New Day for Non-Competes: Proposed Law Will Substantially Change Balance of Power for Employers

This article was co-authored by Timothy M. Barber

Years ago, the Wisconsin Court of Appeals issued a string of decisions making non-competes increasingly difficult to enforce. In more recent years, there have been decisions going the other way, giving employers more arguments for enforceability. In general, though, employees have had the advantage of case law and a statute that disfavored restrictions on employment. However, a new proposed law could radically change the landscape in this area and confer significant advantages to employers who wish to place restrictive covenants on employees.

2015 Senate Bill 69 would repeal and re-create the present non-compete statute, Section 103.465. The new statute proposed in the bill will be extensive and detailed, but key provisions include:

• Removing the existing requirement that mandates voiding a non-compete agreement if any portion of it is unreasonable. Instead, agreements will be reviewed by the court and enforced to the extent they are reasonable and support legitimate business interests, such as protecting confidential/trade secret information, customer/client relationships, or goodwill. If an agreement violates the law, instead of being discarded, it will be modified by the court so that any excessive restrictions are reduced to restrictions allowed under the law—so-called “blue-penciling.”

• Certain non-compete agreements are presumed to be valid. A non-compete restriction of six months or less is presumed to be reasonable; only a restriction of two years or more (which is generally already prohibited by existing law) is presumed to be unreasonable. If an employer offers “garden leave,” i.e., the employee is offered paid leave at the end of the employment relationship, the restriction will be presumed to be valid during the term of any such “garden leave.”

• Courts will no longer construe non-compete agreements against the employer, as is the case under existing law. Instead, all restrictive covenants shall be construed “in favor of providing reasonable protection of all legitimate business interests established by the person seeking enforcement of the restrictive covenant.”

• When determining whether a restrictive covenant is enforceable, courts may consider factors such as “public health, safety, and welfare,” but “may not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought, unless that person shows that exceptional personal circumstances exist[.]”

• If an employer puts an attorney fees provision in a restrictive covenant, a court in any action enforcing the provision is required to award costs and attorney fees in accordance with its terms. If the agreement contains no such provision, the court may still award costs and fees to a prevailing party. This will provide a significant disincentive to employees to litigate non-compete agreements—aside from the fact that the employee likely has less assets to fund litigation than employers, the risk of having to pay fees for both sides is imposing.

• Third-party beneficiaries are allowed to enforce restrictive covenants.

The bill also contains other provisions specifying when an agreement will be supported by consideration and, thus, valid. In general terms, the agreement must either be a condition of employment for a new or recently-hired employee, and if an existing employee enters into an agreement, there must be some additional consideration, such as participation in a bonus plan or payment of money. Other miscellaneous provisions in the bill include a limitation on the ability of courts to strike non-compete agreements on public policy grounds. The new statute would apply to restrictive covenants “entered into or extended, modified, or renewed on the effective date” of the law.

Overall, the clear message of this bill is that employers will gain the upper hand, if not effectively the only hand, in placing restrictions on their employees’ ability to compete after leaving employment. The result of this new law will be significant, as it will effectively overrule 40 years of case law in Wisconsin concerning restrictive covenants. While the possibility of fee-shifting likely will deter litigation in the long run, given the substantial changes made by the proposed statute, we expect there to be litigation to set “the ground rules” under the law once it is enacted. For example, it is unclear what effect the proposed law will have on previous decisions relating agreements that are now excluded from the definition of “restrictive covenant” under the new statute.

Whether the new law may have long-term implications for employment overall in Wisconsin is beyond the scope of this article. Employers who wish to take advantage of the new law, though, will need to make sure that agreements are drafted in accordance with its requirements to ensure maximum benefit. Axley Brynelson’s attorneys are ready both to prepare new agreements and to litigate enforcement of existing agreements.

To subscribe to email alerts from Axley Law Firm, click here.