NONCOMPETE

From Page 8

In its rule change proposal, the FTC argues that noncompetes reduce worker wages, exploit workers and generally sti e new ideas and innovation.

“By preventing workers across the labor force from pursuing better opportunities that o er higher pay or better working conditions, and by preventing employers from hiring quali ed workers bound by these contracts, noncompetes hurt workers and harm competition,” according to an FTC factsheet.

Indeed, a ban would give employees far more freedom to roam, but it could cost employers signicant investment in talent, and it could also drain the value of a company, said Bernard Fuhs, director at Detroit-based Butzel Long. In a world with noncompetes, a company could sell only to have its top management split to form a competing company, for example.

Hazimi Fuhs

Pros and cons of noncompetes

Noncompete agreements have been under increased scrutiny since the beginning of the year when the Federal Trade Commission proposed a sweeping ban on them.

Business groups have spoken out against the proposal, while proponents have rallied it as a win for workers’ rights. The positive and negative impacts they have in the workplace and on the economy are the subject of debate:

Pros

 They protect company trade secrets and proprietary information.

According to arguments in the hearing, 3Fifteen had used more than $600,000 from the accounts in question at Live Life Credit Union to pay leases and payments linked to the acquisition.

“What we want from the stay pending appeal is these locations to be shut down,” Max Newman, partner at law rm Butzel Long and attorney for 3Fifteen, argued in the hearing. “Smashand-grab is what the other side is doing, and particularly how we see Tropics and Skymint. ese operations under Skymint’s management, and I’d call it mismanagement, are losing hundreds of thousands of dollars a month …” e Ingham County judge, however, did not buy into 3Fifteen’s claims that it should be separated from the receivership or authorize an appeal in another court and refused to reverse the March 29 order, according to the transcript from the May 3 hearing. “ e March 29 order restored the status quo and, again, 3F teen isn’t asking for a stay that would just stop this case from proceeding, they’re asking to reverse parts of the March 29 order,” Judge Joyce Draganchuk said in the hearing. “So I think in balancing harms, there would be greater harm in granting the stay than in not … in my view, businesses should not be thrown into upheaval and the order appointing a receiver and the March 29 order stabilizes the businesses and allows them to continue in smooth operations.” self and expenses for the operations it believes it controls.

3Fifteen and Merida accused Skymint’s former CEO Je Radway of several misdeeds, including using the company as his personal piggybank in several extramarital a airs. Radway left the company on an “inde nite leave of absence” on April 7, according to an email to employees from Je Donahue, Skymint’s executive vice president and general counsel, that was obtained by Crain’s.

3Fifteen’s attorneys argued those expenses needed to be paid and the receiver would have done it anyway. e receiver’s attorney disagreed.

“It’s like robbing a convenience store and saying, ‘Well, we paid the wages of the employee because we gave the guy a $100 on the way out the door,’” Dragich said. “You don’t get to make that decision. You’ve taken the money from the receivership estate and all we’re asking for, again, is that those funds be returned and they be returned promptly.”

3Fifteen’s lawyer, Newman, argued the use of those funds was done because the order appointing a receiver was “ambiguous, vague, overwrought, verbose.”

Draganchuk reminded Newman her signature was on that order.

“I know, but it’s got typographical errors in it, misuse of apostrophes, literally repetition of the same phrase twice in a row that suggests that nobody proofread that order and the reason nobody proofread that order is, quite frankly, it’s unreadable,” Newman replied.

“It could chill and thwart innovation on a massive scale,” Fuhs said. “People and companies invest millions of dollars in research and development, talent, et cetera, and go to great lengths to protect that investment and the trade secrets. ey make this investment assuming they’ll be a orded some protections.”

Even if the ban doesn’t happen now, it could eventually, so employers should be prepared, Hazimi said. ey should also understand that not all noncompete agreements are created equal, and a poorly written clause could spell trouble.

“Michigan has the more general approach — a noncompete is enforceable as long as it’s reasonable in duration, geographic scope and narrowly tailored to the competitive business interest,” she said.

“You can’t impose something that’s so overly broad that it restricts employees from working at all.”

 They encourage employers to invest in employees without fear of losing that talent and investment.

 They help employers retain labor.

 They help prevent a departing employee from taking business with them or creating a direct competitor.

 They help preserve the value of a business by protecting its human capital.

Cons e plainti and defendant lawyers also argued over the $600,000 in funds 3Fifteen took from accounts to pay it- e judge ordered 3Fifteen to repay the more than $600,000 to Skymint, including the repayment of $375,000 within 24 hours of the May 3 hearing and the remainder by May 17. e judge, however, declined to hold 3Fifteen in contempt of court over the ordeal.

 They “handcu ” employees to a job.

 They can suppress wages by not allowing employees to move freely in the job market.

 They are often too broad in scope and not narrowly focused, which does a disservice to employers and employees alike.

 They can sti e innovation by stemming the ow of ideas and information in the marketplace.

 They can be subject to legal action by employees who deem them to be unfair.

THE INGHAM COUNTY JUDGE DID NOT BUY INTO 3FIFTEEN’S CLAIMS THAT IT SHOULD BE SEPARATED FROM THE RECEIVERSHIP OR AUTHORIZE AN APPEAL IN ANOTHER COURT.

And with that, the judge denied 3Fifteen’s request. e judge also denied 3Fifteen’s request to enter arbitration over the purchase agreement with Skymint.

Tropics, which rst sued Skymint resulting in the court-ordered receiver, is now funding operations as the receiver looks to stabilize nances. In that lawsuit, Tropics alleged Skymint was burning through $3 million in cash per month and generated only $110 million in revenue in 2022, $153 million below its forecast of $263 million in sales for the year.

Skymint, like many others in the Michigan marijuana industry, was crushed by fast-falling recreational marijuana prices in the state.

Contact: dwalsh@crain.com; (313) 446-6042; @dustinpwalsh

With the decision on a federal ban looming, the state is considering changes to the Michigan Antitrust Act of 1984, which allows for the enforcement of noncompete agreements. House Bill 4399, introduced a week before public comment on the FTC proposal ended, calls for more restrictions on the clauses, such as banning them for minors and low-wage employees.

Often, the agreements are targeted toward company executives who deal with privileged and proprietary information, but in recent years, they have been extended to employees at virtually every level. In some cases, employers have used them not just to protect information, but as leverage to retain talent amid a tight labor market and the “Great Resignation.”

“If this rule comes about and is adopted, that’s going to make it even harder to keep people where they are because it’s one less thing they have to think about it before they jump ship,” Hazimi said.

A noncompete agreement can be as broad and restrictive as a company’s legal counsel wants to write it, but blanket noncompetes that are deemed too burdensome to employees won’t be held up in a Michigan court.

Other contractual tools employ-

SOURCES: FTC, MICHIGAN CHAMBER OF COMMERCE, LEGAL EXPERTS ers can use to protect themselves include nondisclosure agreements, con dentiality agreements and nonsolicitation agreements. ose would still be allowed under a federal ban of noncompetes, but only if they were narrowly tailored and did not function as noncompetes, Hazimi said.

“I tell people to think about what business interests they’re really seeking to protect,” she said.

Fuhs recommends that companies conduct an immediate audit of their employment agreements to make sure noncompetes are reasonable and that trade secret provisions are updated, adding another layer of security. O cials should also pay attention to which employees have access to privileged information.

“If you can’t enforce a noncompete contract, you need to make sure the trade secret, say, the Coca-Cola recipe, is truly secret and protected,” he said.

Contact: knagl@crain.com; (313) 446-0337; @kurt_nagl