COURT DECLINES TO ENFORCE NON-COMPETE AGREEMENT AGAINST AN ENTRY-LEVEL EMPLOYEE

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By Karen L. Piper

Many courts are reluctant to enforce non-compete agreements against entry-level employees, as was the result in the recent Goldfish Swim School v Aqua Tots decision. Steven Ogg worked part-time for Goldfish Swim School as a swim instructor earning $10 per hour and later as a deck supervisor earning $12.50. When hired, he signed an Employee Confidentiality, Non-Disclosure and Non-Compete Agreement. The agreement precluded Ogg from working for a competitor within a 20-mile radius of any Goldfish location for one year after ending his employment and from soliciting any Goldfish employees or customers for an 18-month period after separation. After Goldfish terminated his employment, Ogg began working for Aqua Tots, a direct competitor of Goldfish, in breach of his non-compete agreement.

Upon learning of his employment with Aqua Tots, Goldfish sued Ogg for breach of contract and sued Ogg and Aqua Tots for tortious interference with a contract and unjust enrichment. After some initial discovery and a hearing, the circuit court denied Goldfish’s motion for a preliminary injunction and dismissed the lawsuit. The Michigan Court of Appeals affirmed the circuit court’s decision. 

With respect to the denial of the injunction, the Court of Appeals agreed that Goldfish had failed to prove it would suffer irreparable harm if a preliminary injunction did not enter. The court relied on the fact that Goldfish had no evidence that Ogg had shared Goldfish’s curriculum with Aqua Tots, or taken any client contact information, or solicited any Goldfish clients, or caused Goldfish any financial harm.

With respect to dismissal of the lawsuit, the Court of Appeals determined that Goldfish’s agreement with Ogg did not protect a “reasonable competitive business interest.’” Under Michigan law, in order to be enforceable, a restrictive covenant must: protect an employer’s “reasonable competitive business interests;” and be reasonable as to its duration, geographical area, and type of employment or line of business. The court rejected Goldfish’s argument that the non-compete agreement was necessary to maintain the confidentiality of its swim instruction method, which it characterized as a trade secret. As the court noted, a trade secret is subject to efforts to maintain its secrecy. In this case, Goldfish taught its instructional method to children in front of hundreds of people every day.

Unlike its conclusion that the non-compete provision was unreasonable, the Court of Appeals concluded that the provision barring solicitation of Goldfish clients was reasonable. The court nevertheless affirmed the dismissal of Goldfish’s breach of contract claim because Goldfish had no evidence that Ogg had solicited any Goldfish clients in breach of the non-solicitation provision.

The court also affirmed dismissal of Goldfish’s claims against Aqua Tots for tortious interference and unjust enrichment. Goldfish did not present facts to show that Aqua Tots was even aware of Ogg’s non-compete agreement or that Aqua Tots, in any way, benefitted from Ogg’s prior employment with Goldfish. Aqua Tots had its own method of teaching children how to swim that was quite different than Goldfish’s method. 

This case is a timely reminder that courts look closely at non-compete agreements. Employers should review with counsel whether the non-compete provision protects a reasonable competitive interest and whether, in some cases, a non-solicitation of customers agreement may suffice. Also, to prevent employees from using or disclosing their trade secrets, employers should require all employees to sign a confidentiality and assignment of inventions agreement. BHB Investment Holdings, LLC v Ogg (unpublished, Michigan Court of Appeals No. 330045, Feb. 21, 2017).

This article was written by Karen L. Piper, who is Secretary of the Board of Detroit SHRM, a member of the Legal Affairs Committee, and a Member of Bodman PLC, which represents employers, only, in Workplace Law. Ms. Piper can be reached at Bodman’s Troy office at (248) 743-6025 or kpiper@bodmanlaw.com. For further information, go to: http://www.bodmanlaw.com/attorneys/karen-l-piper.

Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information are included in the re-post of the article. March 2017.