Some areas of the law are black and white. In those cases, contractual provisions can often be easily labeled as permissible or impermissible, allowed or not allowed, reasonable or unreasonable. The enforceability of a provision prohibiting an employer from working in a competing business following their employment (a noncompetition provision) is not one of those areas of the law. The enforceability of noncompetition agreements between and employer and employee lives in the “gray” zone, and courts analyze the provision on a case by case basis. An enforceable noncompetition provision in one situation may not necessarily be enforceable in another. Unfortunately, the answer to whether a noncompetition agreement is enforceable is almost always: it depends. This article will describe some of the factors that courts in Michigan consider when deciding whether a noncompete agreement is enforceable.
Throughout this article, the following example of a noncompetition clause in an employment contract will be referenced: “Employee agrees that, for a period of 1 year following termination of employment with Employer, Employee will not practice vascular surgery within a 35 mile radius from any location where Employee provided services while employed by Employer.”
The Michigan Antitrust Reform Act permits an employer to obtain an agreement that protects an employer’s “reasonable competitive business interests” and prohibits the employee from engaging in a specific line of business after employment so long as the agreement is “reasonable as to its duration, geographical area, and the type of employment or line of business.”[i] If the court finds the agreement to be unreasonable in some respect, it has the option of limiting the agreement to make it reasonable.[ii] This practice is known as “blue penciling,” but is an option many courts decline to exercise.
What is a Reasonable Competitive Business Interest?
It depends. Courts will only enforce a noncompetition agreement if it protects an employer’s reasonable competitive business interest. That means it must protect against the employee gaining an unfair advantage in competition with the employer; it cannot merely prohibit the employee from using general knowledge or skill.[iii] The business interest to be protected must be more than simply preventing the employee from competing.[iv] Examples of reasonable competitive business interests that courts have found to be worthy of protection include close contacts with customers or customer lists, cost factors and pricing, and anticompetitive use of confidential information.[v] In 2006, the Court of Appeals held that, “[i]n a medical setting, a restrictive covenant can protect against unfair competition by preventing the loss of patients to departing physicians, protecting an employer’s investment in specialized training of a physician, or protecting an employer’s confidential business information or patient lists.”[vi]
What is a Reasonable Duration?
It depends. While there is no bright line rule, courts “have found that time periods ranging from six months to three years are reasonable….”[vii] In our example above, we used one year, which would likely be found to be reasonable in most situations including those involving physicians.[viii] However, courts may hesitate or refuse to enforce a one year restriction if the physician was terminated after only a few weeks of employment. Under those circumstances, the one year restriction may be found to be unreasonable.
What is a Reasonable Geographical Area?
It depends. Again, there is no bright line rule. A reasonable geographic restriction in rural Northern Michigan may be treated differently than the same geographic restriction in the more heavily populated Metro Detroit. While discussing a physician noncompetition agreement, at least one court held that a seven mile restriction was “modest in geographical scope.”[ix] In other settings, courts have upheld restrictions of up to 100 miles.[x] But that is not to say that a 100 mile restriction is always upheld. An important factor is whether the geographical scope is “tailored so that the scope of the agreement is no greater than is reasonably necessary to protect the employer’s legitimate business interests.”[xi]
Parties negotiating noncompetition agreements should also pay attention to where the geographical restriction begins. In our example above, the restriction was 35 miles from any location where Employee provided services. A court may restrict a physician from practicing within 35 miles of the physician’s main office, but might look differently if asked to restrict the physician from practicing within 35 miles of a location where the physician only provided occasional services (such as working a shift or two at a satellite office).
What is a Reasonable Line of Business?
It depends (notice the theme?). In our example above, the restriction only applies to the practice of vascular surgery. Assuming the Employee was a vascular surgeon, the restricted line of business is about as narrowly tailored as it could be written. But what if the provision restricted all types of surgery? Or restricted the practice of medicine altogether within the restricted geographic area? Again, depending on the type of services the physician performed for the Employer, restricting those lines of business may or may not be reasonable.
Believe it or not, most lawyers do not like giving the answer “it depends” any more than clients like hearing it. But sometimes that is the truth, and it certainly is when it comes to the enforceability of noncompetition agreements.
Originally published in Healthcare Michigan, November 2020.
About the Author:
Christopher Ryan is Of Counsel in Dickinson Wright’s Ann Arbor office. He is Co-Chair of the firm’s Health Care Litigation Task Force. He can be reached at 734-623-1907 or firstname.lastname@example.org and you can visit his firm bio, here.
[i] MCL 445.774a(1).
[iii] St. Clair Medical, PC v Borgiel, 270 Mich App 260, 266 (2006).
[iv] St. Clair Medical, PC, 270 Mich App at 266.
[v] Certified Restoration Dry Cleaning Network, LLC v Tenke Corp, 511 F3d 535, 547 (6th Cir. 2007).
[vi] St. Clair Medical, PC, 270 Mich App at 266-67.
[vii] Lowry Computer Products v Head, 984 F. Supp. 1111, 1116 (E.D. Mich. 1997).
[viii] See St. Clair Medical, 270 Mich App 260 (enforcing noncompetition agreement that lasted for 1 year).
[x] Coates v Bastian Brothers, Inc., 276 Mich App 498 (2007).
[xi] Superior Consulting Co., Inc. v Walling, 851 F. Supp. 839, 847 (1994).