What Is a Non-Compete?
In simple terms, a non-compete agreement is a contract between an employer and a worker, in which the worker agrees not to engage in a business similar to, or the same as, the employer’s business. In theory, non-competes are designed to protect an employer’s "legitimate business interests": customer contacts, workforce stability, confidential information, trade secrets, and other information that if disclosed to a competitor would be valuable to that competitor. The key to a non-compete is that it must be reasonable in its terms, meaning that the restrictions put into place must be "no greater than required to protect a legitimate business interest of the employer" considering the hardship to the employee and the interest of the public.
Suppose you agree with your employer that you will not open your own accounting firm after leaving your job. Your agreement says that you cannot provide accounting services to anyone who is a customer of your employer for two years after you leave your job. That’s because, as an accountant , you have the opportunity to work closely with your employer’s customers and know a lot about them – information that could be useful to a competitor to either get those customers’ business or to provide competing services to others. If the two year restriction is reasonable in Wisconsin, then it protects a legitimate business interest.
But what if you take that opportunity to obtain trade secrets from the employer, like the kinds of services that are profitable for the company or a detailed list of the company’s customers? That may go beyond protecting a legitimate business interest – and it may be an invalid restriction. If you obtain limited information about customers that would need to be supplemented to use in serving those customers after you leave, a restriction of twelve months might be reasonable. But, if you have all that information in hand when you leave, then a two-year restriction will not be reasonable.
Non-competes are a popular tool for employers, and, in practice, they are often overreaching. Even so, Wisconsin courts are generally reluctant to invalidate non-competes that create jobs for lawyers and are moderately constricting.
Are Non-Compete Agreements Legal in Wisconsin?
Under Wisconsin law, a covenant not to compete is enforceable only if it is reasonably necessary for the protection of the employer, it does not impose undue hardship on the employee, and it is not injurious to the public. A covenant that either (1) exceeds six months, or (2) exceeds 10% of an employee’s monthly salary, measured over the term of the contract, is presumed to be unreasonable.
The most significant element of reasonableness to Wisconsin courts appears to be the extent of the restraint on competition. A Wisconsin court will not enforce a covenant if it imposes a "hardship on the employee disproportionate to the advantages gained by the employer."
The scope of the geographic area sought to be protected is also important. For example, in Land O’Lakes, Inc. v. Ballweg, the court refused to enforce a seven-county restriction because the covenantee could readily find work outside of those counties and the covenants were overly restrictive in terms of geography.
Notice that the Land O’ Lakes court, like many other courts, did not restrict consideration of hardship on the employee to the duration of the restriction or the amount of salary being paid during the not-to-exceed-period. The Land O’Lakes court considered the hardship imposed on the employee in determining whether the six-month "safe harbor" was overcome by the hardship.
Enforceability of garden leave provisions. The courts appear prepared to enforce "garden leave" provisions provisionally until the time period has elapsed, rather than invalidating the non-compete provisions.
Effect of Wisconsin Employment Non-Disclosure Agreement Act (WENDA). The Covenant not to Compete rule and the WENDA requirements apply both to existing and future employers (existing employees and new hires).
Terms of Wisconsin Non-Competes that Matter
For a non-compete agreement to be enforceable in Wisconsin, it must be limited in duration, geographic scope, and must protect a legitimate business interest. In addition, the burden is on the employer to show the employee’s breach is probable, or that irreparable harm will occur if the restrictive covenant is not enforced. The first three restrictions – duration, geography, and legitimate business interest – are the key to ensuring the employee’s ability to compete is stable and the employer is not using the non-compete as an improper "restraint of trade."
Duration and Scope
The optimal duration and scope is different for each case. Enforceable durations have ranged from six months to eight years. A four-year restriction was found unreasonable under the circumstances of Becker v. State Bank of Reeseville, 74 Wis. 2d 592, 247 N.W.2d 494 (1976). Similarly, a seven-year duration was too much in Electric Temps, LLC v. Della Fave, 2016 WL 7665990 (W.D. Wis. 2016). Other courts have found three years to be unreasonable. See e.g., Cawker v. Wells Fargo Bank, N.A., 28 F. Supp. 3d 660 (E.D. Wis. 2014).
Geographic scope is another area where parties can have differing opinions. Parties to a non-compete should account for where the risk arises. What is the business doing? In what areas is the company competing with its competitors? A lot of nonsolicitation agreements encompass restrictions for an entire state whether the employer has presence everywhere or not. In theory, the defendant could be found to be soliciting clients and conducting business in an area where the company does not actually compete. The geographic scope should be designed to protect only those areas where the competitor is currently operating. A geographic scope that is broader should only be secured to protect goodwill and relationships still developing, or actively pursued. Careful consideration should be given to names and addresses of the customer lists. For example, one former employee allegedly used customer lists he received from several companies for his own benefit after he left one of his employers. When he joined a competitor business, he allegedly took customers associated with that competitor. The non-compete was deemed reasonable to the extent it sought to stop him from contacting customers of his former employers due to their commercial relationships with those customers. K & D USA v. Ahrer, No. 17-C-455, ECF No. 20 (E.D. Wis. 2018). But, a non-compete agreement will not be enforced if the company is soliciting business from potential clients in an area where the employer is not competing with competitors (such as telemarketing).
How Common Non-Competes are Disputed and Tips for Negotiation
Given the back-and-forth between employers and employees, it is common for both parties to come up against specific challenges in the context of non-compete agreements. For example, a challenge typically for employers is that the correct or necessary language is not included in the agreement. Or an issue could relate to the duration of the restrictions in the agreement. For employees, common problems are that the scope is overly broad, there is no applicable exception, or that the restriction encompasses too much of the employee’s work. Regardless of the specific issue, though, there are a few potential approaches for either party to take in an attempt to challenge or negotiate a non-compete provision.
The first approach comes from the employer’s perspective. Specifically, the employer could try to prove that the agreement only applies to employees that have valuable and confidential information. In many cases, this will involve trying to breach work product immunity and attorney-client privilege by showing the third parties information that employees have about confidential information meant only for the employer, clients, etc.
For the employee, the employee has potential recourse in two different ways. The first way is to go to the Department of Workforce Development for the state of Wisconsin. The DWD will then investigate the issue and, if necessary, reach out to the company. Although this is a potential option, pursuing it can be hit-and-miss due to timing issues or the fact that the DWD does not have the resources necessary to fully investigate every claim it receives. That said, though, it is an option for employees, and if an investigation is opened, the DWD can then refer the issue to the Equal Rights Division.
The second option for employees is that they can try to negotiate the terms of the non-compete agreement. This is usually done through your company or organization’s legal counsel. Generally speaking, an employer will be more willing to negotiate the terms of an agreement prior to signing than after it is signed. So if there is any desire to alter or remove some of the language, that should be communicated before signing. Otherwise, the employee will likely be stuck with what they agreed to. An important caveat, though, is that even if negotiations do take place, it is not guaranteed that any substantial changes will occur. That said, though, it is ultimately a good idea to at least try to negotiate expert legal counsel and advice.
Recent Court Decisions on Non-Competes
Over the past decade, there have been several notable court cases in Wisconsin that have impacted how non-compete agreements are interpreted and enforced. In 2015, in Rexnord Industries, LLC v. Franklin Catalyst Corp., 2015 Wisconsin 45, the Wisconsin Supreme Court reaffirmed its support for the reasonableness standard in evaluating non-compete agreements, rather than the court having unlimited discretion to modify the agreement to make it reasonable. The Court specifically held:
"The reasonableness standard for restrictive covenants is appropriate because: 1) the law disfavors restrictions on an employee’s ability to earn a livelihood; 2) the law seeks to protect an employee’s right to control his or her own business and therefore the reasonableness standard respects the parties’ expectations under that freedom; 3) the reasonableness standard promotes a fair balance between protection of the employer and restraint on the employee; and 4) modifying an unreasonable covenant forces the court to make choices that would be better made by the parties . "
In KeyCafe, Inc. v. L & T Sys., LLC, 2019 Wisconsin App. 58, the Court of Appeals of Wisconsin ruled in November 2019 that the fact that an employee failed to comply with a nonsolicitation provision prevented the employee any claim for severance or bonus payment. The court also determined that, under the circumstances, the ex-employer was not entitled to attorney’s fees.
Taken together, these two recent cases show that in Wisconsin, while an employer seeking to enforce a non-compete will have to meet the reasonableness standard, once the restrictive covenant has been deemed reasonable, the courts are not likely to interfere with the terms of the agreement, particularly if to do so would materially change the balance of power between the employer and employee.
Non-Compete Agreement Alternatives
There are alternatives to non-compete agreements. Non-solicitation agreements and confidentiality or non-disclosure agreements are some examples. If protecting an employer’s legitimate business interests is what drives non-compete agreements, then there are a number of other legal tools that should be considered at the contract negotiation stage to protect the same interests.
Non-solicitation agreements prohibit employees from sending customers to other employees at a different company. This is an important tool for companies in retaining relationships with their customers.
Confidentiality and non-disclosure agreements make sure that employees do not share information that they learn on the job with others. This can be critical for companies that are hiring employees who have access and control over confidential information.
A starter’s checklist for employers in Wisconsin when drafting non-solicitation and non-disclosure agreements includes the following considerations:
- What does the company want to protect?
- How long should restrictions be in place after an employee no longer works for the company?
- What is the geographic reach of each agreement and will it vary based on the type of employee?
- Is there confusion as to whether a restriction is a non-compete or non-solicitation agreement, which can impact enforceability?
- Are there interim measures the company can take while the individual is still employed to reduce the risk of losing customers?
Best Practices in the Drafting of Non-Competes
An employer must first analyze the business necessity for an agreement and be able to articulate how, if left unregulated or if a former employee’s employment is unregulated, that the employer will be harmed. It is also critical to understand what activities the employee will be engaged in upon termination. The employee’s job and its anticipated future activities should guide the company’s analysis and determination of its business interest so that it can draft a non-compete agreement that is both necessary and enforceable.
Once the variables are understood and the business need is identified, the employer should begin its drafting process with an evaluation of whether its non-compete agreement overreaches in terms of the scope of activities, territory, and duration. Even the best non-compete agreement can become unenforceable if it prohibits the employee from competing in activities in areas that the employer has no interest or activities that the employee does not regularly engage in. Additionally, overly long time requirements following termination can become unenforceable. Therefore, it is critical that an employer tailor its agreement at the very outset as much as possible to avoid committing common drafting pitfalls that can ultimately leave the agreement unenforceable.
First, in drafting a non-compete agreement it is best not to refer to the protected business interest in the agreement. In many instances, it is better to elaborate on the business interest in the agreement itself so that there is no doubt what specific interests are protected. But when a company does decide to state that it is protecting a specific business interest, it should at least be a legitimate business interest recognized by Wisconsin law. For example, a protected business interest would include a customer list, but the company should take care to specify that the information is not publicly available and that its disclosure would be harmful to the employer .
Second, it is best not to refer to confidential information in the body of the non-compete agreement. Instead, the employer should draft a separate confidentiality agreement that states what confidential information is protected and why its disclosure would harm the employer.
Third, it is best to be as specific as possible about the geographic reach of the non-compete agreement and the specific activities that it will prohibit. It is also best to prevent the non-compete agreement from reaching either employee competition before the employment relationship ends or competition in activities that the employee does not regularly engage in. For instance, at its most basic level, the territory of a non-compete agreement could cover the state of Wisconsin (although this could be too broad). But there is very little precedent for courts to apply the non-compete agreement’s protection more narrowly depending on the employee’s role. The employer should draft its non-compete with the employee’s regular activities in mind. For example, an architect with a well-defined customer base and no employees may have their business interest protected statewide. But a commissioned sales representative for a larger territory should clearly not have their agreement apply throughout an entire state, especially if they have knowledge of only a small pocket of the company’s customers.
Finally, in determining the scope and duration of its non-compete agreements, it is best to remember that if challenged, a Wisconsin court will likely conduct a reasonableness analysis into the particular circumstances of the employee and the nature of the employee’s employment. Thus, if a company’s employee is younger than 40, has a strong network, and actively exploits that networking, an overly long non-compete agreement may not be reasonable.