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By: Lisa M. Okasinski, Esq.
Demorest Law Firm, PLLC
Royal Oak, Michigan

Non-compete agreements are used in employment contracts to restrict the ability of employees to work for a competitor after the employment relationship ends. Non-compete agreements protect the employer’s legitimate interests in protecting innovative products, confidential information, efficient workforce and critical customer lists, and prevent an employee from sharing that information with a competitor after the employment relationship ends.

However, some concern arises over when a non-compete agreement becomes an unreasonable restraint on trade and has a stifling effect on innovation and the mobility of employees. The balance between protecting an employer’s property and allowing the employee to freely move to another company has caused much debate on the use of non-compete agreements and what is reasonable.

Such debates often encompass aspects of the non-compete agreement such as:

  • Which employees does it apply to?
  • How long will it stay in affect?
  • Does it apply the same if an employee is fired as it would if the employee voluntarily quits?
  • How expansive of a geographic area does the non-compete agreement apply to?
  • What other restrictions are placed on the employee?

Because of these concerns, states vary widely in their treatment of non-compete agreements. Some states, like Michigan, tend to take an employer-friendly stance on non-compete agreements and allow employers and employees to enter into non-compete agreements to protect the “reasonable competitive business interests” of the employer so long as the agreement is reasonable in duration, geographical scope, and the type of activity restrained. Other states, such as Colorado limit the application of non-compete agreements to executive and management personnel. While still other states, like Georgia apply severe restrictions on non-compete agreements, and California bans them altogether.

To date, it has been somewhat difficult to discuss the use of non-compete agreements because of a lack of access to employment contracts, which are not always accessible to the public. However, recent studies done by University of Michigan business professor, Norman Bishara, in conjunction with others, has given some insight on trends in non-compete agreements.

In one study, Bishara reviewed CEO employment contracts in 500 publicly traded companies. From that information he found that 80% contained non-compete agreements. Further, he found that those non-compete agreements covered a broad geographic range and usually lasted between 1 to 2 years. He also noted a trend over time in which the non-compete agreements were becoming more and more restrictive.

A second study by Bishara focused on employment contracts of average Americans. That survey appeared to raise more red flags in regards to unfair restraints on the employees and potential for abuse. For example, 31% of those surveyed said that they have signed a non-compete agreement at some point.   Of those, 90% didn’t negotiate that non-compete agreement and 48% assumed that it wasn’t negotiable.

Bishara noted the significance of these two studies, stating:

CEO’s fully know what they’re getting into and will give up some future freedom of movement for stability and support, as well as compensation. It’s when you get below the CEO or high executive level that you start to worry about them because they can be abused. And that can have a chilling effect on employee mobility and related positive benefits such as greater innovation.

Although Bishara’s research doesn’t conclude which state has taken the right approach in regards to its treatment of non-compete agreements, it provides valuable insight on the current trends in non-compete agreements that is essential to the debate.

Bishara’s paper regarding non-compete agreements in CEO employment contracts is set for publication in the Vanderbilt University Law Review.

For more information about Lisa Okasinski and Demorest Law Firm, PLLC, please visit the International Society of Primerus Law Firms.