The BUSKLAW November Newsletter: Employment-Related Restrictive Covenants Have Teeth!

 Are you a party to a Michigan employment contract that includes non-competition, non-solicitation, and confidentiality provisions? Have you wondered whether these restrictive covenants have teeth, i.e., are they enforceable via a preliminary injunction? That's a great question, and we have the answer from Michigan Business Court Judge Christopher Yates in his recent decision: Aaron Symonds v Lighthouse Insurance Group, Inc.

Let's start with the facts. Mr. Symonds was a shareholder (i.e., not a mail clerk) in the Lighthouse Insurance Group. He signed an employment agreement that included non-competition, non-solicitation, and confidentiality obligations. He then voluntarily left Lighthouse to work for a Lighthouse competitor, Collins & Associates, as their Vice-President of Commercial Lines. In that capacity, he began to solicit several Lighthouse clients to move their property and casualty insurance over to Collins. Symonds conceded under oath that his work for Collins "was a breach of his contractual non-competition obligation to Lighthouse" and "violated his non-solicitation obligation to Lighthouse." 

No surprise that Judge Yates found that these facts satisfy the four criteria under Michigan law for granting a preliminary injunction to stop Symonds from violating these restrictions as a Collins employee:

1. As the party seeking the injunction, is it likely that Lighthouse will prevail on the merits? Judge Yates answered "yes," finding that the non-competition clause in Symonds's employment agreement with Lighthouse is largely agreeable in time (although he reduced the 3-year duration to 18 months) and in geographic coverage [30 miles of (sic) any county in which Lighthouse maintains an office]. He also pointed to Symonds's "unequivocal" admission under oath that he was violating the non-competition and non-solicitation covenants in his work for Collins. 
2. Did Lighthouse make a particularized showing of concrete irreparable harm? Judge Yates found that Symonds solicited several existing Lighthouse clients to move their insurance policies to Collins, and he even solicited a Lighthouse employee to come work for Collins. So, "that evidence leads ineluctably to concern that Symonds poses a threat to Lighthouse's client base." 
3. Did Lighthouse show that it would be harmed more by the absence of an injunction compared to the harm to Symonds from issuing the injunction? This is an awkward way of saying that a court must balance the harm to the parties. Judge Yates noted that this test "militates against stringent injunctive relief in cases involving restrictive covenants because the former employee will be dispossessed of income if a preliminary injunction bars them from maintaining their new employment." Here, the Court must consider the fate of Mr. Symonds, who would be barred working for Collins by the restrictive covenants. How can he put bread on the table? Fortunately, Symonds's employment agreement with Collins contemplated this very scenario, providing that if the non-compete provision with Lighthouse was enforced, Collins would pay him $200K per year until the provision expires. Not too shabby; kudos to Symonds (or his lawyer) who had the foresight to include this "failsafe" provision. So Judge Yates found that Lighthouse "faces greater peril in the absence of injunctive relief that Symonds will endure if the Court grants injunctive relief..."
4. Will the public interest be harmed if the injunction is issued? Judge Yates observed that although enforcement of contracts serves the public interest, Michigan law disfavors non-competition agreements as restraints on commerce. He found that this factor "doesn't tip the scales in favor of either side in this dispute." 

So Judge Yates granted Lighthouse's request for a preliminary injunction, finding that although Symonds isn't barred from working for Collins, he can't compete with Lighthouse by offering, soliciting, or accepting any insurance business within the specific geographical area for 18 months after leaving Lighthouse. And Symonds can't solicit any insurance business from any Lighthouse customer for three years. As is typical in preliminary injunction hearings, both of these rulings are subject to further order of the Court.  

A final note. Just because these restrictive covenants have teeth in Michigan, there may be a different outcome under other States' laws. Under California law, for example, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” So if you're a Michigan business with employee contracts containing restrictive covenants, make sure that Michigan law controls - and that the covenants are reasonable in duration, geographic coverage, and the type of employment or line of business. (Please contact me for drafting suggestions.)  

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