Detroit non-compete lawyer: These are my 3 most-asked questions, Crain's Detroit Business

This article originally appeared in Crain’s Detroit Business on March 14, 2022.

Timothy Lowe shares best practices for employers related to restrictive covenants.

Companies across many industries use restrictive covenants to protect their business interests against former employees. Restrictive covenants can take multiple forms: non-compete agreements that prevent former employees from working for a competitor, non-solicitation agreements that prevent former employees from soliciting customers or employees, and nonuse and nondisclosure agreements that prevent the misuse or disclosure of confidential information.  Each of these restrictions has a place in a company’s toolkit for protecting its business assets.  Here are three common questions I receive about restrictive covenants:

1. Aren't restrictive covenants illegal in Michigan?

No. Restrictive covenants, including non-compete agreements, are enforceable in Michigan — and in most states — if they protect an employer’s legitimate business interests and are reasonably drawn as to duration, geographic scope and line of business. Legitimate business interests include goodwill, customer relations, trade secrets, confidential business information and specialized skill or training. Reasonable geographic scope and time vary depending on the circumstances.  A good analysis considers what restrictions are necessary to protect the employer’s interests based upon the employee’s job and their access to clients and confidential information. One size may not fit all.

Employers should keep in mind that state laws are changing. In recent years, states including Illinois, Louisiana, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Washington, and Washington D.C., have passed laws restricting the use of non-competition agreements, typically focusing on low-wage workers, and in some cases focusing on workers in specific industries. Most of these laws affect non-compete agreements only, and do not affect non-solicitation or non-disclosure agreements. 

2. Did the federal government outlaw non-compete agreements?

No. President Joe Biden’s Executive Order on Promoting Competition in the American Economy initiated July 9, 2021, encourages the “Chair of the [Federal Trade Commission] . . . to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

While there was speculation that the order would amount to a complete ban on non-competition agreements, that is not the case. The order does not impact the current state of the law or enforceability of non-competition agreements in any context, including those between an employer and its employees, partners, or in the context of the sale of a business. Rather, it simply “encourages” the FTC to “consider” using its authority to “curtail the unfair use of non-compete clauses.”

3. What should I consider when implementing a restrictive covenant program with my employees?

An employer cannot just have employees sign restrictive covenants that solely protect their business interests. They must assess whether the restrictive covenant is enforceable and reasonable for the employee. The first question for an employer to ask is what restrictions are needed based upon the employee’s access to clients and confidential information. Often, a tiered approach best meets the employer’s interest, where different categories of employees are asked to sign different types of restrictions. 

Aside from the actual restrictions, other contract terms to consider include:

• Choice of law and forum: Businesses with employees in multiple states may have options regarding which state’s law will apply to a restrictive covenant and which court will decide any enforcement action. Given the recent changes in state law, this can be a critical decision for a company. 
• Tolling: A restrictive covenant agreement may provide for the tolling — the extension of a restriction for the duration of any violation, so the employer gets the full benefit of its bargain.
• Attorney fees: A restrictive covenant agreement may obligate the employee to reimburse the employer for any attorney fees and costs incurred in enforcing the agreement.

The appropriate use of non-compete agreements can be an effective method of protecting your business interests. However, as the FTC and the states weigh imposing limitations on restrictive covenants, businesses should proactively evaluate how a change in law could impact their current employee contracts and determine whether alternatives exist that can appropriately protect their assets. Do not hesitate to reach out to your legal team to learn more about what options are available and which type of agreements will likely remain unaffected by changes in the law.