Michigan Legislator Introduces Bill to Ban Non-Compete Agreements

As reported recently by Crain's Detroit Business, State Rep. Peter Lucido introduced House Bill 4198, which would ban employee non-compete agreements in the State of Michigan. The bill, which has no co-sponsors (and which has little chance of passage), proposes to amend MCL 445.774a, the state code section pertaining to covenants not to compete.

As amended, the proposal would allow for enforcement of covenants incidental to the purchase of goodwill. However, it specifically would void any restrictive covenant entered into between employer and employee.

Michigan has a somewhat circuitous history with regard to non-competes. Thirty years ago, employment non-competes largely were void, subject to some narrow exceptions. In 1985, however, the legislature reformed non-compete law to bring the state largely within the majority of other states, effectively allowing them as long as the terms are reasonable and are designed to protect a valid competitive business interest. Lucido would take the law back to its pre-1985 status.

Matt Marx, Deborah Strumsky, and Lee Fleming published a well-known Management Sciences article in 2009, which tested the effect of the law's evolution on the mobility of Michigan employees. The study concluded that the change in Michigan law positively correlated to a brain drain, as star inventors left Michigan for states with more lax non-compete enforcement policy. In many respects, the Marx-Fleming study is the intellectual forbear to Orly Lobel's book Talent Wants to Be Free (Yale Univ. Press 2013).

In the Crain's article, attorney Bernard Fuhs takes issue with Rep. Lucido's rationale for getting rid of non-competes. Confidentiality Agreements, Lucido says, are sufficient to protect intellectual property. Fuhs offers the best retort: it's virtually impossible to police compliance with a non-disclosure agreement absent evidence from a whistleblower or through sheer dumb luck.

Non-competes provide a more objective means to ensure protection of intellectual property, even if they are somewhat overinclusive. By "overinclusive," I mean that non-competes impede a flow of knowledge or value that can be restricted only incidentally and that may not provide any competitive advantage at all.

The entire rationale for enforcing non-competes is that the economic benefit from preventing disclosure of proprietary information exceeds the social cost in preventing use of non-proprietary spillover knowledge .