Wednesday, April 1, 2015

Wisconsin Republicans Pushing Legislation to Make Enforcement of Restrictive Covenants Easier to Enforce

Earlier this month, State Republicans introduced Senate Bill 69 and companion bill, Assembly Bill 91 (legislation), a measure that would repeal Wisconsin Statute section 103.465, which applies to contract provisions that restrict competition by employees after the termination of an employment relationship--usually referred to as noncompete agreements.  

Wis. Stat. sec. 103.465 currently reads:

Restrictive covenants in employment contracts. A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.

The proposed legislation would make drastic changes to make restrictive covenants substantially easier to enforce as Wisconsin currently does not favor such restrictive covenants as the current policy is to encourage employment, not stifle it.  This policy became solidified in the Wisconsin Supreme Court's landmark decision in Star Direct, Inc. v. Eugene Dal Pra2009 WI 76, 767 N.W. 2d 898, 319 Wis.2d 274.  

Though it's not clear how the final legislation would look like, if passed, the key highlights of the legislation as drafted are:

  • Excludes from the definition of "restrictive covenant" two types of agreements:  certain confidentiality agreements that apply to confidential information that is not competitively valuable, and certain employee non-solicitation agreements.
  • Provides guidance for courts in the form of 3 factors on when to find a restrictive covenant is reasonable and supported by sufficient consideration as current law and case law still makes it difficult for lawyers and judges to fully determine when a restrictive covenant may be considered unreasonable and unenforceable.  (Note:  The issue of whether consideration in addition to continued employment is required to support a covenant not to compete entered into by an existing at-will employee is currently before the Wisconsin Supreme Court in Runzheimer International, Ltd. v Friedlen.)
  • "Legitimate business interest" to support enforcement of a restrictive covenant would include:  a business' trade secrets, confidential information, substantial relationships with existing and potential customers, goodwill associated with a specific geographic location, and unique extraordinary, or specialized training provided by a business as a result of the employment relationship.
  • Determination of reasonable necessity of restraint.   4 factors are provided to consider when determining whether a restraint is reasonable and includes rebuttable presumptions that a court is required to apply.
  • "Blue penciling" now allowed.  Currently, if any of the known 5 criterion are deemed unreasonable, the restrictive convenient is void in its entirety.  This legislation does away with this precedent and allows blue-penciling by allowing a court to modify the restrictive covenant so it is reasonable.
Stay tuned!

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