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Wisconsin Business Law Blog

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Wisconsin Senate Proposes Change to Non-Compete Law

Posted in Business Litigation, Noncompete Agreements, Operating a Business

The Wisconsin Senate recently passed a bill that would yet again fundamentally change the current state of Labor & Employment law in Wisconsin. The bill still requires Assembly approval the Governor’s signature.

Senate Bill 69 repeals current Wisconsin Statute section 103.465, which governs the enforceability of non-compete agreements in employment contracts. The bill would replace the current statute with a less restrictive and more comprehensive mandatory statutory scheme that Wisconsin courts would be required to follow when determining whether a non-compete is enforceable contractual provision. Currently, under § 103.465, non-compete agreements are more likely than not to be ruled unenforceable because the statute only allows enforcement “if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” This statutory reasonableness standard has allowed for significant judicial law making, making enforcement of non-compete agreements less likely. If the bill becomes law, it would make it much more difficult for courts to strike down non-compete clauses in employment contracts, and make enforceability much more likely.

Notable provisions in the bill include:

  • allowing an employer’s offer continued employment to an at-will employee that is conditioned upon the employee’s acceptance of a contractual non-compete provision to constitute valid consideration for an enforceable contract (which statutorily enacts the recent Wisconsin Supreme Court holding in Runzheimer International, Ltd. v. Friedlen, 2015 WI 45.);
  • requiring “blue-penciling,” a practice recently rejected by the Wisconsin Supreme Court in Star Direct, Inc. v. Dal Pra, 2009 WI 76, in which a court is limited to “crossing-out” only the unreasonable portion of the non-compete agreement, whereas the current law under Star Direct allows courts to eliminate all non-compete provisions (even reasonable ones) where only one individual non-compete is found to be unreasonable;
  • creating a rebuttable evidentiary presumption that a provision that only restrains competition for 6 months or less is presumed to be reasonable; while providing that a provision restraining competition for more than 2 years is presumably unreasonable, but still allowing the employer to prove that the provision is reasonable through clear and convincing evidence;
  • expanding the scope of legitimate business interests protected by the statute to include an employer’s prospective clients, rather than just existing ones;
  • requiring a court to jump through some hoops in order to strike down the provision on public policy grounds by requiring that the court explicitly set out the public policy ground it rests its decision on as well as requiring the court to state why the public policy for non-enforcement substantially outweighs the recognized legitimate business interest of the employer;
  • prohibiting a court from using a terminated employee’s individual economic hardship (from being prohibited from competing against their former employer) as a basis for non-enforcement, unless that person can show there are exceptional circumstances for non-enforcement;
  • requiring that if a terminated employee is found to have violated an enforceable non-compete agreement, that any contractually determined attorney fee shifting must be enforced, or in the absence of that, allowing the court to give the cost and attorney fee to the winning party;
  • disallowing the narrow construction of contract interpretation against the employer, and requiring interpretation of the contract in the favor of providing reasonable protection of the legitimate business interest of the employer; and
  • providing that for employers who have secured an injunction against their former employee, they would not be required to post a bond in order to gain injunctive relief, however, the court could require the employer to provide the former employee security for any damages they might incur due to the injunction.

A link to the bill can be found here.

This is a significant and comprehensive change in the current state of employment law in Wisconsin. The bill ties the hands of the judiciary in striking down non-competes, and gives employers much more power over their employees after termination.

It remains to be seen whether the Governor will sign this bill, but those businesses currently with non-compete agreements should know that these changes will only affect those contracts signed after the bill becomes law while current agreements would still be subject to the judicial discretion allowed by the current § 103.465. Schober Schober & Mitchell S.C. will be keeping a careful eye out for if and when this bill becomes law. Please contact us with any questions regarding the potential change in non-compete law; our business law attorneys will be happy to help.

This post is the combined efforts of Jeremy Klang and Thomas Schober.

 

Feds Resort to 1789 Law to Stop Apple

Posted in Operating a Business, Other Legal Issues, Technology Related Topics

I read an article noted on the ABA Journal Weekly Newsletter entitled, “Feds say 1789 law requires Apple to help government get encrypted smartphone data.” I’ve always been a proponent of individual liberty (and privacy), and I wanted to see what the government was arguing to support its case that they are entitled to snoop on everything we say or do on our smartphones.

The above article cites two further articles, one from Ars Technica’s Law & Disorder, and the other from Wall Street journal’s Digits.

In essence, the government is saying that a court can order anyone to cooperate with the government to get at data the government needs to enforce laws. The 1789 law, as amended, now reads:

28 U.S. Code § 1651 – Writs

(a) The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.

(b) An alternative writ or rule nisi may be issued by a justice or judge of a court which has jurisdiction.

The article points out that the real purpose may be to stop technology companies from making smartphones or other devices that the government cannot get into.

The comments following the blog are outstanding. As is usually the case, many say that if the government wins this case, the “bad guys” will be the only ones left with good encryption, and the rest of us well face constant government surveillance, harassment, arrest and prosecution for things that shouldn’t be anyone else’s business. While I agree, I’ll let you decide.

Dropbox Passwords Hacked

Posted in Business Formation, Business Litigation, Buying, Owning and Selling a Business, News and Recent Decisions, Operating a Business, Other Legal Issues, Technology Related Topics

We learned this morning about another data breach, this time relating to the widely used Cloud Service called Dropbox.

Steve Kovach, of BusinessInsider.com reported yesterday that over 7 million Dropbox passwords have been compromised.

After the Target, Home Depot and other recent breaches, this isn’t a big surprise. However, since many lawyers use dropbox to share confidential information with their clients, it may certainly startle many.

If you haven’t considered encrypting the messages you send, now may be the time.

We thank our friends at Abacus Data Systems, Inc. for getting us word of the above news!

Can I Crowdfund in Wisconsin Yet?

Posted in Business Formation, Operating a Business, Technology Related Topics

Wisconsin’s equity crowdfunding law, which was unanimously passed by the legislature and signed by Gov. Walker last November, officially took effect on June 1, 2014.  Wisconsin is one of 11 states that has “taken matters into its own hands” by passing its own crowdfunding laws while the federal rules are still pending.

President Obama signed the JOBS Act back in April of 2012, which was intended to make it easier for small businesses to raise capital.  One provision required the SEC to implement rules for a new crowdfunding exemption from the SEC requirements by the end of 2012.  Despite this requirement, no federal rules have been issued yet.

While securities law is normally a federal issue, the SEC has a longstanding “intrastate offering exemption” that allows companies to sell securities within their home state without registering the offering with the SEC.  States, like Wisconsin, have used this exemption to make their own crowdfunding laws ahead of the federal rules.  However, these state crowdfunding laws apply only to intrastate offerings.  This means that Wisconsin’s crowdfunding law can only permit companies formed in Wisconsin to solicit Wisconsin investors.  Interstate investments, such as an Illinois resident investing in a Wisconsin company, are still governed by federal law and thus are impermissible until the federal rules are released.

The SEC’s Compliance and Disclosure Interpretations from April 11, 2014 (“CDIs”) highlights some of the challenges of intrastate offerings.  For one, the intrastate exemption requires that securities are only offered and sold to in-state residents.  The CDIs note that it would likely be a violation of the intrastate exemption to use the company’s home website or social media sites, such as Facebook and Twitter, to advertise the offering, since these mediums will almost certainly reach residents of other states, and thus be an “offer” to an out-of-state resident.  Eliminating free modes of advertising such as Twitter and Facebook for intrastate offerings could lessen the appeal of crowdfunding until the federal rules are released (and thus interstate investments are permissible) since the primary purpose of crowdfunding is to eliminate the expense of raising capital.

So, at present, crowdfunding puts those who use it at high risk of violating laws until the SEC issues some additional rules.

This article was prepared with the help of Kelsey O’Gorman.

Easier Tax-Exempt Status: New IRS Form 1023-EZ

Posted in Business Formation, Operating a Business, Other Legal Issues, Tax

Good news for those of you starting new exempt organizations: the IRS just released a new form, called the 1023-EZ, which will make applying for tax-exempt status for some smaller organizations much easier.  The new form is only three pages long, compared to the lengthy 26 page standard 1023 form.  The simplified form will substantially reduce the legal expense of starting a 501(c)(3) and hopefully speed up the IRS approval process.

The IRS hopes that simplifying the approval process for smaller organizations will also reduce delays for larger organizations by freeing up more resources to review the lengthier applications.  Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months or longer.

The IRS estimates that as many as 70 percent of all applicants will qualify to use the new 1023-EZ.  Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

However, the new application processes is still not without complications.  For example, you will still have to decide whether your organization will be a public charity or private foundation.  Further, certain types of organizations, such as churches, are categorically excluded from using the new form, even if they are small in size.

Therefore, it is still important that you confer with an attorney who can help determine if you qualify to use the 1023-EZ and to help you make other important decisions related to your non-profit organization.  If you need assistance in this area, one of our business attorneys would be happy to assist you.

Thanks to our law clerk, Kelsey O’Gorman, who assisted in the post.

The Innocent Owner Defense: Wait! That’s My Car!

Posted in Buying, Owning and Selling a Business, Operating a Business, Other Legal Issues

One of my partners, Eric Raskopf, who practices criminal and traffic defense work, recently posted to his blog, On Legal Ground, an article about someone losing their car as a result of being stopped while involved in criminal activity. Before you say, “Wait, that’s never going to happen to me,” read about what your kids, or maybe your employees, friends or neighbors may unintentionally do to your property, when you are not adequately supervising. Enjoy the read!

Proposed Federal Legislation is Likely to Raise Legal Fees

Posted in Operating a Business, Tax

How is Washington going to raise legal fees? Quite simple: just raise the costs for lawyers to do business by raising taxes substantially on many law firms.

The Federal Government has two bills pending, each of which would require law firms with gross receipts in excess of $1 Million to report for tax purposes using the accrual method of accounting. Most such law firms currently report on a cash basis. Consequently, if passed, all such law firms would have to report as taxable income monies which were billed, but not yet received. That would have the effect of causing a large amount of taxes to be paid by all such firms, which essentially means that in order to continue to meet all their other expenses, including payroll, such firms would be left with one option: raise fees.

If you may be opposed to such action, please consider writing your Senators and Representatives, mentioning the Tax Reform Act of 2014 and Section 51 of a similar Senate draft bill.

What do Clients Feel about the NSA Evesdropping on Attorney-Client Phone Conversations?

Posted in Other Legal Issues

The American Bar Association’s annual technology conference was held in Chicago last week, and one session was entitled, “Tools for lawyers worried that NSA is eavesdropping on their confidential conversations.” While I think most of the conversations I hold with my clients would be pretty boring stuff for the NSA, there are a few occasions where a client consults with me as to whether certain behavior or actions may be construed as criminal in nature. When that happens, I believe both my client and I presume such conversations are protected as “attorney-client privilege.” But is that really true anymore?

The ABA session and article linked above point out that the law is so vague and changes from day to day, such that lawyers really are not certain what the law is.

I’d love to hear the thoughts of others on this topic, whether lawyers or clients. How do you feel about your government snooping? If you or your attorney took measures to stop such snooping, do you think it would make you even a larger target, giving the government the idea that you have “something to hide?”

I have to admit that the whole thing gives me the creeps. The past few years have seen an increased erosion of private citizen rights in this country. Is this just another one? When the President can broadcast to the nation that he doesn’t need to follow the law and in fact will make laws himself, does that thinking then extend to others in government who then want to control others, maybe those being you and me?

My biggest question is this: If government can snoop, then can they also plant incriminating evidence? I’m sure the answer is “yes.” If that’s the case, then no one is safe. What then makes this the land of the free? What makes this country any different than those other countries which deny human rights?

This is just too important to ignore. I think it is time to enter the conversation. Your comments would be greatly appreciated!

Obamacare’s New 3.8% Sales Tax on Real Estate

Posted in Buying, Owning and Selling a Business, Other Legal Issues, Real Estate, Tax

Starting in 2013, a new 3.8% federal tax, known as the “Medicare Tax,” may apply to some gains on the sale of real estate, including even sales of personal residences. However, this is not a general tax and there are some exceptions. It is best to know the rules and seek competent tax advice.

The tax is calculated upon the lesser of:

1.  Net investment income; or

2.  The amount modified adjusted gross income exceeds: $250,000 for married couples filing a joint return or surviving spouses, or $125,000 for a married individuals filing a separate returns. The excluded amount is $200,000 for all other taxpayers.

Married couples filing jointly may still exclude up to $500,000 and singles up to $250,000 of the gain on the sale of a personal residence, thereby avoiding the tax. Consequently, persons selling homes may be subject to the new tax if their gain: 1. exceeds the exempt amount ($250,000 for individuals, $500,000 for married couples) and 2. causes taxable income to increase above the $125,000/$250,000/$200,000 limit.

While I’m focusing on the sale of real estate in this short article, I want to point out that this tax applies to all investment income, including dividends and interest, as well as gains on the sales of many other things, including the sale of a business.

If you find yourself in such a situation, be sure to confer with your tax advisor.

When the Contract says, “It is all in the contract,” is it?

Posted in Operating a Business

The Wisconsin Bar Association has a number of different sections for its various members. One such section is the Business Law Section. This section puts out periodic newsletters. In the December, 2013, edition of the Business Law News, Attorneys James M. Ledvina and Brick N Murphy, both of the Law Firm of Conway, Olejniczak & Jerry, S.C., of Green Bay, tackled an interesting topic raised by an unpublished, but none-the-less important, Wisconsin Court of Appeals decision. This deals with what is commonly known as an “integration clause.”

In the case of C&M Hardware, LLC v. Ture Value Co., 2013 WI App 84, 348 Wis. 2nd 761, 833 N.W.2d 872 review denied, 2013 WI 87, 350 Wis.2d 727, 838 N.W.2d 635, the Court of Appeals looked at the issue of whether a contract clause which purports to say that the contract includes all matters between the parties, really does, thereby stopping a party from bringing in evidence outside the contract?

In this case, C&M alleged that provisions in the contract that said it was “the entire agreement” were not conspicuous nor did they specify the specific tort claims that C&M would be releasing if it signed such a contract. The Court of Appeals agreed with C&M.  As a result, Ledvina and Murphy suggest adding the following language to all such clauses:

THE PARTIES ACKNOWLEDGE AND AGREE THAT BY AGREEING TO THIS SECTION THE PARTIES ARE WAIVING RIGHTS THAT THEY MAY OTHERWISE HAVE TO ASSERT CLAIMS FOR CONTRACTUAL BREACH OF REPRESENTATIONS OR WARRANTIES, MISREPRESENTATION AS A TORT, NEGLIGENCE, NEGLIGENT MISREPRESENTATION, FRAUD, AND OTHER TORT CLAIMS.

While this is an unpublished opinion, and is only useable for argument sake, it still doesn’t make a lot of sense. Parties that sign contracts should read them. If they sign them, we should be able to rely on the fact that they did read them. If we even put in a paragraph that says, “this is the whole agreement,” we should all be able to rely on it. This decision basically says, you now have to provide a very visible paragraph that sets forth what someone is giving up if they sign a contact that says, “this is it.” Extend this further: maybe we need such a paragraph for each and every term of a contract. Maybe we should just get opinion letters from the other side indicating their clients have read and understand the contract. Isn’t that what they hired their lawyers for to begin with?