Opinion ID: 2215595
Heading Depth: 1
Heading Rank: 5

Heading: What Is An Unreasonable Restraint of Trade: Balancing Test

Text: It has been long established in English and Michigan common law that a balancing test is used to test the reasonableness or unreasonableness of a contractual restraint of trade. In determining the reasonableness of a restraint under this test, the court weighs 1) the interests of the party in favor of whom the restraint runs; 2) the interests of the party being restrained; and 3) the interests of the public. Mitchel v Reynolds, 1 P Wms 181; 24 Eng Rep 347 (Q B 1711); Hubbard v Miller, 27 Mich 15, 19; 15 Am Rep 153 (1873). [4] As shall be discussed, the specific definition and application of the balancing test has varied according to the type of restraint being examined. Specifically, covenants not to compete ancillary to an employment contract have often been treated differently under the balancing test from covenants not to compete incident to the sale of a business in two respects. First, the reasonableness of employee restraint has been generally scrutinized more rigorously than the reasonableness of the covenant not to compete incident to the sale of a business. Second, courts examining the employee restraint have often required that both the language of the covenant and the application of the restraint to the specific facts of the case be reasonable. Courts examining covenants not to compete incident to the sale of a business have almost always focused only on the reasonableness of the application of the restraint to the specific facts of the case. The precise definition and manner of application of the balancing test called for in non-competition forfeiture clause cases is unsettled in Michigan law. [5] We consider below the reasons underlying the requirements of strict scrutiny and reasonable limitations in the language of the covenant not to compete incident to an employee contract. These reasons are clearly applicable to cases involving non-competition forfeiture clauses. We therefore conclude that courts examining such clauses must subject the clause to strict scrutiny and require that both the language of the clause and the application of the restraint be reasonable. Under this approach, a non-competition forfeiture clause is a reasonable restraint of trade only if it 1) is no greater than is necessary for the protection of the legitimate interests of the employer; 2) does not impose undue hardship on the employee; and 3) is not injurious to the interests of the public. Once the employee establishes that there is a restraint, the burden is placed on the employer to show the validity of the restraint.