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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 and 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.