When deciding to sell one’s business, one of the key and essential issues that usually arises is the negotiation and/or drafting of a non-competition provision to be enforced against the seller of the business.
Pursuant to Michigan law, if a non-competition provision is reasonable, such provision is enforceable. MCL 445.774a(1); Mid Mich. Med. Billing Serv. v. Williams, Case No. 323890, 2016 LEXIS 319, at *13 (Mich. App. Feb. 18, 2016). Indeed, courts applying Michigan law have routinely upheld non-compete agreements restricting the former employee from engaging in restricted activities for periods of six months to three years. Mid Mich. Med. Billing Serv., supra, at *13 (quoting Kelly Services, Inc v Marzullo, 591 F Supp 2d 924, 939 (E.D. Mich., 2008)).
However, with respect to non-competition clauses made in connection with the sale of a business, in Woodward v Cadillac Overall Supply Co., 396 Mich App 379 (1976), the Michigan Supreme Court explained:
The purpose of a contractual restraint of trade is to protect certain interests of the party in favor of whom the restraint runs. When the contractual language creates a restraint beyond that which is necessary to protect the interests intended to be protected or the legitimate interests of the party benefited, the clause may be said to be overbroad.
A court confronted with an overbroad contractual restraint of trade must decide whether to enforce the restraint, in spite of its overbroad language, if the application of the restraint to the party before the court who is alleged to be subject to the restraint is reasonable, given the nature of this party’s conduct, and its effect on the party who is to be protected by the restraint. In the context of a sale of a business, courts have almost uniformly enforced an overbroad covenant not to compete in such situations, often reforming the language of the covenant to form a more reasonable restraint in terms of the interest to be protected.
This has been the long-established practice of Michigan courts in dealing with covenants not to compete incident to the sale of a business.
Id. at 397-98 (emphasis in original).
Accordingly, Michigan courts give the parties negotiating a contract for the sale of the business broad latitude in drafting non-competition provisions to protect the interests of the purchasing party. Indeed, as stated in Woodward, it has been the long-established practice of Michigan courts to enforce overbroad non-competition provisions contained in contracts for the sale of a business to protect the interests of the party purchasing the business.
As shown above, a party entering into a contract to sell his/her/its business must take great care in reviewing any non-competition provisions included in the transactions documents, particularly where courts in Michigan have a long-standing policy of enforcing covenants with broad language to protect the purchasing party.