Federal Rule of Reason Applies to Commercial Noncompetes in Michigan

Ronald S. Nixon's Unfair Competition Legal Blogs

Licensed for 20 years

Attorney in Troy, MI

On July 14, 2016, the Michigan Supreme Court issued an important decision for Michigan noncompete jurisprudence.  It held that the reasonableness standard applied to employment noncompetes and codified at MCL 445.774a (i.e. has a legitimate business purpose and is reasonably limited as time, territory, and line of business) does not apply to noncompetes between commercial entities.  Rather, courts should apply the rule of reason analysis of federal antritrust cases, which it quoted as follows:

whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences. Bd of Trade of City of Chicago v United States, 246 US 231, 238; 38 S Ct 242; 62 L Ed 683 (1918).

See Innovation Ventures v Liquid Manufacturing, opinion of the Michigan Supreme Court decided July 14, 2016 (Docket no. 150591).
 
This decision probably should not have been a sea change for Michigan law.  The standard for covenants outside the employment context that the Michigan Supreme Court articulated over 140 years ago is similar:

if, considered with reference to the situation, business and objects of the parties, and in the light of all the surrounding circumstances with reference to which the contract was made, the restraint contracted for appears to have been for a just and honest purpose, for the protection of the legitimate interests of the party in whose favor it is imposed, reasonable as between them and not specially injurious to the public, the restraint will be held valid.

Hubbard v Miller, 27 Mich 15, 19 (1873). But courts in Michigan applying the rule of reason have invariably turned to the the same analysis used for employment covenants.  E.g., In re Spradlin, 284 BR 830, 836 (ED Mich 2002)(holding that covenant ancillary to the sale of a business passed the rule of reason because it was reasonably limited in time, geographic scope, and line of business). As a practical matter, then, the decision is an important change, and it will be interesting to see how Michigan courts apply the federal standard.

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