by Richard D. Weber, J.D.
MDA Legal Counsel
Published in the July 2003 issue of the Journal
Question: I recently signed an employment agreement with a professional corporation that precludes me from practicing dentistry in my community for a period of two years if the contract is terminated. I question whether this contract provision is enforceable. Please advise me of the status of the law in this area and whether this provision is enforceable.
Answer: For most of this century, covenants not to compete were prohibited by statute in Michigan. The statute provided that all non-competition agreements, whether reasonable or unreasonable, were against public policy, and therefore illegal and void. In 1985, the Michigan Legislature repealed this statutory prohibition on non-competition agreements. Two years later the statute was amended by specifically providing that courts may enforce non-competition agreements that are reasonable and necessary to protect an employer's competitive business interests.
Since covenants not to compete in employment agreements were statutorily invalid prior to 1985, Michigan appellate court decisions are of recent vintage. Case law has made it clear, however, that enforceable restrictive covenants must be designed to protect the employer's legitimate business interests. They must be reasonable when applied to three specific issues:
- geographical area; and
- type of employment or line of business restricted.
The reasonableness of the covenant is determined on a case-by-case basis. The courts attempt to strike a balance between the employer's legitimate business interests and the employee's ability to earn a living. There is no absolute time period that is determinative of whether the duration of a restrictive covenant is reasonable. If the duration has a legitimate relationship to the interests of the employer to be protected, it probably would be determined reasonable.
The same analysis would apply to the geographic scope and the type of business restricted. A covenant not to compete in a dentist's employment contract that covered the entire state of Michigan would not be enforceable. A restrictive covenant in a dentist's employment contract that precluded the practice of a specialty unrelated to the employer's practice would be unreasonable and unenforceable. On the other hand, a dentist's employment contract that restricts an employed dentist from practicing the specialty practiced by dentists in the professional corporation employer, within a geographical area in which the professional corporation draws patients, which is limited in duration, would probably be enforceable. Even if a restrictive covenant is unenforceable because of its unreasonable duration or geographical area, courts have the authority to modify the restrictive covenant by limiting the same to what the court considers reasonable under the circumstances.
The limited number of Michigan appellate court cases interpreting this statute apply primarily to commercial business relationships. Nevertheless, the statute, and the analysis of the Michigan appellate courts that have interpreted the statute, are applicable to dentists' employment contracts.
Whether your particular contract would be enforceable or not would depend upon whether the restrictions are reasonable in time and geography, limited to what would be deemed necessary to protect the competitive business interests of your employer, and whether your employer is a professional corporation, partnership, limited liability company, or other health care entity.