On September 4, 2024, the Federal Trade Commission’s ban on non-compete agreements will take effect, reshaping how companies protect their interests and manage employee transitions. This significant change leaves many Michigan SMB owners wondering: How can we safeguard our business assets and client/customer relationships in this new environment?
Non-solicitation agreements are an effective yet often overlooked tool for protecting a business’ interests. As SMBs navigate the post-non-compete world, these agreements offer a viable alternative for maintaining a competitive edge while complying with new federal regulations. In this article, we’ll explore how non-solicitation agreements can fill the void left by non-competes, examine their enforceability in Michigan, and provide practical guidance for implementation.
The FTC Non-Compete Ban: A Quick Recap
The Federal Trade Commission’s ban on non-compete agreements prohibits employers from imposing non-compete clauses on workers across a broad spectrum of roles. Starting from the effective date, the ban prohibits all new post-employment non-compete agreements between employers and employees across all industries and worker types, including both senior executives and lower-level employees. It does not apply to agreements prohibiting an employee from competing against an employer while employed.
Post-employment non-compete agreements that are already in place may continue to be enforced, but only for senior executives. The definition of a senior executive is generally an employee who holds a policy-making position and earns an annual salary exceeding $151,164.
For Michigan’s SMBs, this change carries significant implications. Companies that have long relied on non-compete agreements to protect their client base, trade secrets, and competitive advantage must now pivot to alternative strategies, such as non-solicitation agreements. The FTC has stated that non-solicitation agreements are generally not considered non-compete clauses and are therefore not subject to its ban on non-compete agreements, so long as they do not function as non-competes and are not “so broad or onerous that it has the same functional effect [as a non-compete].”
Non-Solicitation Agreements: An Alternative Approach
Unlike non-competes, which broadly restrict an employee’s ability to work in a similar field, non-solicitation agreements focus specifically on preventing former employees from pursuing or “soliciting” a company’s clients or employees for a specified period after leaving.
While both types of agreements aim to protect business interests, non-solicitation agreements offer a more targeted approach. They allow former employees to continue working in their field of expertise, potentially even for competitors, but draw a clear line when it comes to actively pursuing their former employer’s clients or staff. This balance often makes non-solicitation agreements more palatable to employees and potentially more enforceable in court.
Enforceability of Non-Solicitation Agreements in Michigan
In Michigan, non-solicitation agreements are generally enforceable, but they must be carefully crafted to withstand legal scrutiny. This requires striking a balance between protecting legitimate business interests and avoiding undue restrictions on an employee’s ability to earn a living. Michigan courts typically evaluate these agreements based on several crucial factors.
First, the agreement must be reasonable in scope, duration, and geographic area. A non-solicitation clause that’s too broad or extends for an unreasonable length of time may be deemed unenforceable. For instance, a two-year restriction on soliciting clients within a 50-mile radius of the business might be considered reasonable, while a blanket five-year ban covering the entire state could be seen as overly restrictive.
Secondly, the agreement must protect a legitimate business interest. This could include maintaining client relationships, protecting confidential information, or preserving goodwill. In general, preventing ordinary competition is not a legitimate business interest. Therefore, the non-solicitation agreement should be tailored to protect specific, identifiable business assets or relationships.
A few common pitfalls to avoid include overly broad language, failure to provide adequate consideration, and inconsistent enforcement. It’s important to consult with experienced legal counsel to avoid these and other potential pitfalls, such as guarding against the risk that a non-solicitation agreement inadvertently creates an employment contract in at-will employment situations.
Remedies for Breach of Non-Solicitation Agreements
When a non-solicitation agreement is breached, Michigan businesses have several potential legal remedies, including:
- Injunctive Relief: Courts can order the former employee to stop prohibited solicitation activities. This is often the quickest way to prevent further damage.
- Monetary Damages: Businesses may be compensated for losses, including lost profits from improperly solicited clients, costs of acquiring new clients, potential disgorgement of the former employee’s profits from the breach
- Liquidated Damages: If included in the agreement, a predetermined sum may be awarded. These clauses must be reasonable to be enforceable.
- Attorney’s Fees and Costs: If specified in the agreement, the winning party may recover legal expenses.
To effectively use these remedies, Michigan SMBs should:
- Act swiftly upon discovering a breach
- Document all suspected violations and resulting losses
- Consider sending a cease-and-desist letter as an initial step
- Consult legal counsel to determine the best course of action
By understanding these options, businesses can better protect their interests and client relationships in the face of a violation.
Conclusion
In the wake of the non-compete ban, Michigan SMBs should consider the use of non-solicitation agreements to protect their interests. Employers who take this step should craft tailored agreements that clearly define “solicitation” while maintaining reasonable scope and duration. These agreements should be introduced at the start of employment whenever possible, with proper consideration provided if implemented later. Regular review and updates are crucial to ensure agreements remain relevant and legally sound, and consistent enforcement across similar positions helps maintain their integrity.
By thoughtfully implementing and enforcing non-solicitation agreements, Michigan SMBs can protect their client/customer relationships and competitive edge, all while adapting to the new realities of employment-related agreements in a post-non-compete world. If you have any questions about, or require assistance with, non-solicitation agreements, please contact us.
