Commercial Non-Competes And Employment Non-Competes – A Distinction With A Difference

Commercial litigators are usually familiar with non-compete agreements, which generally restrict a person from engaging in a competing business within a certain geographical area for a certain time period. Michigan Courts have long recognized that these agreements are enforceable if they are reasonable.

But in a recent decision the Michigan Supreme Court held that the context in which a non-compete agreement arises will provide different rules for evaluating whether the agreement is enforceable. In Innovation Ventures, LLC v Liquid Manufacturing, LLC, 499 Mich 491; 885 NW2d 861 (2016), the business entity parties had entered an agreement not to compete with one another following the termination of their manufacturing agreement. However, shortly after entering into their termination agreement a dispute arose in which the plaintiff alleged that the defendants had violated the non-compete by engaging in a competing business venture.

The trial court reviewed the issue of whether the non-compete agreement was enforceable by applying the standards set forth in MCL 445.774a. That statue states that a non-compete agreement is enforceable if it is reasonable; and when determining whether a non-compete agreement is reasonable, the court must consider whether the restriction is reasonable as to: (1) duration; (2) geographical area; and (3) type of employment or line of business in which the employee is prohibited from engaging.

But the Michigan Supreme Court held that the trial court’s analysis was erroneous, because these factors only apply to a non-compete agreement between an employee and employer, not to a non-compete agreement between two businesses. The Court held that the appropriate analysis for non-competes between businesses is the “rule of reason.” The “rule of reason” is a body of federal anti-trust law developed under the Sherman Act. The Court held that this body of law applies to other agreements in restraint of trade because the Michigan Legislature specifically stated that courts should look to federal precedent in interpreting Michigan’s Anti-Trust Reform Act.

The rule of reason provides that an agreement in restraint of trade is reasonable, and therefore enforceable, if it regulates and promotes competition, as opposed to suppressing or destroying competition. The court’s analysis should focus on several factors related to the market in which the agreement has an impact and whether that impact has increased or decreased competition in that market.

The two key takeaways from the Michigan Supreme Court’s ruling in Innovation Ventures are: (1) it is important at the outset to determine whether the non-compete applies to an employment relationship or an agreement between business entities; and (2) if it is the latter, the question of whether the restraint is reasonable and enforceable will turn on the impact the agreement has in the relevant market, not the duration and geographical limitation of the restriction.