Smart Business Series: Non-Competition Agreements
In today's business environment, smart business practices will not only safeguard your business in the event of litigation, but create an environment allowing you to grow and succeed. This is the first in a series of smart business practices.
Although non-competition agreements (non-competes) were once disfavored by the courts, they have become common in today's competitive business environment and are regularly enforced. Under the Michigan Anti-Trust Reform Act (MARA), an employer and employee are free to enter into an agreement to protect the employer's "reasonable competitive business interests." They are commonly used to prevent former employees from unfairly competing with their previous employers once they have moved on. Often, they serve as companions to confidentiality agreements which seek to protect proprietary information, such as trade secrets, pricing and customer information. These types of agreements are enforceable whether termination was voluntary, mutual or involuntary.
The key to an enforceable non-competition agreement is that it is reasonable, meaning the terms of the agreement must not preclude the ability of the former employee to earn a living in his or her given occupation. This balance is achieved by setting reasonable limitations in three key areas, notably (1) the duration of the agreement, (2) the geographical scope, and (3) the type of activity restrained. MARA specifically provides courts with the ability to limit unreasonable non-competition agreements and will enforce them only if they are reasonable.
Although reasonableness can be a somewhat subjective measurement, litigation has engendered some guidelines for writing enforceable agreements. Investing in a well-drafted non-competition agreement will not only protect your reasonable competitive business interests, but prevent misunderstandings which can lead to disputes between the owner and former employees when it is time to part ways.