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Key Employee Non-Competes: Strategies for Enforceability

Posted in Buying, Owning and Selling a Business, News and Recent Decisions, Noncompete Agreements

For many business owners, retaining key employees is a paramount concern of running their business. Employers often have invested a significant amount of training, heavily rely upon their key employees for revenue and business operations, and, in many cases, the employee is a likely candidate to take over the business. Beyond these reasons, a business owner may also fear that a key employee will be poached by a competitor which would result not only in a loss of the investment, but also risk the business’ competitive advantage or risk losing customers to the employee.

One strategy to alleviate this fear is to have the employee sign a non-competition agreement. We’ve written on our blog about the importance of having a carefully drafted non-competition agreement in the past, but it’s worth a reminder that a poorly drafted non-competition agreements risks a court voiding the whole agreement even if only one contract term violates the law. This is the case because Wisconsin has a statute (Wis. Stat. sec. 103.465) that imposes certain restrictions on the enforceability of non-competition agreements between employees and employers. The statute puts heavy scrutiny on the terms and surrounding circumstances of a non-compete agreement, and typically favors the employee.

However, a recent Wisconsin Court of Appeals case, Karsten v. Terra Engineering  & Construction Company, reminds us that it is possible for non-competition agreements to be scrutinized outside of the context of the statute, under a less restrictive method called the “rule of reason”. Under the rule of reason, the terms of a non-competition agreement and the surrounding circumstances of its negotiation still must meet certain elements, but this method is much less restrictive and therefore, the agreement is more likely to be enforced by the courts. Notably, under the “rule of reason”, if the court thinks the non-compete’s terms are unreasonable, rather than voiding the whole agreement completely, the court can modify the scope of the contract to what it thinks is reasonable. This is a huge advantage compared to the penalty of voiding the entire contract under 103.465. The Karsten court ruled that the statute “does not apply” and that the rule of reason applies to a non-compete  “when the [non-competition agreement] is not a condition of employment and the employer does not possess an unfair bargaining advantage over the employee.”

With that in mind, what are some ways that these agreements can be drafted and/or negotiated in order to avoid being scrutinized under 103.465?

  • Don’t use employment as the consideration for the contract! Provide an adequate bonus or benefits such as deferred compensation plans or the purchase of life insurance, in exchange for their agreement to the non-compete. Many employers expressly state in the agreement that the consideration is the employer employing the employee in the first place, or if negotiating with a current employee, the continued employment of the employee (implying that they will not continue to be employed if they do not sign).
  • Don’t expressly state that you have the right to terminate the employment of the employee for breaching the covenant! Most employees are employees at will, so therefore could be terminated with or without cause (provided there aren’t any discriminatory reasons for your termination). Because of this, even if there’s a separate employment agreement, there’s really no reason to expressly tie breach of the non-compete to your right to terminate.
  • Play Fair! The courts require that there is not unfair bargaining advantage by the employer. Consider giving the employee the opportunity to ask questions, to negotiate the consideration they’re receiving, encourage them to speak to legal counsel, and don’t threaten any negative consequences regarding their employment for their failure to sign. Providing language in the agreement that acknowledges that the parties understand the terms and their legal effects may also be helpful in achieving this goal.

Non-compete law is constantly evolving in Wisconsin. The business attorneys at Schober Schober & Mitchell, S.C. keep a close eye on these changes to ensure our clients are always in the best position to mitigate risks in their business.

Questions? Contact me at jmk@schoberlaw.com.