Many businesses require top executives and sales professionals to sign non-compete agreements. These individuals typically have access to vital trade secrets or customer relationships that could be used to damage the business if the person leaves to work for a competitor or set up a competing venture.
Increasingly, however, non-competes are used with low-level employees such as fast food workers, customer service representatives, and hair stylists. This practice has met with a flurry of criticism. (For some recent examples, see here, here, and here.) One prominent critic contends that non-competes enable employers to “use the threat of litigation to constrict wages and employee mobility,” and that “[w]orkers bound by noncompetes cannot rely on outside offers and free-market competition to fairly value their talents.”
An opinion from the Michigan Court of Appeals sheds light on the subject. The case, BHB Investment Holdings, LLC v. Ogg (Feb. 21, 2017, unpublished), involved franchises of two competing swim instruction chains, Goldfish Swim School and Aqua Tots. Goldfish Swim School of Farmington Hills (“Goldfish”) sued a part-time instructor who was terminated and went to work for Aqua Tots Canton (“Aqua Tots”) in alleged violation of his non-compete and non-solicit agreements. Goldfish also brought claims against Aqua Tots. The instructor earned $12.50 per hour at Goldfish and $11 at Aqua Tots.
Non-compete law varies drastically by state. Some states broadly favor non-competes. Other states virtually ban them. Some states impose highly specific limitations across the board. Others take a more flexible, case-by-case approach. Courts in some states will reform or strike out portions of an overly broad agreement to make it enforceable. Others will refuse to enforce an overly broad agreement at all. And this is just the beginning. Each state has distinct rules governing the reasonable scope of a non-compete, the business interests that may be protected by a non-compete, the consideration required to support a non-compete, and the showing needed to obtain an injunction, among other things.
Bottom line: A non-compete agreement that is enforceable under one state's laws may not be enforceable under another's. Consequently, "choice of law"—the rules that determine which state's laws apply in a dispute—is often a crucial consideration in the non-compete context.
A recent case from the Sixth Circuit Court of Appeals drives this point home. In Stone Surgical, LLC v. Stryker Corp., the medical device company Stryker sued a top sales representative for going to work for a competitor in violation of his non-compete agreement. Stryker is headquartered in Michigan. The sales rep lived in Louisiana and received products, delivered products to doctors and hospitals, and conducted sales meetings in Louisiana.
Non-Compete law is complicated and fraught with uncertainty. Employers sometimes exploit this uncertainty to exact compliance. For departing employees and the companies that hire them, the good news is that non-competes are often harder to enforce than it may first appear.
Non-compete agreements are different from other agreements. They are subject to closer judicial scrutiny than most other types of contract. To be sure, some states are tougher on non-competes than others. But even in the most pro-non-compete jurisdictions, a court will refuse to enforce a non-compete if certain exacting criteria are not met. Why is that?
Law and the Creative Economy is the blog of lawyer Maxwell Goss. This blog is for informational purposes only.