Eric Parzianello on non-compete laws
By Steve Thorpe
Legal News
In October of 2014, the Jimmy John’s fast food chain experienced some negative publicity when a federal complaint revealed the employment agreement their workers are required to sign. Employees, including low-wage sandwich makers and delivery drivers, must agree not to work at one of the sandwich chain’s competitors for a period of two years following employment at Jimmy John’s. In February State Rep. Peter Lucido (R-Macomb County) proposed legislation, which would amend 1984 PA 274, Michigan’s Antitrust Reform Act MCL 445.774a. Eric Parzianello is a partner at Hubbard, Snitchler, & Parzianello in Detroit. His practice is concentrated in representing employers and entrepreneurs in all aspects of employment and business law including severance, termination issues, non-compete disputes, and the protection of proprietary information.
Thorpe: Tell us about the current law in Michigan.
Parzianello: Michigan’s current statute with respect to obtaining non-competition agreements from employees is found at MCL 445.774a. Employers may currently obtain from an employee an agreement that prohibits the employee from engaging in employment or a line of business after termination of employment. The agreement must be reasonable as to duration, geographical area, and the type of employment or line of business. Additionally, the covenant must only protect the employer’s “reasonable competitive business interest.”
Michigan courts find that a non-compete agreement protects the employer’s reasonable competitive business interests if it protects against the employee gaining some unfair advantage in competition with the employer, including preventing the use of confidential information. Reasonable competitive business interests also include protecting confidential cost information, pricing and contact with the employer’s customers. However, reasonable competitive business interests do not include protecting against the employee’s general knowledge and skill acquired during the employment.
If a court finds that any such agreement is unreasonable in any respect, the court may modify the agreement to render it reasonable and then specifically enforce the agreement as modified.
Thorpe: What is the proposed change?
Parzianello: House Bill 4198 would eliminate any type of non-compete agreement between employers and employees. Specifically, the amendment of MCL 445.774a would provide that “any term in an agreement an employer obtains from an employee, contract laborer or other individual that prohibits or limits the individual from engaging in employment is void.”
The proposed amendment would only permit a purchaser of a business to obtain an agreement or covenant from the selling owners, principals or officers protecting the purchaser’s reasonable competitive business interests.
Thorpe: Why was it proposed?
Parzianello: First, other states have either enacted or are considering similar legislation. California law provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” California courts utilize this statute to void covenants not to compete except in narrowly drawn circumstances. Beginning July 1, 2015, health care professionals in New Mexico may not be subject to non-compete agreements. Also, the Massachusetts legislature is again considering limiting non-compete agreements after failing to get similar legislation passed in the 2014 session.
Next, non-compete agreements have traditionally been associated with corporate executives who are exposed to confidential information and paid commensurately for their expertise. Some highly publicized reports, however, indicate that these types of agreements are being used against low-skilled, hourly employees by large companies such as Jimmy John’s and, more recently, Amazon. In the case of online mega-retailer Amazon, it required warehouse workers earning about $12 per hour to reaffirm 18-month non-compete contracts as a condition of receiving severance pay after they were laid off.
Instances like these and the perception that such agreements stifle economic opportunities for employees and stifle economic growth for the state likely also contributed to the proposal.
Thorpe: Would the change affect existing agreements?
Parzianello: As proposed, the change would not affect existing non-compete agreements. The primary and overriding rule to determine whether a statute is to be applied prospectively or retroactively is that legislative intent governs. The proposed enacting language of House Bill 4198 provides that the amendment would take effect 90 days after the date it is enacted into law. Michigan law is clear that if new legislation provides a specific, future effective date and omits any reference to retroactivity, the conclusion is that the statute should be applied prospectively only.
Thorpe: What types of agreements would remain permissible?
Parzianello: Several types of agreements that would not violate any prohibition on non-competes would remain permissible. Confidentiality agreements that protect a company’s trade secrets are routinely enforced by courts in Michigan. Trade secrets may include customer and vendor lists, cost and pricing information, product information and other similar sensitive information. Employees subject to such an agreement cannot take or use the protected information against the employer.
Additionally, non-solicitation agreements typically prohibit employees from soliciting an employer’s existing customers or its existing employees. A covenant that prohibits an employee from soliciting the employer’s other employees would likely not be interpreted to violate the proposed legislation. Similarly, in certain circumstances, an employer’s use of non-solicitation agreements as applied to customers may remain permissible even if House Bill 4198 is passed. A provision that does not generally prohibit competition but provides that the employee agrees not to use the employer’s trade secrets to solicit existing customers may remain enforceable.
Last, provisions in employment agreements requiring employees to return all company property upon leaving the company are important and would obviously remain permissible.
Thorpe: What advice do you have for employers regarding the proposal?
Parzianello: Although it’s unclear whether the legislation has enough political support to pass, it would be wise for employers who do not have existing non-compete agreements or other protective covenants with their employees to consider implementing them. From an employer’s perspective, the ability to reasonably protect its business may be critical to continued success. If this or similar legislation is passed, that ability may be limited.
For those employers which already maintain protective covenants with their employees, it would be prudent to have those agreements reviewed by counsel to ensure compliance with and the maximum protection permitted by Michigan law.
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