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How Not To Avoid A Non-Compete Agreement

Posted by Eric Parzianello on September 8, 2009

A Michigan Court of Appeals case illustrates exactly how not to violate a non-compete agreement. In Pasek v. Estate of Denonville, Mich. COA No. 279224 (August 27, 2009), plaintiff Robert Pasek sued the estate of Francis Denonville for breach of an alleged oral buy-sell agreement for shares in Blast & Vac, Inc. Pasek alleged that he declined a lucrative cleaning contract offered to him by Detroit Edison because he was a party to a non-compete agreement he entered into with his former employer. Apparently in an attempt to avoid the non-compete, he referred the contract to Blast & Vac, a new company to which he made capital contributions.

Pasek alleged that he and Denonville agreed that Denonville would hold Pasek’s shares of the company in his name until the expiration of Pasek’s two-year non-compete agreement. Denonville was then supposed to transfer the shares to Pasek. In exchange, Pasek was to pay Denonville the increase in value of the company during the time in which Denonville managed the company. After the non-compete agreement expired, Denonville refused to transfer the shares to Pasek in accordance with the agreement. Denonville later died and Pasek then sued Denonville’s estate.

The Court of Appeals found that Pasek’s own allegations showed that he entered into the buy-sell agreement with Denonville to create a “strawman” to manage Blast & Vac. Pasek’s sole purpose was to indirectly compete with his previous employer. Because Pasek’s actions to enter into the buy-sell agreement for an improper purpose were contrary to Michigan law, the Court of Appeals found that Pasek’s alleged agreement violated public policy and was therefore unenforceable.

The effect of non-compete agreements can often be minimized through negotiation with the prior employer or in other ways. Entering into a oral agreement for a transfer of shares at some future point in time is not one of those recommended ways.

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