Noncompete provisions are part and parcel of many employment agreements. But these provisions must be carefully drafted to be enforceable. There are three surefire ways to have a court invalidate your noncompete clause without much judicial cogitation:
- Failure to provide a reasonable duration for the clause
- Failure to restrict the operation of the clause to a reasonable geographic area
- Failure to establish a reasonable competitive balance interest as the subject of the clause
The first point is easy to grasp. In Michigan, you are on solid legal ground if the duration of your noncompete clause doesn't exceed one year. And you are probably OK if you add a year to that. But you're walking on quicksand if your noncompete provision lasts longer than two years.
The second point is a bit more complicated. Courts don't like to enforce a noncompete clause if its geographical scope is too wide. For example, if I'm in the packaged ice business and sell my product mostly to retailers in West Michigan, a court probably won't enforce a noncompete agreement that covers the central or eastern side of the state.
One drafter of a noncompete clause — by accident or design — tried to avoid this issue by not mentioning a geographical area at all. Perhaps they hoped the clause wouldn't be litigated or, if it was, that the court would helpfully insert a reasonable geographic area covered by the clause. That was the issue in a recent federal court case in Pennsylvania, Catalyst Outdoor Advertising LLC v. Jennifer Douglas.
Ms. Douglas signed a noncompete agreement with Catalyst, a seller of billboard advertising, but the agreement didn't specify a geographical area for the restriction. She went to work for another billboard advertiser, City Outdoor, and Catalyst sued to enforce the noncompete. The Court found the noncompete clause wasn't enforceable because not only did it fail to specify a geographic area, but also City Outdoor and Catalyst didn't operate in the same (or overlapping) territory so they weren't actually competitors. And the Court further noted (cue sad trombone) that it wasn't in the business of revising contracts to make them enforceable.
The third point — the requirement for a reasonable competitive business interest — sounds complicated, but it isn't, as illustrated in a recent Tennessee Court of Appeals case: Sugar Creek Carriages v. Hat Creek Carriages. (The quaint name arises from the fact that both parties offer horse-drawn carriage rides to customers in downtown Nashville.)
Lester Blackwell signed a noncompete agreement with Sugar Creek that was OK from a duration and geographical area viewpoint. But what the agreement sought to protect was a problem — the carriage-driving expertise Sugar Creek taught to Lester that he later used in driving for Hat Creek, Sugar Creek's competitor. But Sugar Creek didn't claim Lester's specialized training involved its confidential information or disclosure of customers. And in fact, Sugar Creek offered the same training to anyone who could pay to attend its driving school. Further, Sugar Creek's offer declared that at the completion of the class, you will be prepared to start your own horse-drawn carriage business.
So the Court held that there was no competitive business interest for something that wasn't a trade secret, confidential business information or a customer list, but freely available to all, with the clear message that "after this training, you can go into the horse carriage business — just like us!"
Dare I say it? Don't horse around with your noncompete provisions. Have a competent attorney review them to see if they satisfy the three basic requirements and, if not, remedy the defects before you and your ex-employee wind up in court.
Attorney Chadwick C. Busk is a 1977 Notre Dame Law School graduate and a veteran of the corporate legal trenches. He continues to practice business and technology law at busklaw.com and blogs at busklaw.blogspot.com.