Enforcement of Non-Competes

It is well established that non-compete agreements in employment contracts are enforceable if they meant the requirements of MCL 445.774a of the Michigan Antitrust Reform Act (“MARA”).  But what about non-compete agreements that do not arise in the employment context?  In Brillart v. Danneffel, 36 Mich. App. 359 (1971), the Court of Appeals ruled that if good will was transferred in connection with the sale of a business, the purchaser of the business could enforce a non-compete provision in the purchase agreement provided its terms were reasonable in terms of the line of business, length of the restraint period and the geographical scope.  However, the Court of Appeals held in Bristol Window & Door, Inc. v. Hoogenstyn, 250 Mich. App. 478 (2002), that the rule of reason should be used to evaluate a non-compete agreement between a business and independent contractors.  Did this mean that in the sale of business context, there still had to be a transfer of good will in order for the non-compete provision to be enforceable?  And what standards do the bench and bar apply in determining the enforceability of a non-compete provision that does not arise in the employment context?  Our Supreme Court very recently answered those questions in Innovation Ventures, LLC v. Liquid Manufacturing, LLC, 2016 Mich. LEXIS 1405 (July 14, 2016).

The plaintiff in Innovation Ventures had contracted with the defendant for the design, manufacture and production of energy drinks.  After initially operating under an oral agreement, the parties then memorialized their manufacturing agreement in writing, adding a non-compete provision.  The plaintiff subsequently terminated the manufacturing agreement and purchased the equipment that the defendant had used to manufacture the energy drinks.  The parties entered into a termination agreement, which also contained a non-compete provision.  The plaintiff subsequently informed the defendant that it had breached the termination agreement, including the non-compete provision, and filed suit.

The trial court granted the plaintiff a temporary restraining order, which it later lifted, and then granted summary disposition dismissing the claims based on alleged breaches of the non-compete provision.  The Court of Appeals affirmed the trial court’s rulings and evaluated the reasonableness of the non-compete provision under the standard governing such provisions as set forth in MCL 445.774a.

On appeal to the Supreme Court, the plaintiff argued that the Court of Appeals had applied the wrong standard to determine if the non-compete provision was unreasonable.  The Supreme Court held that the Court of Appeals had “erred by applying the standard articulated in MCL 445.774a, which is the proper framework to evaluate the reasonableness of non-compete agreements between employees and employers.  Instead, the Court should have applied the rule of reason to evaluate the parties’ non-compete agreement.”

The Supreme Court determined that a different provision of MARA, MCL 445.772, applied.  MCL 445.772, which is modeled on Section 1 to the Sherman Act, provides that a “contract, combination, or conspiracy between 2 or more persons in restraint of, or to monopolize, trade or commerce in a relevant market is unlawful.”  As the Supreme Court noted, there is a long set of precedents, both state and federal, holding that such conduct is to be evaluated under the rule of reason.  The Court also stated that the only statutory guidance for evaluating the reasonableness of a non-compete provision is contained in MCL 445.774a, which “sets forth the factors a court must consider to assess whether a non-compete agreement between an employer and an employee is reasonable.”  But, the Court held, “MCL 445.774a does not address the proper framework for evaluating a non-compete agreement between businesses.”

Instead, the Court held that such agreements must be evaluated under the rule of reason.  In order to provide some guidance as to how that inquiry should be framed, the Court quoted from Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918):

“To determine that question [of whether the restraint promotes or suppresses or even destroys competition] the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual and probable.  The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.”

This could be a complicated inquiry in some cases, although now the bench and bar know that the law in Michigan is settled that all non-compete agreements, not merely ones arising in the employment and sale of business context, are potentially enforceable if they satisfy the rule of reason.