beta’s employment of Coyote in a non-sales capacity in Michigan, Acme would most likely not be successful in doing so.

The two examples above intentionally represent opposite ends of the spectrum of enforceability. There are a number of reasons for the conclusion that one of the non-compete agreements would likely be enforceable and the other would not. Some of those reasons relate to the different provisions included in the non-compete agreements and others relate to the different factual circumstances in which the agreements are to be enforced. Some of the reasons are seemingly based on fairness and common-sense, while others are seemingly based on the application of abstract legal principles. Perhaps most importantly, some of the reasons that you may feel are important in making the determination may not be even be considered by a court or if considered may be inconclusive.

Non-compete agreements can be a valuable and relatively inexpensive tool for an employer to reasonably protect its business interests, but the use of these agreements is not simple and not without risk. Please note that the above discussion is intended only as a summary and should not be relied upon to determine the enforceability of any individual non-compete agreement since the enforceability of a non-compete agreement is highly dependent on the individual facts and circumstances of the employer, the employee, and the actual language of the non-compete agreement.

If you are considering the use of a non-compete agreement with your employees, or if you are confronted with a circumstance involving a prospective or current employee’s non-compete agreement obligations to a former employer, please seek the advice of a legal professional.

Print PDF (4 pages)

Read An Introduction to Non-Compete Agreements (Part 1 of 2)

Eric W. Seigel, Business Counsel, Partner, Tuesley Hall Konopa, LLP

Author: Eric W. Seigel is a business lawyer and partner at Tuesley Hall Konopa, LLP. He helps his business clients with day-to-day business law needs, contract review and negotiation, business acquisitions and sales, and exit and succession planning. He is licensed to practice in Indiana and Michigan.

You can contact Eric by calling 574.232.35378 or by email eseigel@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
Non-Compete Agreements

Non-Compete Agreements

This Non-Compete is Not Worth the Paper It’s Written On (Sometimes)

In our unscientific recollection of rumors heard around Indiana and Michigan workplaces, there seems to be a widespread belief among employees that they can’t be held to their non-compete agreements. Many times, employers believe the opposite, that their non-compete agreements are iron-clad. In both cases, these opinions often arise from almost no research or analysis.

In truth, the law regarding agreements not to compete, agreements not to solicit, and the related doctrine of trade secrets is intricate. An agreement that can be enforced in one industry or against a particular employee might be found invalid for a different industry or employee. Indiana law differs from Michigan law, and both of those differ from the law in other states. That’s why you normally won’t hear a lawyer saying a non-compete agreement is either worthless or iron-clad. It’s usually more nuanced. And that doesn’t even consider the costs and practical considerations that go into when and how to enforce or fight a non-compete or trade secret battle. This is one area where the old adage is true: You need to consult a professional.

But some general practices will help employers and business owners when hiring new employees. If your new talent came from a competitor, you should take a few steps to protect your business.

First, find out if the employee has a non-compete agreement. Get a copy. Study it. Consult with your lawyer if you have questions.

Second, with or without an agreement, clearly, communicate to your new hire in writing that you are not hiring him or her to gain access to a competitor’s trade secret information. Instruct the employee not to bring or use the competitor’s information in your workplace.

Finally, make a decision and clearly communicate to the new hire again, in writing who will pay the legal expenses if the competitor sues its former employee. There may be circumstances where the company will wish to defend its new employee. But in most cases, you should leave that to the employee.

With a little bit of planning, you can save a lot of trouble in an area of the law that is not as simple as some people believe.

Michael J. Hays, Business Counsel & Partner, Tuesley Hall Konopa, LLP

Author: Michael J. Hays is a civil litigation attorney and Partner at Tuesley Hall Konopa, LLP. His practice areas include civil litigation, employment law, business counsel, and contract review. Michael is licensed to practice in Indiana and Michigan.

You can contact Michael by calling 574.232.3538 or by email mhays@thklaw.com

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Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.