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Drafting Non-Compete Clauses so They Don’t Become “Compete Clauses”

Jun 11 | 2014  by

Non-compete clauses are an essential tool for business owners looking to protect their business interests.  These restrictions 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.  As a “general” rule, these non-compete clauses are permitted in Michigan; however, in order to be enforced, a particular clause must be “reasonable” under the circumstances. It is important for the employer (and their attorney) to have a clear understanding of 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.

Michigan courts have been known to enforce these covenants, in some situations, for long periods such 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 own a business and are concerned that key employees may leave your business and compete with you?  If so, it is imperative to have enforceable non-compete agreements in your purchase agreement and employment agreements.  The danger of copying a non-compete clause off the internet, for example, is that a court may find it unreasonable and unenforceable, leaving your business interests unprotected.