In Michigan M&A, the covenant not to compete has always been the paper shield for the thing the buyer is actually buying goodwill. The buyer may be paying for customer relationships, referral channels, brand recognition, pricing know-how, supplier leverage, and the seller’s reputation in the market. If the seller can immediately re-enter the same space, approach the same customers, and leverage the same know-how, the buyer’s bargain can erode before the ink is dry. That is why deal lawyers instinctively reach for a seller noncompete as a core closing deliverable, not an afterthought.
House Bill 4040 would change the default posture for noncompete in Michigan by moving from a broadly permissive reasonableness regime to a general prohibition, paired with narrow exceptions. The most important exception for deal lawyers is the bill’s sale-of-business pathway, which if it becomes law would function less like a blanket safe harbor and more like a drafting test: if you can prove you are inside the exception and you can show the restraint is appropriately tailored, you have a fighting chance; if you cannot, the restriction may be void, and the buyer’s attempt to enforce it may create exposure.¹
This article focuses on the practical question the bill forces onto every term sheet and purchase agreement: if a Michigan noncompete is only permitted in a sale-of-business context, how do you paper the deal, so the restriction survives scrutiny and is still enforceable when it matters?
Before HB 4040, Michigan’s best-known statutory framework for employee noncompete is the Michigan Antitrust Reform Act provision codified at MCL 445.774a. Under that framework, an employer may obtain a covenant that protects the employer’s reasonable competitive business interests, so long as the restriction is reasonable in duration, geographic reach, and the type of employment or line of business restrained, with courts empowered to limit overbroad covenants to render them reasonable.² The legal conversation in litigation often becomes a dispute over what interest is being protected, whether the scope matches that interest, and whether the time and geography are tied to real competitive realities rather than just a preference to avoid competition. Michigan appellate decisions repeatedly emphasize that enforceability turns on reasonableness and tailoring, not on the mere existence of a signed form. ³
HB 4040, as introduced, would invert the starting point. The bill provides that, subject to a limited exception, a business may not enter into, attempt to enter into, obtain, attempt to obtain, enforce, attempt to enforce, or even represent that a noncompete applies to a worker or former worker.¹ That is a broad prohibition not only on enforcement but also on the conduct surrounding formation and assertion. The bill then supplies an exception that is, in practice, the deal lawyer’s main road back to enforceability in a classic acquisition scenario. ¹
The significance for M&A is not theoretical. The bill is drafted to apply to noncompete agreements entered into “before, on, or after” the effective date of the amendatory act. ¹ If enacted in that form, it signals a legislative intent to reach existing agreements, not merely new ones. A buyer’s diligence on restrictive covenants would no longer be limited to “is it reasonable?” but would also become “is it even permitted?” and “does it fit within the exception that keeps it alive?” ¹
HB 4040’s exception is built as a two-gate structure. To be outside the general prohibition, two conditions must be met. First, the worker must qualify based on their relationship to the transaction: either the worker is an owner selling the business or selling all or part of their ownership interest, or the worker is responsible for the sale of all or substantially all of the business’s operating assets.¹ Second, the noncompete itself must meet four content requirements: it must protect only the business’s reasonable competitive business interests, have a reasonable duration, restrict competition only in the relevant market, and restrict competition only to the same type of trade or commerce.¹
Two immediate drafting consequences flow from this structure. The first is that you have to paper the seller’s status, so it clearly fits one of the gateway categories. The second is that you must draft the restraint so its scope can be defended not just as “reasonable” in the abstract, but as aligned with “the relevant market” and with “the same type of trade or commerce,” concepts that naturally invite narrower tailoring than the broad “competitive with the business” language that shows up in legacy templates. ¹
HB 4040 also includes provisions that function like tripwires for purchase agreements. Terms that purport to waive statutory requirements, that require the worker to adjudicate in another state, that deprive the worker of Michigan substantive protections for a claim covered by the bill, or that require the worker to pay arbitration costs for a claim related to the noncompete are declared void and unenforceable.¹ In other words, even if the core covenant is properly within the exception, the wrong forum clause, choice-of-law clause, or cost-shifting clause can destabilize the enforcement package.
HB 4040 defines “worker” broadly, to include not only employees but also independent contractors, externs, interns, volunteers, and apprentices. ¹ That definition is a deliberate expansion beyond the traditional employment-only conversation and matters in two ways for deals. First, it reaches relationships that often exist in founder-led companies where key people are labeled as contractors, advisors, or consultants. Second, it means the bill may apply even when the seller is not a W-2 employee at signing, as long as the seller provides work in some covered capacity and then stops.
This is where the sale-of-business exception becomes more than a “seller noncompete is allowed” soundbite. The exception is framed around a “worker,” and then it describes that worker as an owner who is selling the business or an ownership interest, or as the person responsible for the sale of substantially all operating assets. ¹ Many sellers in M&A are, in fact, both owners and workers in the ordinary sense. Founder-operators, shareholder-physicians, partner-managers, and member-managers are exactly the people buyers most want restrained, and they are typically also the people who perform work for the entity. If HB 4040 becomes law, the safest course is to treat these individuals as covered “workers” and draft to the exception deliberately, rather than assuming a seller covenant will be treated as a purely “commercial” restraint outside the statute’s reach.
That caution is heightened by how Michigan has historically drawn distinctions between employee noncompete and commercial noncompete. A Michigan Bar Journal article discussing Innovation Ventures explains that commercial noncompete can be evaluated under an antitrust rule-of-reason framework rather than the employee reasonableness framework, and that, in some circumstances, a commercial restraint may be enforceable even if “unreasonable” to a contracting party so long as it does not harm competition in the relevant market.⁴ HB 4040, however, would explicitly import “relevant market” language and impose affirmative reasonableness and tailoring requirements inside its sale-of-business exception.¹ If enacted, that drafting choice suggests the Legislature may be narrowing what deal lawyers have historically treated as a wide lane for seller restraints, especially where the seller is also a worker.
If a covenant is going to survive as a sale-of-business restraint, the documents should read like a sale-of-business restraint from the first recital to the last remedy. That sounds obvious, but in practice many deals weaken enforceability by scattering restrictive covenant terms across an employment agreement, an equity rollover agreement, a consulting agreement, and a general release, without a clear center of gravity.
HB 4040’s gateway explicitly focuses on a worker who is selling the business or their ownership interest, or who is responsible for the sale of substantially all operating assets. ¹ That means your documents should make it easy for a court to answer a simple question: is this covenant part of the consideration exchange for a business sale transaction? The most defensible structure is usually to place the covenant in the purchase agreement itself, or in a separate restrictive covenant agreement executed at closing that is expressly incorporated by reference into the purchase agreement and supported by the purchase consideration. When the covenant instead appears as a condition of post-closing employment, it becomes easier for an opposing party to argue it is really an employment noncompete in disguise, which is exactly what HB 4040 is designed to police. ¹
This does not mean you cannot also have employment-related restrictions. It means you should be intentional about separation. If the seller will remain with the business after closing, papering often works best when the noncompete covenant tied to the sale has its own consideration logic and its own scope tied to goodwill, while employment documents focus on confidentiality, invention assignment, and limited non-solicitation or other permissible protections. HB 4040 expressly states it does not limit the enforceability of agreements prohibiting disclosure of confidential information or trade secrets, and it also preserves a narrow category of non-solicitation agreements if compensation and duration conditions are met.¹ Even in a deal environment, that statutory preservation can be used to build layered protection without forcing every protective impulse into the noncompete bucket.
Because HB 4040’s first gateway condition is status-based, you should draft as if you will someday need to prove that status using only the four corners of the deal documents. If the covenantor is an owner selling the business or a full or partial ownership interest, the purchase agreement and the restrictive covenant agreement should say so clearly, using definitions that track the deal form.
In a stock sale or membership interest sale, this is often straightforward: the seller is transferring shares or membership units. In asset deals, the identity of the “seller” can be a legal entity, while the individuals the buyer most wants to restrain are principals, officers, or key managers. HB 4040 provides a second route for those individuals by covering a worker “responsible for the sale of all or substantially all of the business’s operating assets.”¹ If you are relying on that prong, you should consider whether your purchase agreement’s representation and signature blocks reflect that the covenantor was, in fact, responsible for the sale, not merely an employee informed after the fact. The more the deal file shows a real role in negotiating, marketing, or executing the sale, the easier it is to defend the gateway condition.
This is also a place where careful drafting can prevent unnecessary fights. When a principal is selling a partial interest, such as in a recapitalization where the seller rolls equity and remains a significant minority owner, the bill’s text expressly includes “full or partial ownership interest.” ¹ That phrase should be echoed in your covenants and recitals, so the transaction plainly falls within the intended statutory lane. The buyer’s objective is to avoid a later argument that “this wasn’t really a sale” or “this wasn’t really an ownership transfer that counts,” because those arguments are exactly how a noncompete becomes vulnerable.
Traditional noncompete drafting often starts with geography and then tries to justify it later. HB 4040’s exception requires the restraint to restrict competition only “in the relevant market,” which can mean that the analysis is not purely a mileage radius debate. ¹ “Relevant market” is a competition concept. Even outside HB 4040, Michigan commercial noncompete analysis can involve market thinking, as reflected in discussions of the antitrust rule of reason. ⁴ Under HB 4040, the market concept is not optional if you want the covenant to qualify for the exception; it is an express statutory condition. ¹
In practice, “relevant market” for a sold business can be framed through product or service scope and the geographic or customer channels in which the goodwill actually exists. For a local service business, the relevant market might align with a geographic area because customers buy locally. For a specialized B2B company, the relevant market might be defined by an industry niche and a set of customers that purchase nationally, where a strict geographic boundary would be both underinclusive and overinclusive. The key is that the covenant should read like it is restraining competition only where the purchased goodwill is competitively meaningful, not everywhere the seller might someday want to live.
This is where deal diligence should feed drafting. Buyers should understand what the company actually sells, who actually buys it, where those buyers are, and how the seller’s reputation is monetized. If the documents include enough context to show that the restraint is tethered to the business the buyer purchased, the “relevant market” condition becomes defensible. If the covenant instead uses a catch-all definition such as “any business competitive with the Company anywhere,” it invites the claim that it restrains competition outside the relevant market and therefore fails a statutory requirement. ¹
HB 4040’s exception adds another narrowing requirement that is easy to miss: the covenant must restrict competition only “to the same type of trade or commerce.” ¹ This language pushes deal lawyers away from vague “competitive activity” formulations and toward a more disciplined definition of what the seller is being restrained from doing.
A useful way to think about this is that the buyer is entitled to keep what it bought, not to prevent the seller from earning a living in unrelated work. Michigan reasonableness jurisprudence in the employee context already reflects that theme, emphasizing tailoring to legitimate interests. ³ HB 4040’s “same type of trade or commerce” condition makes it explicit in the sale-of-business lane. ¹
In deal paper, this often means defining the restricted business in terms that match the sold line, not the seller’s broader skill set. If the seller built a company that provides a particular healthcare revenue cycle service, the restraint should focus on that service line rather than “any healthcare consulting.” If the sold business is a specialized manufacturing process, the restraint should focus on that product category rather than a blanket ban on “manufacturing.” The goal is to draft the restrained activity so it mirrors the competitive threat to the acquired goodwill, because that is what you will need to defend when the seller argues the covenant
HB 4040 requires that the covenant have a “reasonable duration.”¹ Michigan courts already treat reasonableness as central to enforceability in the employee context, and they will modify or limit restraints they find unreasonable.²³ The Mid-Michigan Medical Billing decision is a useful reminder of how quickly an overbroad restraint can be trimmed: the court held a provision unreasonable where its duration was effectively unlimited and remanded for modification consistent with a reasonable limitation.⁵
In sale-of-business covenants, parties sometimes assume they can demand longer periods because the buyer is purchasing goodwill. Michigan practice has long recognized goodwill protection as a legitimate interest, and commercial contexts can involve different analytical frameworks. ⁴ But HB 4040’s exception is not drafted as “anything goes if it’s a sale.” It demands reasonableness as a condition of legality. ¹ That means duration should be selected as part of the overall tailoring story: long enough to protect the buyer’s ability to retain customers, rebrand, integrate, and stabilize relationships without the seller’s competitive shadow, but not so long that it looks like a punitive lifetime restraint.
“Reasonable” is ultimately a fact-driven label, but the paper can help. Duration is easier to defend when the documents and transaction context supply business reasons that match the actual lifecycle of the goodwill being purchased. If customer relationships are renewed annually, a one-to-two-year period may align with that reality. If the business sells multi-year contracts and the seller’s influence persist longer, the paper should explain that connection in the logic of the deal. When a covenant is challenged, courts look for tailoring to protect competitive interests rather than a desire to eliminate a competitor. ³ HB 4040’s private remedy structure also increases the importance of that discipline, because a worker who is threatened with an overreaching covenant can seek damages and lost income tied to threatened enforcement. ¹
Even a well-tailored noncompete can be weakened by boilerplate that HB 4040 would treat as void. The bill declares void and unenforceable any term that purports to waive statutory requirements, requires out-of-state adjudication for a claim covered by the bill, deprives the worker of Michigan substantive protection for such claims, or requires the worker to pay arbitration costs for a claim related to the noncompete. ¹
For deal lawyers, the practical message is that the restrictive covenant package cannot be passed into a purchase agreement that otherwise uses Delaware law, an out-of-state forum, and mandatory arbitration with shared fees, at least not without carefully carving the noncompete dispute framework to comply with the Michigan-specific rules HB 4040 would impose. If you want Michigan enforcement, your forum and choice-of-law clauses should be consistent with Michigan protections for these claims, and if you insist on arbitration, cost allocation should be drafted so the worker is not required to pay the costs of arbitration for claims related to the noncompete. ¹
This is not simply a technical compliance issue. A significant share of real disputes in business divorces and post-closing fallouts arise from the buyer’s first cease-and-desist letter, often drafted quickly and sometimes containing broad assertions that “you are bound by your noncompete.” HB 4040 expressly prohibits a business from representing that a noncompete agreement applies to a worker or former worker when the general prohibition is in play. ¹ If the buyer asserts a covenant that later turns out to be outside the exception, the buyer’s messaging itself could become part of the problem. The safer enforcement posture is to evaluate the gateway conditions and the tailoring conditions before making threats, and to communicate in a way that reflects that analysis rather than assuming enforceability.
Although HB 4040’s exception is framed as conditions rather than as a consideration statute, sale-of-business enforceability arguments are traditionally strengthened when the economic exchange is clear. When a buyer purchases a business, it is buying tangible assets plus intangibles such as goodwill, and a seller covenant not to compete is often described as integral to the transfer of that goodwill. Michigan drafting commentary in the Bar Journal context recognizes goodwill protection as a legitimate interest and emphasizes the value of recitals and evidence supporting enforceability under Michigan’s reasonableness framework. ⁴
In practical deal paper, it helps when the purchase agreement and related documents identify the goodwill and the buyer’s expectation of continued customer relationships and market position, and when the restrictive covenant agreement states that the buyer’s willingness to pay is based on receiving that goodwill free from immediate seller competition. This is not about theatrics. It is about making the future enforcement record stronger, especially under a statute that demands that the restraint protect “reasonable competitive business interests” and be tied to “the relevant market” and “the same type of trade or commerce.” ¹
This is also where overbreadth can create avoidable risk. If the noncompete tries to restrain businesses and activities not part of what was sold, the seller will argue the restraint is not protecting purchased goodwill but instead is protecting the buyer from competition generally, which Michigan law has long resisted and which HB 4040’s conditions would likely make harder to defend.¹³ The buyer’s strongest position is that the covenant is proportionate to the goodwill actually purchased and the competitive threat the seller uniquely poses.
Many deals are not clean founder-to-buyer stock sales. In an asset sale, the seller may be an entity that sells operating assets, while individuals sign only ancillary agreements. HB 4040 anticipates this reality by allowing the exception to apply where the worker is “responsible for the sale of all or substantially all of the business’s operating assets.” ¹
If you plan to rely on that prong, papering is crucial. “Responsible for the sale” reads like a factual characterization, not a job title. The deal record should support it. If the covenantor is the executive who led the sale process, negotiated terms, coordinated diligence, or acted as the primary decision-maker, that should be reflected in the purchase agreement’s recitals, representations, or at least in how the parties describe roles and authority. If, instead, the covenantor is simply an employee signing a restrictive covenant because the buyer asked for it, with no clear connection to responsibility for the sale, the exception becomes easier to challenge.
This prong also matters in management-led rollups and private equity platform acquisitions where only a subset of management owns equity, but multiple managers are critical to the sale process. HB 4040 creates an argument that a key manager who is not an owner may still fall within the exception if they were responsible for the sale of substantially all operating assets. ¹ Because the statute does not define “responsible” further, conservative drafting should assume the parties may someday need to prove that responsibility through the documents and surrounding transaction facts. The more the role is documented, the less vulnerable the covenant is to being characterized as an ordinary worker noncompete, which the bill generally forbids. ¹
HB 4040 expressly states that it does not limit the enforceability of confidentiality and trade secret protections. ¹ That is a major drafting outlet because many acquisition risks that buyers try to solve through noncompete are, at their core, information problems rather than competition problems. If the buyer can prevent misuse of confidential customer data, pricing strategies, and proprietary processes, the buyer may not need a broad restraint on the seller’s ability to work at all. The trade secret and confidentiality lane also typically carries less risk of being declared void as an impermissible restraint on labor mobility, provided it is drafted to protect information rather than to function as a disguised noncompete.
HB 4040 also preserves a narrow category of non-solicitation agreements under specific conditions, including a compensation threshold tied to 200% of the federal poverty line for a family of three and a one-year maximum duration after the last date the worker provides work for the business.¹ In a sale context, this preservation can be part of a layered strategy for individuals who do not clearly fit the sale-of-business gateway but who still pose customer-raiding risk. The drafting caution is that the bill defines “noncompete agreement” broadly to include an agreement that penalizes or functions to prevent a worker from seeking or accepting work or operating a business.¹ Overbroad “non-solicitation” language can drift into noncompete territory if it effectively blocks the worker from working in their field. A disciplined approach is to keep customer non-solicitation focused on solicitation and misuse of relationships or information, not on generalized work prohibitions.
HB 4040 contains an explicit private right of action for an aggrieved worker, with mandatory awards for a prevailing plaintiff that include reasonable attorney fees and actual costs necessary to defend against enforcement or to void or limit the agreement, along with all income lost as a result of actual or threatened enforcement or unreasonable terms. ¹ This remedy design changes the buyer’s enforcement calculus. Under many traditional noncompete disputes, parties expect a TRO fight and then settlement. Under HB 4040’s structure, threatening enforcement of a covenant that is later found outside the exception, or that contains unreasonable terms, can create a direct damages pathway for the worker. ¹
That means “papering” is not only about drafting but also about how the buyer asserts rights post-closing. A buyer should be able to articulate, before sending a demand, why the covenantor meets the sale-of-business gateway and how the restraint satisfies the four statutory conditions.¹ If the buyer cannot do that, the buyer may be better served by relying on confidentiality and trade secret claims, unfair competition theories, or narrowly permissible non-solicitation protections, rather than attempting to enforce a covenant that may be vulnerable. The lesson of Michigan case law on reasonableness, including decisions that modify overbroad injunctions, is that courts pay attention to tailoring and to the factual fit between the restraint and the interest being protected. ³⁵ HB 4040 would raise the stakes of getting that fit right. ¹
If HB 4040 becomes law in materially its introduced form, the strongest seller noncompete packages will share a common theme: the documents will make it easy to see that the restraint is an exchanged element of the business sale, that the covenantor’s role fits the exception, and that the restraint is surgically tied to the purchased goodwill in the relevant market and the same trade or commerce.¹
In practical terms, that means the restrictive covenant agreement should read less like a generic employment form and more like a transaction document. It should speak in the language of the deal what is being sold, what goodwill is being transferred, and why limited restraint is part of what the buyer paid for without drifting into an overbroad ban that suggests the buyer’s true objective is simply to neutralize a competitor. It means the purchase agreement should support the covenantor’s gateway status through clear descriptions of ownership transfer or responsibility for asset sale, because those are the keys HB 4040 uses to unlock permissibility.¹ It also means that boilerplate governing law, forum selection, and dispute resolution provisions must be harmonized with the bill’s void-term rules, avoiding out-of-state adjudication mandates and worker-paid arbitration cost provisions for noncompete-related disputes.¹
Finally, it means thinking about the endgame at the drafting stage. The “best” covenant is not the one that reads toughest on closing day. It is the one that a judge will enforce quickly when the seller’s competitive entry threatens goodwill. Michigan experience teaches that the TRO stage is often decisive, and that overreaching can cost momentum. ⁴ A tailored covenant supported by deal context and drafted to fit statutory conditions does more than satisfy HB 4040’s text. It increases the odds that, when the buyer needs urgent relief, the record looks like a fair bargain that protects legitimate interests, rather than a restraint that goes beyond what the transaction required.
HB 4040 is a legislative attempt to narrow noncompete to exceptional settings and to constrain their scope even within those settings. ¹ For deal lawyers, the sale-of-business exception is not a loophole to replicate yesterday’s forms. It is an instruction to draft with precision, to treat status and market scope as essential, and to avoid the kind of boilerplate that the bill explicitly punishes. If Michigan moves in this direction, the discipline of “papering the deal” will be less about finding the broadest prohibition the seller will sign and more about building a covenant a court can confidently enforce because it is clearly within the exception and carefully tethered to the goodwill the buyer purchased.
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Sources
1- Michigan House Bill 4040 (Introduced Jan. 30, 2025; Bill Electronically Reproduced Feb. 4, 2025), proposed amendments to Sec. 4a of 1984 PA 274 (MCL 445.774a) (bill text reproduced by LegiScan). https://www.billtrack50.com/billdetail/1811633
2- Michigan Compiled Laws § 445.774a, Michigan Antitrust Reform Act—Agreement or covenant protecting business interests of employer; applicability of section (text reproduced by Justia, 2022 compilation). https://law.justia.com/codes/michigan/chapter-445/statute-act-274-of-1984/section-445-774a/
3- St Clair Medical, P.C. v. Borgiel, 270 Mich. App. 260 (Mich. Ct. App. 2006). https://www.casemine.com/judgement/us/5914b59fadd7b04934773d83
4- Dennis M. Haffey & James F. Hermon, “Noncompete Agreements Under Michigan Law: While Employee Noncompete Must Be Reasonable, Even Unreasonable Commercial Noncompete May Be Valid,” Michigan Bar Journal (Dec. 2016). www.michbar.org/file/barjournal/article/documents/pdf4article3013.pdf
5- Mid Michigan Medical Billing Service, Inc. v. Williams, No. 323890 (Mich. Ct. App. Feb. 18, 2016) (unpublished). https://law.justia.com/cases/michigan/court-of-appeals-unpublished/2016/323890.html
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