by Daniel J. Schulte, MSMS Legal Counsel
QUESTION:
Several questions have been received lately regarding the enforceability of a covenant not to compete. These questions arise in the context of an employment relationship and the purchase/sale of a medical practice. Some ask whether they are enforceable at all in Michigan. Others what a time period and geographic scope that they know will be enforceable. Yet others are unwilling to agree to what is being asked of them in an employment agreement or a purchase agreement and are seeking information to use in negotiations with an employer or a buyer/seller.
ANSWER:
The short answer is that a covenant not to compete is enforceable in Michigan if it is reasonable. However, to fully address this issue three points must be considered.
The first point is that no one can tell you in advance what a court in the future will consider “reasonable”. Instead, only some general legal advice based on experience can be given. As to the time period the covenant not to compete applies, 1 to 5 years is what I have seen most often. The specific length will depend in large part on whether the covenant not to compete is contained in an employment agreement v. a purchase agreement or other commercial agreement (read below for an explanation). The reasonableness of the geographic scope usually depends on the distance patients travel to obtain medical care at an office. The point of a covenant not to compete is to protect a legitimate business interest. If, for example, the farthest a material number of patients of a medical practice travel to receive care at that practice is 10 miles, the practice likely has no legitimate business interest that will be protected by a covenant not to compete extending 11 or more miles away.
The second point is that it makes a difference whether the covenant not to compete is contained in an employment agreement, a purchase agreement or other commercial agreement. In 2016, the Michigan Supreme Court clarified that only a covenant not to compete contained in an employment agreement must be reasonable. By contrast, a covenant not to compete contained in a purchase agreement or other nonemployment commercial agreement may be enforceable even if it is not reasonable as to a party to the agreement. This is a significant difference. When challenging the enforceability of a covenant not to compete in a nonemployment commercial agreement it is necessary to prove more than the unreasonableness of the time period, geographic scope and restricted activity. In addition, it must be proven that an adverse anticompetitive effect in the relevant market will occur as a result of enforcement of the covenant not to compete. This added burden of proof is why covenants not to compete in nonemployment commercial contracts are more likely to be enforced that those contained in employment agreements. This also explains why the time periods, geographic scope and breath of activity restricted are usually greater in nonemployment commercial agreements.
The third point is that even though a covenant not to compete is enforceable is no guarantee that it will be enforced. Enforcement of a covenant not to compete is usually sought in the form of an injunction preventing the part to a covenant not to compete from engaging in an activity. Injunctions are equitable remedies. This means courts have wide discretion in deciding whether to grant them (i.e. a covenant not to compete that is enforceable may not be enforced). For example, a court may take into account the bad acts of the nonbreaching party to a covenant not to compete (even one contained in a purchase agreement) in deciding not to grant an injunction.
As you can see, few clear-cut answers can be given to your questions. Instead, the enforceability of a covenant not to compete will depend on many factors.