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Can Ex-Employees Be Forced To Purchase Customer’s Goodwill for Violation of A Non-Compete? Michigan Court of Appeals Says Yes

Posted by Eric Parzianello on September 13, 2009

If you’re looking for a way to calculate damages in the event your former employee violates a non-compete or non-disclosure agreement, the Michigan Court of Appeals recently upheld one such damages clause  in the case of Eastern Oil Company v Ermatinger. In that case, the court approved the use of a contract provision which allowed the employer, Eastern, to elect to sell the goodwill of the customer to the offending former employee, Ermatinger. Although the non-compete clause had a six month duration, Ermatinger’s duty not to disclose confidential information did not terminate.

Ermatinger had agreed that, after her termination, if she disclosed confidential information or solicited customers which resulted in sales to any prohibited customers, then Eastern could force her to buy the customer’s goodwill according to a pre-determined formula. The purchase price was equal to the total of Eastern’s gross sales – not profits – to the customer during the two years before Eastern made its election.

The court approved the provision since prior cases had upheld longer non-compete agreements and despite the fact that the non-disclosure provision had no termination date.  Even though there was no time limit on the disclosure of confidential information, the court found the provision to be enforceable since that duty was unrelated to Ermatinger’s ability to seek future employment.

As most employees will challenge the validity of non-compete agreements even after signing them, they must be reasonable in duration and scope and include damages provisions which a court will uphold.

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