Drafting an Enforceable Non-Compete Agreement for Your Business
On behalf of Fausone Bohn, LLP on Thursday, April 9, 2015.
Paul Bohn, Esq.
A non-compete clause is key part of the toolbox for business owners looking to protect their interests. For business owners, large or small, it’s important to draft a strong non-compete clause that can hold up in court as reasonable and enforceable.
Non-compete clauses are typically used in two situations. First, upon the sale of a business, this tool can prevent the seller from competing with the person who purchased the business. Second, they’re used to prevent key employees who leave the company from going to work for a competitor or taking the business’s customers with them.
However, not all non-compete clauses are enforceable. In order to be enforced, a particular clause must be “reasonable” under the circumstances. It is important that you and your attorney clearly understand the law when carefully drafting these clauses. Otherwise, a court may strike down a poorly drafted clause that it finds unreasonable.
When determining if a particular clause is reasonable, and therefore enforceable, a court looks primarily at two questions – is the clause reasonable (1) in its duration, and (2) in its geographic scope. Courts take an in depth look at the facts and circumstances of each situation when determining reasonableness.
You may have heard about Jimmy John’s making their workers and drivers sign non-compete agreements, which could very well prevent them from going to work for Subway for example. Jimmy John’s use of these agreements has stirred up controversy, but it has also drawn the attention of the New York Attorney General Office, which has launched an investigation. As a business owner, large or small, you don’t want to draw that kind of negative attention.
Michigan courts have, in some situations, enforced non-compete agreements for as long as five years. When reviewing the geographic scope, courts will typically look to see if the clause mirrors the territorial scope of the business. If so, it is more likely to be upheld. For example, if the business involved is a local business that only services customers within a 20 mile radius, a covenant not to compete that restricts the person in the entire state of Michigan is probably too broad and unenforceable.
Are you buying a business, or do you own a business and are concerned that key employees may leave your business and compete with you? If so, you will want an enforceable non-compete clause in your purchase agreement and/or employment agreements. Don’t fall into the trap of simply copying and pasting a clause off of the internet, which would likely produce a non-enforceable agreement that leaves your business interests unprotected.