An overbroad noncompete agreement could be unenforceable

Q: Two years ago, I started a new job at an engineering and design firm as an entry level engineer. On my second day of on-boarding, I signed a bunch of documents, including a “Noncompete Agreement” which forbids me from working for any competing business in Michigan for two years after I leave the company. I started looking for a new job after some recent decisions by management, but pretty much any firm I interview with could be viewed as “competing.” Didn’t the Federal Trade Commission just rule that noncompete agreements are illegal?

A: On January 5, the Federal Trade Commission proposed a rule that would ban noncompete clauses as a form of unfair competition, but it’s a long way from becoming a law. The federal rulemaking process is slow, often taking as long as three years for a rule to move from suggestion to enactment.

In an opinion piece in the New York Times, current FTC chair Lina Khan argued that noncompete clauses strike at the heart of America’s values, denying workers freedom. “You’re not really free if you don’t have the right to switch jobs or choose what to do with your labor,” she wrote.

The proposed rule is, in part, a reaction to increased use of noncompete clauses. A 2019 study estimated that as many as 60 million private-sector workers are subject to noncompete agreements. An earlier study, from

2014, found almost 20% of the U.S. workforce is covered by noncompete agreements — everyone from high-paid executives to fast food workers.

A Michigan firm recently became the posterchild for noncompete abuse. Prudential Security was the subject of an FTC

complaint after it reportedly required more than 1,000 minimum-wage security guards to sign noncompete agreements, and allegedly threatened the workers with a $100,000 penalty if they took another security job within a 100-mile radius within two years after leaving the company.

Noncompete agreements were originally used to protect businesses from opportunistic employees who abused their access to confidential information or trade secrets. Typically, such agreements affected only upper-level employees.

Now, as the Prudential Security case demonstrates, they are often used as a way to reduce turnover. The overall effect of such agreements, according to a 2020 study, is to depress wages for everyone, and increase gender and racial wage gaps. But the Prudential Security case also tells another story: Noncompete agreements that are too broad are unenforceable.

Under Michigan law, a noncompete agreement is only valid to the extent it is “reasonable as to its duration, geographical area, and type of employment or line of business,” MCL 445.774a. The noncompete agreement you were asked to sign, with its two-year restriction on working anywhere in Michigan for undefined “competitors” is likely over-broad and therefore unenforceable. Generally, a noncompete agreement is over-broad if the restrictions are more than the employer needs to protect its interests.

If noncompetes are barred, employers have other ways to prevent employees from competing — unfairly or otherwise. Nondisclosure and trade secret agreements bar workers from using or revealing “confidential” and trade secret information. But workers should be wary about signing these clauses, too. A restaurant, for example, wanted to prohibit its chef — who had been hired for his way with pastries — from using his “know-how” (defined as a trade secret) on behalf of any other business. Another employer tried to classify the names of all the suppliers it dealt with — who were used by most businesses in the industry — as confidential information.

The problem for employees is that even when noncompete or nondisclosure clauses are unenforceable, they are usually asked to sign them as a condition of continued employment after being hired, and any later decision on enforceability is usually made by a court. The cost of litigating the issue is beyond most workers’ means.

A comment period on the FTC proposal ends March 20. Those interested, can comment at regulations.gov/document/ftc-2023-00070001.

Troy Attorney Daniel A. Gwinn has a practice focused on employment law, civil rights litigation, probate, and trusts and estates. Contact him with your legal questions at daniel@gwinnlegal.com or visit the website at gwinnlegal.com. “Ask the Lawyer” is informational only and should not be considered legal advice.