Noncompete Agreements: No Longer Business as Usual

Posted By: Donna Oser Blog, Industry,

It may be time to rethink noncompete agreements, the use of which is common for associations and many of our industry partners. From the beginning of his term, President Biden's administration made it clear that it views noncompete agreements as a tool to reduce competition among businesses and prevent employees from pursuing better employment opportunities. On January 5, the administration's intention was made clear when the Federal Trade Commission (FTC) proposed to ban noncompete agreements restricting employee mobility.

Noncompete Agreements in Michigan

Companies use noncompete agreements to protect their business interests by preventing employees from competing against them in the near future - either by setting up shop or by going to work for a competitor. The legality and parameters of noncompete agreements vary significantly from state to state. According to Foster Swift, for noncompete agreements to be legal and enforceable in Michigan, they must be: (1) narrowly drawn; (2) to protect a reasonable business interest; and (3) be reasonable in their duration, geographical area, and type of business, as defined by MCL 445.774a

Potential Pain Points

Even before FTC's ban, experts cited a variety of potential pain points for crafting and enforcing noncompete agreements:

  • Jurisdiction: Because laws vary, attending to the laws in numerous jurisdictions can be an onerous task for employers with employees in multiple states. 
  • Geography: Reasonableness of an agreement is determined on a case-by-case basis, so it's difficult to anticipate the court's willingness to enforce a specific geography, bye.g. city-wide or county-wide versus state-wide.   
  • Scope: Defining which employees are subject to noncompete agreements - arguments have been made on all sides of the issue, from having all employees commit to limiting their use to key employees with proprietary knowledge or access to trade secrets.  
  • Duration: Just as with geography, there is no standard duration accepted by the courts, and an agreement's reasonableness is considered on a case-by-case basis. 
Looking Ahead

Companies that use noncompete agreements should be thinking ahead. Given the administration's position, the state of the labor market, and public sentiment, aligning company practice to use noncompete agreements only when absolutely necessary and to the greatest impact may make the most sense. The FTC invites the public to submit comments on the proposed rule through March 10, 2023 and will review the comments and may make changes to a final rule after that. 

Note: This post does not constitute legal advice.