The Michigan Supreme Court recently reinforced the proper analysis for reasonableness of a non-compete clause between two businesses and what qualifies as consideration between two parties in Innovation Ventures v. Liquid Manufacturing.
In Case Innovation Ventures the plaintiff contracted the defendant, Liquid Manufacturing, to design, manufacture, and install manufacturing equipment for the production of 5-Hour ENERGY at the defendant’s manufacturing plant in late April 2009. This exchange was memorialized in an Equipment Manufacturing and Installation Agreement (EMI) and was signed in conjunction with a Nondisclosure and Confidentiality agreement. The EMI gave rise to the first two of the following provisions, while the Nondisclosure Agreement gave rise to the latter two of the following provisions:
- A right to terminate the business relationship (but not the non-compete) for any cause on 14-days notice
- The option to buy equipment used by the defendants to manufacture the plaintiff’s product.
- A Nondisclosure provision that prohibited the disclosure of information that revealed any products were bottled using the same equipment as 5-hour energy
- A non-compete provision that prohibited competition against the plaintiff that involved the design and production of bottling equipment.
In 2010, the plaintiff exercised both his right to terminate the earlier agreement and his option to buy the defendant’s equipment and memorialized these actions in a Termination Agreement with the defendants. The Termination Agreement included additional non-compete provisions and expressly granted permission to the defendants to manufacture 36 products using the plaintiff’s equipment as long as plaintiff received a nondisclosure agreement from each company associated with the production of any of those 36 products.
Shortly thereafter, in September of 2010, the defendants formed the Limited Liability Company Eternal Energy to begin bottling a new product called Eternal Energy. The defendants sought and received Innovation Ventures’ permission to add Eternal Energy to the list of products Liquid Manufacturing could produce using the equipment. From that time until the equipment was repurchased by plaintiff in 2011, the defendants used the plaintiff’s equipment to bottle Eternal Energy.
In 2012, the plaintiff filed a complaint against defendants, alleging they violated the non-compete agreements contained in the EMI and Nondisclosure agreement by manufacturing, marketing, and distributing Eternal Energy and other energy drinks.
At trial, both the trial and appellate courts held that the EMI and the Nondisclosure Agreement were unenforceable for a failure of consideration, and thus the non-compete provisions therein were also void. The lower courts reasoned that no consideration could have been provided by the plaintiff because he terminated the parties’ business/employment relationship within two weeks of signing the Agreements and without providing the defendants what they were promised under the Agreements. In addition, the lower courts analyzed the reasonableness of the non-compete provisions between an employer and employee as articulated in St Clair Medical, PC v Borgiel, 270 Mich App 260, 265; 715 NW2d 914 (2006), and MCL 445.774a.
The Michigan Supreme granted leave to address the issue of consideration and the method to determine reasonableness for non-compete provisions between businesses.
On the issue of whether the parties’ there was sufficient consideration between the two parties, the Supreme Court disagreed with the lower courts and held that the EMI and the Nondisclosure Agreement were not void for failure of consideration. The court reasoned that because the defendants already completed a significant amount of the work contemplated in the agreements, any claim that the plaintiff failed to pay would be properly brought as a breach of contract claim, rather than as a failure of consideration defense. The court further explained that while courts have generally recognized failure to perform a substantial part of the contract or one of its essential terms as a basis for rescission, a party seeking to void a contract on the basis of an event anticipated by the contract cannot claim failure of consideration. Because the plaintiff acted within the rights explicitly provided by the contract to terminate the agreement on 14-days notice, he was insulated from a claim of failure of consideration.
In spite of the incorrect weighing of consideration by the lower court, the ruling was affirmed in favor of the defendants because the Supreme Court found no genuine issue of material facts regarding whether they actually breached the EMI and the Nondisclosure agreement.
However, on the issue of whether the non-compete provisions in the Termination Agreement and the Nondisclosure Agreement were reasonable, the Supreme Court remanded the case to be analyzed using a different standard than the one employed by the trial and appeal courts.
Rather than using the reasonableness standard described in St Clair Medical, PC v Borgiel, 270 Mich App 260, 265; 715 NW2d 914 (2006), and MCL 445.774a, the Michigan Supreme Court reviewed the non-compete in light of The Michigan Antitrust Reform Act (MARA), which governs the contracts between businesses. MCL 445.771 & MCL 445.772. As such, commercial non-competes must be analyzed using a different standard than that of an employee-employer relationship with specific attention to federal cases interpreting the rule of reason. MCL 445.784(2).
The relevant federal case law dictates that the relevant factors are those facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. Bd of Trade of City of Chicago v United States, 246 US 231, 238; 38 S Ct 242; 62 L Ed 683 (1918).
This article was written by John Toth, law clerk.
