Non-Competes Between Commercial Ventures to be Assessed Under Rule of Reason

Posted on July 18, 2016

In Innovation Ventures v Liquid Manufacturing, LLC, Michigan Supreme Court Docket No. 150591 (decided July 14, 2016), the Michigan Supreme Court considered whether the validity of a covenant not to compete should be determined by looking at the factors provided in MCL 445.774a or by using the “rule of reason” analysis. MCL 445.774a sets forth factors for a court to consider in analyzing covenants not to compete in an employer-employee context. The covenant not to compete considered in this case, however, was in a written agreement between two businesses. The statutory factors include the following: (1) duration of the covenant, (2) geographic area restricted by the covenant and (3) type of business or employment involved. The Michigan Court of Appeals used these factors to throw out the covenant not to compete entered into between these two commercial ventures. The Michigan Supreme Court, however, disagreed. The superior Court found guidance in the words of MCL 445.784(2) which provides that courts should look to federal interpretation of similar statutes where there are specific rules not provided by Michigan’s Antitrust Reform Act. The Michigan Supreme Court stated that federal courts have weighed the enforceability of covenants not to compete between commercial ventures by using the “rule of reason.”

The Michigan Supreme Court cited factors commonly used by federal courts in reviewing provisions under the Sherman Antitrust Act as including information regarding the business involved, the condition both before and after the restraint was imposed and the “history, nature and effect” of the restraint. Other factors include the parties’ reasons for entering into the covenant. The factors to be considered in weighing inter-company non-competes appear to take into consideration a much broader range than employer-employee covenants. Covenants not to compete entered into between business enterprises are enforceable if reasonable; however, as with all covenants not to compete, they should be carefully drafted.