Effective and Enforceable Noncompetition Agreements with Employees – Reasonableness is the Key

Businesses often protect their goodwill, customers, and historical and future success through requiring that key employees enter into restrictive covenant agreements that restrict the employee’s activities during the employee’s employment and for a period of time after the employment relationship ends. The employee is typically restricted, for example, from engaging in activities that are competitive with the business of the employer. 

The employer and the employee have conflicting interests in entering into noncompetition agreements. The employer generally wants the terms restricting the employee’s activities to be as broad and far-reaching as possible to protect its business interests. On the other hand, the employee would prefer, of course, to not be subject to any restrictions. To the extent his or her employment requires entering into a noncompete agreement the employee desires a narrow scope of restrictions.

When preparing a noncompete agreement in an employment context, the enforceability of its terms is primarily governed by Michigan’s Anti-Trust Reform Act (“MARA”), MCLA Section 445.700, et seq. MCLA Section 445.774a of MARA provides:

“An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration geographic area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.” (Emphasis added).

So, even if an employer and employee agree to the terms of a noncompete at the time the parties enter into the agreement (for example, at the beginning of the employment relationship), the enforceability of the agreement is measured by reasonableness. To be enforceable, MARA requires a noncompetition agreement to protect an employer’s “reasonable competitive business interests” and be “reasonable” as to the duration, geographic scope and the type of activities that it limits. If a court finds that the terms of a noncompetition agreement are unreasonable, MARA explicitly permits the court to amend and enforce the terms of the agreement to conform to the court’s view of reasonableness in the context of each specific case.