Business Buyer Can’t Enforce Noncompete Against Sellers’ Son
Each state has its own rules about the enforceability of employee noncompetition agreements. Employers must draft their covenants in compliance with the rules or risk getting an agreement that’s unenforceable under state law. A Wisconsin business buyer recently learned that lesson the hard way when it tried, and failed, to enforce a noncompliant noncompete agreement against a former key employee.
Auto-Chlor manufactures, rents, and sells sanitizing and washing equipment, chemical dispensers, linen washing chemicals, and other materials for sanitizing and washing eating utensils and cleaning linen. In mid-2016, it purchased a competing business named B&E Services, which was then owned by Brian and Elizabeth Ehlert. The sellers’ son Doug Ehlert was a key employee of their company.
On the same day Auto-Chlor and the sellers executed an asset purchase agreement for the sale of the business, they signed a separate noncompete. Among other things, the agreement stated the sellers’ son was required to sign the noncompete as a condition for the buyer to enter into the asset purchase agreement and as a condition for his subsequent employment with the new business.
The noncompete agreement restricted the son from competing against Auto-Chlor for a period of five years after the asset sale was completed. He started working for the new owner shortly after the sale transaction but promptly ended his employment in December 2016.
Auto-Chlor subsequently filed a lawsuit against the son claiming he had breached the noncompete. The trial court decided the agreement violated Wisconsin law and dismissed the lawsuit.
Auto-Chlor appealed to the Wisconsin Court of Appeals, which affirmed the dismissal because the noncompete didn’t comply with the state’s employee restrictive covenant law.
Wisconsin Law on Noncompetes
Wisconsin’s employee restrictive covenant rule is set forth in Section 103.465 of the Wisconsin Statutes. The statute requires employers to show their agreements:
- Are necessary to protect the business;
- Provide a reasonable time limit;
- State a reasonable territorial limit;
- Aren’t harsh or oppressive to the employee; and
- Don’t conflict with public policy.
The statute states any covenant imposing an unreasonable restriction is illegal, void, and unenforceable even if any part of the agreement or performance would be a reasonable restraint.
In the present case, Auto-Chlor conceded it couldn’t enforce the agreement if it was subject to Section 103.465, presumably because the five-year restriction was too long. Generally, a restrictive covenant can be no longer than two years, and many are only one year.
After conceding the agreement was unenforceable under Section 103.465, Auto-Chlor argued it should be subject to a more lenient common-law “rule of reason” frequently applied to sellers of a business. After all, the son had been required to sign the agreement as a condition of the sales transaction between the buyer and his parents.
The appeals court acknowledged an employer may require an employee to sign a noncompete for multiple reasons. In the present case, however, the son was required to sign as a condition of employment, which made the agreement subject to Section 103.465. Auto-Chlor System of the Mid-South, LLC v. Ehlert, 2020AP1768 (Aug. 5, 2021).
Wisconsin’s rule governing employee restrictive covenants essentially creates an “all or none” proposition for each agreement. Therefore, it’s important for those of you covered by the state law to draft compliant covenants. Otherwise, they may be found to be illegal, void, and unenforceable. The risk of noncompliance is significant and can open the door to unfair competition claims.
This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.