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Wisconsin Makes Covenants More Employer Friendly

Posted in Business Formation, Business Litigation, News and Recent Decisions, Noncompete Agreements

 

For over 50 years, Wisconsin has been deciding cases related to covenants not to compete in working relationships under Wisconsin Stat. § 103.465. On July 14, 2009, in an opinion authored by Justice Michael J. Gableman, Wisconsin’s Supreme Court changed the way that statute will work, much to the benefit of employers. Here’s what they did.

 

Wisconsin Stat. § 103.465 was enacted in 1957. It was designed to protect employees from unscrupulous employers who would require employees not to compete, even if such requirement were not necessary to protect the employer. Such actions could have the effect of enslaving an employee who felt he had no possible employment available, except that which would violate a covenant, once signed.

The statute reads as follows:

103.465 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 subsection, 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.

Until recently, it was generally assumed that for restrictive covenants in employment agreements to be valid, they must all be valid or they would must all fall together. It prohibited a court from redrafting covenants not to compete by "blue-penciling" those provisions which may be invalid and making them valid. For example, if an agreement were for 20 years, could a court say that the agreement is valid, but only for a shorter term, or say, two years, and thus rewriting such provisions to the extent they are valid?

In the case of Star Direct, Inc. v Eugene Dal Pra, 767 N.W. 2d 898, 2009 WI 76, decided this past July 14, the court came to a conclusion that such agreements may stand in part and may fall in part. Here’s how the court came to that conclusion.

Dal Pra had three covenants with Star Direct, his employer:

  1. a business covenant, stopping him from stealing business in a particular area,
  2. a customer covenant, stopping him from stealing certain customers, and
  3. a confidentiality agreement, stopping him from disclosing certain confidential information.

Dal Pra had been a route salesman for Star Direct in the very competitive industry of supplying convenience stores.

To be enforceable, the court indicated that five requirements must be met The covenant must:

  1. be necessary to protect the employer;
  2. provide a reasonable time limit;
  3. provide a reasonable territorial limit;
  4. not be harsh or oppressive, as to the employee; and
  5. not be contrary to public policy.

The court first looked at whether each covenant was enforceable under the facts. Then it considered whether each covenant was reasonably necessary to protect Star Direct’s interests. The court found the business clause unenforceable as overbroad. It held that the other two covenants were enforceable.

The court then went on to determine two other key issues: 1) whether the enforceable clauses were reasonably necessary to protect Star Direct and 2) whether the three clauses were divisible, thereby permitting any to stand if even one failed. It is this issue relating to divisibility that makes this case unique and changes much standing law.

In order to make its finding, the court had to determine that the word "covenant" in the statute does not mean all the language in a restrictive agreement that has the effect of restricting an employee. It instead concluded that "covenant" refers to each separate "provision" in a restrictive agreement, thereby giving a court the ability to find some covenants enforceable and reasonable, and others not, thus permitting the "blue-penciling" of the elimination of the unenforceable provisions without destroying the entire restrictive agreement.

The troubling words of the statute read: "any covenant… 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 court distinguished a number of prior cases by pointing out that when an entire agreement was determined to be invalid, it was based upon the individual provisions being "textually linked." What does that mean?

The court says: "The foundational inquiry for determining whether a covenant is divisible is whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced." That depends on the facts. In this case, there were three separate covenants, not referencing or relating to each other.

So what can you do to create a covenant that will stand up to such a test? First, draft each covenant as a separate section, and better yet, as a separate agreement. Second, do not use language that inter-relates them, such as common penalty clauses or cross references. Finally, make sure that each covenant is reasonable and complies with five essential requirements set forth above.