June 07, 2017
June 07, 2017
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 The case, BHB Investment Holdings, LLC v. Ogg (Feb. 21, 2017, unpublished), involved franchises of two competing swim instruction chains, Goldfish Swim School and Aqua Tots.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.
Though Michigan tends to be more favorable towards non-compete agreements than many states, the court ruled against Goldfish, finding that the instructor’s non-compete was invalid and that the non-solicit had not been violated. To be enforceable, a non-compete must protect a reasonable competitive business interest. Goldfish claimed that the instructor knew trade secrets in which it had a legitimate interest. It argued that “although Ogg was a low-level employee, he had access to the most valuable of Goldfish’s proprietary information—the swim training curriculum, which he had memorized.” The court should enforce the non-compete, it suggested, to keep this valuable information away from competitors. The court disagreed, pointing out that the company’s instructional methods were anything but a secret: [Plaintiff] and other Goldfish franchisee display the Goldfish instructional method in front of hundreds of people daily. The instructors use the instructional techniques and employ Goldfish-specific terminology to teach students under the observation of the students’ family members. Any member of the public can enter the facility and watch the lessons as well.
It concluded that because the information “is revealed to the public on a daily basis, it cannot be deemed a trade secret or proprietary.” The non-compete was therefore invalid. As for the non-solicit, the court found this restriction to be reasonable in principle, citing Michigan cases establishing that an agreement preventing a former employee from using the employer’s information to solicit clients on behalf of a competitor is enforceable. Nevertheless, there was no evidence that the instructor had actually influenced any Goldfish clients to follow him to Aqua Tots. Therefore, no relief was warranted under the non-solicit, either.
A takeaway for non-compete litigants generally is that confidential information, to be protectable, must be kept confidential. This point may seem obvious, but there is often a real dispute over whether sufficient steps—or any steps at all—have been taken to protect the information at issue. Whatever the agreement might say, there is no reasonable competitive business interest in protecting “secrets” that a business freely makes known to the public. Another takeaway is that it is hard to prevail on a non-solicit claim without direct evidence that the company lost business. Goldfish argued that “instructors at the swim schools are the face of the organization.” But its claim failed because could not identify any customers actually taken by the instructor.
What about non-competes for low-level workers in particular? The majority opinion notes in more than one place the defendants’ contention that “entry-level employees” should be treated differently from “high-level employees,” but it does not directly invoke this distinction in reaching its conclusions. However, a separate concurrence by Judge Gleicher is instructive: Preventing Ogg from being a swim instructor for a one-year period to protect Goldfish secrets is akin to making a teenaged minimum-wage McDonald’s employee promise not to work for Burger King in the future. Certainly, a person learns some generalized skills at a fast food restaurant that would reduce training time if the person accepted employment at another fast food establishment. But the employee’s understanding of how to cook a hamburger and operate a cash register would not give Burger King an “unfair advantage.” The McDonald’s transferee could not use the secret of the Big Mac to alter the Whopper. Similarly, Ogg learned from Goldfish how to interact with and teach young children. This skill likely made training at Aqua Tots easier. As with any other large chain, however, the Goldfish-institutional knowledge of a single low-level employee could not reform Aqua Tots.
In short, businesses need to recognize that there is a crucial distinction between generalized skills and bona fide trade secrets. An entry-level worker may be given a certain amount of knowledge and training, but such knowledge and training does not always rise to the level of protectable information—even if the worker goes on to use it in service of a competitor. In Judge Gleicher’s terms, not every advantage is an unfair advantage. Michigan has no bright-line rule regarding low-wage non-competes (unlike Illinois, which has passed an across-the-board ban on non-competes for low-wage workers). But at a minimum a business seems far less likely to entrust genuine trade secrets to an hourly employee than to a high-level executive or salesperson. And without a protectable interest, a non-compete is invalid.
Maxwell Goss represents plaintiffs and defendants in all stages of federal and state court litigation and provides strategic advice on intellectual property and business law matters.