I recently had a client who contacted me just before he signed a severance agreement. The severance agreement provided a measly amount of money. But it also included a non-compete agreement that was substantially different than the one my client signed at the outset of his employment. Notably, the first non-compete he signed was unenforceable for a variety of reasons. The new one, however, was airtight. So he followed my advice and turned down the severance agreement offer.
A declaratory judgment plaintiff in Michigan was not, however, so preminiscent. He sold the assets of the company he had formed - to a competitor. As part of that sale, he signed a purchase and sale agreement that included restrictive covenants, including a five-year non-compete. In exchange, he got a consulting gig with the company to whom he sold his company’s assets. And as part of that arrangement, he signed an employment contract that included yet another non-competition provision.
It wasn’t too long after he started his new job that he started to feel “unwelcome” at his new employer/the buyer. Sensing his termination was imminent, he decided to leave. He agreed to a separation agreement. The separation agreement (Agreement #3!) included a provision that called upon him to be bound by the two-prior non-competition agreements.
Sure enough, the plaintiff almost immediately gained employment with a direct, albeit larger alleged competitor. And sure enough, he immediately received a cease and desist notice from his prior employer/the buyer.
The plaintiff/seller took the initiative and went to court, asking it to declare him free of all of the prior restrictive covenants because, as he saw it, there was a lack of direct competition between the two employers, at least relative to the work he would be performing for the new employer.
Now here is the twist – the separation agreement mentioned above also included an explicit release of all claims, “known or unknown” – against the buyer. (“ouch”) As such, according to both the trial court and – late last month – the Michigan Court of Appeals, the seller’s request to be released from the non-compete was meritless. Specifically, in exchange for $24,000, the plaintiff waived his right to bring any lawsuit against his former employer. The case is Boston v. Independent Tooling Solutions, 2018 WL 6070431 (Nov. 20, 2018).
But what if the plaintiff simply continues his new employment and the buyer (Independent Tooling Solutions) then sues him? The Court of Appeals didn’t say he could not defend himself if this happened. And five years is a very long time when it comes to evaluating the reasonableness of a covenant not to compete. Food for thought!