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House Bill 4198, what is it good for? Nothing, absolutely nothing.

If you employ anyone or hope to employ someone, be aware of a very bad idea. House Bill 4198, introduced by State Rep. Peter Lucido would, if it became law, effectively ban non-compete agreements between employers and employees in the State of Michigan. Particularly for fashion designers, who lack statutory protection for the overall design of their garments and accessories, a covenant not to compete is a very important provision in the designers’ agreements with their employees.

According to Crain’s Detroit Business (March 23, 2015, p. 25), House Bill 4198 was a reaction to a publicized debate over the use of covenants not to compete by Jimmy John’s Franchise LLC to prohibit their sandwich makers from working for a competitive sandwich shop. I have to wonder whether anyone involved in such a debate, or involved in authoring House Bill 4198, has a working knowledge of current Michigan statute on the topic and the role of our courts in enforcing covenants not to compete.

First, a short lesson – the United States of America and all of its parts abhor restraints on trade. We like competition and believe that it is good for business and good for consumers. However, when an employer makes its proprietary information (a secret recipe, customer contacts, the sketches for next season’s designs, etc.) available to its employee, the employer needs to protect against the possibility that the employee will leave, take proprietary information with them, and use that proprietary information to benefit a competitor. A covenant not to compete provides that protection.

For example, a designer making laser cut accessories needs help. She hires an employee to work on handbag designs, and for that new employee to do his job he needs access to the designer’s CAD drawings of her work in progress. To protect this critically important, proprietary information, the designer would require an employment agreement that contains specific provisions or terms to include a covenant not to compete. For example, that covenant may state: “For a period of one year beginning on the last day of employment, Employee shall not, anywhere in the State of Michigan, engage in the design, manufacture, assembly or sale of handbags that are made, in whole or part, with laser cut components, for the Employee’s own benefit or as an employee, independent contractor, owner, representative or agent of any entity that design, manufactures, assembles or sells handbags.”

To balance an employer’s need to protect proprietary information with our collective interest in encouraging competition, Michigan and many other states permit covenants not to compete in employment agreements only if those covenants meet very specific requirements. Under current Michigan statute, MCL 445.774a, “An employer may obtain from an employee an agreement . . . which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement . . . is reasonable as to its duration, geographical area, and the type of employment or line of business.”

The phrase in Michigan statute, “reasonable competitive business interest,” is particularly important if anyone is debating whether sandwich makers could be prohibited from working for a competitive sandwich shop. While sandwich shops could certainly compete with one another, is there something that the sandwich maker would gain from their job at the first shop, and take with them to use for the benefit of the second shop, that would allow the second shop to unfairly compete? Couldn’t anyone that buys a sandwich determine the amount and order of ingredients piled on a piece of bread? So, if a sandwich shop filed a lawsuit when their prior employee went to work for a competitor, the court would ask that question – what is the reasonable competitive business interest that is protected by the covenant? If the answer is “none,” and the employer is trying to prevent all competition (not just unfair competition) the court would not enforce the covenant. If, on the other hand, the sandwich maker made the special sandwich dressing and therefore knew their employer’s secret recipe, the court may enforce the covenant to prevent that secret recipe from making its way into the new employer’s sandwich shop.

Existing Michigan statute and our courts work – they achieve the balance that is needed, permitting fair competition while giving an employer a means of addressing unfair competition that results from an employee’s misappropriation of proprietary information. Where fashion design is knocked off, and federal law does very little to protect the designer, a covenant not to compete remains far too important to be banned by misguided legislation.

Categories: Contracts, Employment, Intellectual Property, Manufacturing

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