The BUSKLAW July Newsletter: Horsing Around with Non-Compete Clauses


Non-compete provisions are part and parcel of many employment agreements. But these provisions must be carefully drafted to be enforceable. There are three sure-fire ways to have a court invalidate your non-compete clause without much judicial cogitation:
  1. Failure to provide a reasonable duration for the clause;
  2. Failure to restrict the operation of the clause to a reasonable geographic area; and
  3. Failure to establish a protectable business interest as the subject of the clause.
The first point is easy to grasp. In Michigan, you are on solid legal ground if the duration of your non-compete clause doesn't exceed one year. And you are probably okay if you add a year to that. But you're walking on quicksand if your non-compete provision lasts longer than two years. 

The second point is a bit more complicated. Courts don't like to enforce a non-compete clause if its geographical scope is too wide. For example, if I'm in the packaged ice business and sell my product mostly to retailers in West Michigan, a court probably won't enforce a non-compete agreement that covers the central or eastern side of the State.  

One drafter of a non-compete clause - by accident or design - tried to avoid this issue by not mentioning a geographical area at all. Perhaps they hoped that the clause wouldn't be litigated or if it was, that the court would helpfully insert a reasonable geographic area covered by the clause. That was the issue in a recent federal court case in Pennsylvania, Catalyst Outdoor Advertising, LLC v Jennifer Douglas. Ms. Douglas signed a non-compete agreement with Catalyst, a seller of billboard advertising, but the agreement didn't specify a geographical area for the restriction. She went to work for another billboard advertiser, City Outdoor, and Catalyst sued to enforce the non-compete. The Court found that the non-compete clause wasn't enforceable because not only did it fail to specify a geographic area, but also City Outdoor and Catalyst didn't operate in the same (or overlapping) territory so they weren't actually competitors. And the Court further noted (cue sad trombone) that it wasn't in the business of revising contracts to make them enforceable.  

The third point - the requirement for a protectable business interest - sounds complicated, but it isn't, as illustrated in a recent Tennessee Court of Appeals case: Sugar Creek Carriages v Hat Creek Carriages. (The quaint name arises from the fact that both parties offer horse-drawn carriage rides to customers in downtown Nashville.) Lester Blackwell signed a non-compete agreement with Sugar Creek that was okay from a duration and geographical area viewpoint. But what the agreement sought to protect was a problem - the carriage-driving expertise that Sugar Creek taught to Lester that he later used in driving for Hat Creek, Sugar Creek's competitor. But Sugar Creek didn't claim that Lester's specialized training involved its confidential information or disclosure of customers. And in fact, Sugar Creek offered the same training to anyone who could pay to attend its driving school. Further, Sugar Creek's offer declared that at the completion of the class, you will be prepared to start your own horse-drawn carriage business.

 So the Court held that there was no protectable business interest for something that wasn't a trade secret, confidential business information, or a customer list, but freely available to all, with the clear message that "after this training, you can go into the horse carriage business - just like us!" 

 Dare I say it? Don't horse around with your non-compete provisions. Have a competent attorney review them to see if they satisfy the three basic requirements, and if not, remedy the defects before you and your ex-employee wind up in court. 
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The BUSKLAW August Newsletter: This Single-Sentence Contractual Provision Can Save - or Ruin - Your Day!


When it comes to business contracts, some provisions are more important than others. And it's true that some of these critical clauses are buried deep within a contract, so by the time you get to them, your eyes are glazed over, and you gloss over them. But that could be unfortunate. 

 One such provision is what lawyers call the choice of law and forum selection clause (for convenience, "COLFS"). That clause typically reads as follows:

 The validity, interpretation, and construction of this agreement are governed by the laws of the State of [INSERT STATE], and any and all claims hereunder shall be brought in [SPECIFY NAME OF COURT AND COUNTY].

 A recent decision by Kent County Circuit Court Judge Christopher Yates underscores the importance of a COLFS provision in an employment contract between OtterBase, a Grand Rapids, MI-based staffing firm, and two of their former employees, Carrie Rogers and Emily Reed. Rogers and Reed had experience in the staffing services industry in southern California, and OtterBase wanted to expand its business to that area. In 2013, OtterBase entered into an employment contract with Rogers and Reed that included provisions restricting them from competing with OtterBase and soliciting OtterBase clients during and after the term of the contract. The contract included a COLFS provision stating that Michigan law governs the contract, and any claims between the parties could only be decided in Kent County Circuit Court. 

 The contract ended badly in 2016. Contrary to the contract, Rogers and Reed started a new company in California that competed with OtterBase and apparently solicited OtterBase clients. OtterBase sued Rogers and Reed in Kent County Circuit Court, and they asked Judge Yates to throw out the suit on the basis that the COLFS provision was unenforceable.
At stake here was more than the inconvenience of Rogers and Reed having to come to Michigan to defend the lawsuit, but whether the non-compete and non-solicitation provisions were enforceable. Simply stated, Michigan law recognizes the validity of these restrictions (if carefully drafted), but California law does not. California law states that "any contract by which anyone is restrained from engaging in a lawful provision, trade, or business of any kind" is void. So, if the Judge Yates upheld the COLFS provision, it was "game over" for Rogers and Reed. 

 The criteria for the validity of COLFS provisions are well-established. Judge Yates reviewed them and determined that:
  • Michigan had a substantial relationship to the contracting parties because OtterBase is headquartered in Grand Rapids, and the purpose of the contract was to have Rogers and Reed extend its business to California.
  • OtterBase does business in several states, and it has a legitimate purpose in having a Michigan COLFS provision to avoid confronting a crazy quilt of laws that require different treatment of employees working in different states.
  • Rogers and Reed were free to negotiate the COLFS provision. 
  • Michigan public policy favors the enforcement of COLFS provisions. 
  • The COLFS provision may stand despite the fact that Michigan law recognizes restrictive covenants in employment contracts but California law does not. The two states' different views on that subject aren't enough to invalidate the COLFS provision.  
Do your contracts contain COLFS provisions that may save - or ruin - your day if you litigate with the other party? You should have your attorney carefully review your contracts for COLFS provisions and summarize them as part of your contracts database. You do have a contracts database, right? 
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The BUSKLAW March Newsletter: Basic Legal Protections for a Small Technology Business



This post is directed to a small Michigan-based technology business with several employees who write code or produce other creative work. Start-up technology businesses may find this post especially relevant; established smaller technology firms may also find this useful. As always, the recommendations in this post should not be taken as legal advice and are simply general guidelines for your consideration.

 Here are what I consider basic legal protections that you – the astute entrepreneur - should have in place for your technology business from the day that you open the door:
  • Protect Your Intellectual Property. Your creative output may be protected by U.S. patent, copyright, trademark, or trade secret law. Know the basics of these legal protections by reading this excellent article in the February, 2016 issue of the Michigan Bar Journal. Then, find a good intellectual property (I.P.) attorney to discuss the best cost-effective ways to protect your valuable I.P. assets. 
  • Have Your People Sign Employment (or Independent Contractor) Agreements. Your employees should sign employment contracts as an integral part of the hiring process. Standard provisions should include confidentiality, I.P. rights assignment outside of the work for hire doctrine, non-compete, conflict of interest, and acknowledgment of any separate human resources policies such as vacations, benefits, leave of absence, etc. And consider including a mandatory arbitration provision in exchange for discharging an employee only for “good cause.” Finally,  if you want to classify any of your people as independent contractors rather than employees, you will need to have special agreements with these folks to (hopefully) avoid tax and other liability problems. 
  • Respect the Formalities of Your Business Entity. Whether you are a corporation, limited partnership, or limited liability company, there are statutory requirements to observe if you want to keep the legal protections afforded by these entities intact. Your attorney should help you understand these formalities. In the case of a corporation, you need to have annual shareholders’ and directors’ meetings with appropriate business actions. And it’s wise to have your lawyer attend these meetings, if only to make sure that the appropriate resolutions are properly enacted and put in the best legal form. The danger of ignoring the required formalities includes personal liability for debts incurred by the business entity. 
  • Adopt a Record Retention Policy. Even a small business can be hit with a lawsuit, and when that happens, you’ll be glad that your board of directors adopted a record retention policy (RRP) and appointed one of your detail-oriented employees as a record retention manager. The RRP should detail how long and in what form your business must keep its documents, including emails, contracts, employment agreements, payroll records, purchase orders, invoices, receipts, licenses, etc. It should also specify when the policy will be suspended if there is litigation (this is called a “litigation hold”). An RRP is vital to justify the normal destruction of business data that may be requested by a plaintiff’s attorney on a "fishing expedition." Your business may be small, but you need an RRP! And once adopted, make sure that you follow it (as with all of your other company policies)!
  • Protect Yourself with Contracts. Even if you have only a handful of contracts, make sure they are signed, dated, safely stored, can be produced in a legible format, and don’t put you at a disadvantage. And don’t accept any contract that lands on your desk, however innocent it may appear, without first consulting with your attorney! Agreements to be wary of include leases (if you lease equipment or your business location), supplier agreements, customer agreements, bank loans, service agreements, and non-disclosure agreements. (And avoid letters of intent for the reasons discussed here.) These documents will contain legal jargon that you won’t understand. Consider having your attorney draft a set of plain-language purchase order terms and conditions that you can routinely send to your suppliers. And tell your attorney that you want a plain-language arbitration provision in all of your contracts to avoid the burdensome time and expense of litigation! Finally, don't try to save a few bucks by going to an Internet legal forms site and downloading a document that sounds okay to you. You're rolling the dice with that approach! 
  • Do Lunch with These Three. You’ll be busy building your business, but you’ll still get hungry around noon. Resist the habit of avoiding lunch (exception: to exercise) and take the following three people to lunch on a regular basis: your attorney, your outside accountant, and your insurance broker. You “don’t know what you don’t know,” so you’ll benefit from talking to these folks. If you don't benefit, find a replacement for the unhelpful person.  
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Smaller firms aren't immune to the risks of doing business in a litigious culture. You need to devote time, effort, and the necessary expense to keep your firm on an even keel by considering these basic suggestions.


If you find this post worthwhile, please consider telling your colleagues about it. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. Thanks!