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Michigan Supreme Court Clarifies Rule Applicable to Business-to-Business Non-compete Agreements

September 18, 2016

 In Innovation Ventures, LLC v. Liquid Manufacturing, LLC, No. 150591 (July 14, 2016), the Michigan Supreme Court clarified the proper standard that applies to non-compete agreements between businesses. Generally, non-compete agreements are governed by Michigan's Antitrust Reform Act (MARA), MCL 445.771 et seq., which bans agreements that would restrain or monopolize trade or commerce. Case law has further clarified that a noncompete agreement will only be deemed unlawful if it is unreasonable. Because MARA applies to noncompete agreements, lawyers and judges have looked to its provisions to determine when such a provision is unreasonable, in particular relying on MCL 445.774a. But as the Michigan Supreme Court held, that statute applies only in the employer-employee context and should not be used when reviewing non-compete agreements between businesses. Instead, courts should rely on the "rule of reason" developed in the federal courts.

 

Citing the United States Supreme Court's opinion in Board of Trade of City of Chicago v United States, 246 U.S. 231 (1918), the Michigan Supreme Court observed that a restraint on trade, such as a non-compete, must be analyzed to determine whether it "merely regulates and perhaps ... promotes competition or whether it ... suppress[es] or even destroy[s] competition." Courts should consider aspects such as "the facts peculiar to the business to which the restraint is applied; [the affected business's] condition before and after the restraint [is] imposed; [and] the nature of the restraint and its effect, actual or probable." In addition, "[t]he history of the restraint, the evil believed to exist, the reason for adopting the particular [restraint, and] the purpose or end sought to be attained[] are all relevant facts."

 

Businesses that rely on or are subject to commercial noncompete agreements would be wise to have those provisions reviewed by an attorney to determine whether their rights have been affected by Innovation Ventures.

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