Myths About Restrictive Covenants WI Employers Can Throw to the Curb

Restrictive covenants can help employers guard against unfair competition by an employee. To be enforceable in Wisconsin, however, they must comply with state law and be carefully drafted to reflect the employee’s specific circumstances. Following are some common employer misconceptions about restrictive covenants that can result in an unenforceable agreement.

Dispelling Myths

Myth #1: If one provision is unenforceable, the entire contract is doomed.

For several decades before 2010, Wisconsin courts held that if a provision in a covenant not to compete was unenforceable, so was the rest of the contract. That ended with Star Direct, Inc. v. Dal Pra. In that case, the Wisconsin Supreme Court decided unenforceable provisions can be separated from the rest of an employment agreement, and the remaining parts can be enforced if they can be understood and implemented without needing to refer to the invalid provisions. Even though nearly 10 years have passed since the ruling, many employers haven’t modified their employment contracts to take advantage of it.

Covenants not to compete should be drafted so the key provisions—such as the nondisclosure of confidential information, the restriction on post-employment competition, and the nonsolicitation of employees—are independent clauses. Each should be capable of being understood and enforced without relying on definitions or information in other clauses. That way, should one covenant be found unenforceable, you may still achieve a measure of protection from unfair competition by applying the surviving provisions.

Myth #2: Non-competes signed in other states are enforceable in Wisconsin.

Employers headquartered in another state—and whose operations have expanded into Wisconsin—often use their home state covenant not to compete form. They also often include a choice-of-law provision designating their state law as controlling.

Wisconsin’s statute governing non-competes (and state case law construing it) are unique to our state. Most likely, a foreign non-compete form will fail to include some elements required in Wisconsin. In addition, as our state supreme court found in Bush v. National School Studios, Inc., Wis. Stat. § 103.465 applies to restrictive covenants affecting Wisconsin residents regardless of what state law the contract identifies as governing. Employers expanding into the Dairy State should consult with a Wisconsin attorney to ensure employment agreements comply with our state laws.

Myth #3: One size fits all.

Enforceable restrictive covenants are carefully tailored to reflect the competitive threat an employee represents. Because overly broad provisions may be found to be unenforceable, you must take care to match the restrictions imposed by the contract to the competitive information, geographic territory, and/or job duties of the employee. Of course, those will vary greatly from person to person.

Nevertheless, employers often require employees with widely different positions to sign the same covenant not to compete form. The one-size-fits-all agreements are often drafted using modifiers like “all,” “including, but not limited to,” and “and/or” in an attempt to throw a lasso around a broad body of potentially proprietary information or competitive activity. That way, the agreement can apply to a wide range of employees.

The approach may backfire because it results in needlessly broad provisions. A similar problem arises when employment contracts aren’t updated regularly to reflect an employee’s changing or expanded responsibilities and duties.

Myth #4: Geographic restrictions extend to all business locations.

A geographic restriction—for example, forbidding a former employee from working for a competitor within a specified distance of the ex-employer’s business facilities—is a covenant commonly used by businesses serving customers at multiple locations. Suppose an environmental consulting business has offices in 20 cities. The employer may have a legitimate interest in preventing an employee from going to work for a competitor in a market the company currently serves. Therefore, a restrictive covenant may attempt to keep the individual from working for a competing firm “within 25 miles of any office or business location of the employer.”

While the 25-mile provision seems straightforward, it may be overly broad and unenforceable in two respects:

• First, the competitive threat posed by the employee may not extend to all 20 cities. For example, she may market only to businesses in the upper Midwest. If so, blocking her from working for a competitor within 25 miles of any U.S. location is overly broad.
• Second, the restriction must restrict the employee from performing similar duties or in a similar capacity as she performed for the former employer. For example, if she was engaged in sales but is moving to a competitor to do engineering, there may be no legitimate competitive threat to the former employer.

Keep in mind that enforceability isn’t determined by what the employee actually does but by what the restrictive covenant says. The employee may be able to defeat the covenant because of its overly broad language even if she performs identical work for a competitor on the same street as the office where she worked for the former employer.

Bottom Line

A non-compete agreement’s enforceability can turn on a single word. You must draft it carefully to identify the specific competitive threat an individual employee represents. Using out-of-state agreements or form contracts drafted to cover a wide range of employees can lead to an unenforceable covenant. A best practice is to have your agreements regularly reviewed for compliance with Wisconsin law and revised accordingly.

This article, slightly modified to note recent updates, was featured in the October issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.