Sweeping Changes Proposed To Wisconsin Law Governing The Enforceability of Non-Competition Agreements

Wisconsin law — well known for its hostility towards the enforceability of restrictive covenants against employees — may soon be dramatically altered. On March 5, 2015, Republican Senator Paul Farrow introduced Senate Bill 69, ¹ which would overhaul Wisconsin non-compete law and make it significantly easier for employers to both impose and enforce employee non-competes.

The Proposed Changes

If passed, the bill would repeal Wisconsin’s current statute governing the enforceability of restrictive covenants in the employment context, Wis. Stat. § 103.465, and would make the following changes and/or clarifications to existing law.

• Clarify that “valid consideration” for a restrictive covenant includes continued employment, not only at the outset of employment,but also if the covenant is entered into during employment and is premised only on continuing at-will employment, so long as the employee’s rate of pay and benefits are equal to the employee’s pay and benefits before he or she enters into the agreement and provided continuation is actually contingent on execution of the non-compete (i.e., the employer actually terminates those who refuse to sign). Notably, this would override the pending decision from the Wisconsin Supreme Court in Runzheimer International, Ltd. v. Friedlen, 2014 WI 50, 354 Wis. 2d. 866, 848 N.W.2d 861, where the question is whether continued at-will employment constitutes valid consideration for a restrictive covenant entered into during employment. While the proposed law would only apply to agreements entered into after its effective date, the ability to premise consideration on continued at-will employment alone would make it easier for employers to require current employees to enter into new or updated agreements.

• Provides that legitimate business interests justifying enforcement of a restrictive covenant include: (1) trade secrets (or any other valuable and confidential business information); (2) substantial existing or prospective client relationships; (3) client goodwill associated with a geographic location; and (4) unique or specialized training. While similar to existing law, this provision of the proposed bill provides for explicit protection of “prospective” customer relationships, which Wisconsin courts have been reluctant to find constitute a legitimate business interest in some cases.

• Clarifies the process by which Wisconsin courts determine whether a restrictive covenant is overbroad and establishes rebuttable presumptions regarding the reasonable length of a restrictive covenant. Specifically, the bill provides that a restriction of six months or less would be presumed to be reasonable, while a restriction lasting more than two years would be presumed to be unreasonable, although not necessarily so if there is clear and convincing evidence of the need for a longer restriction.

• Enables Wisconsin courts to “blue pencil” a restrictive covenant by modifying an otherwise overbroad restrictive covenant as necessary to protect the employer’s legitimate business interest. This is a considerable change from the current Wisconsin law, which explicitly prohibits judicial modification of overbroad restrictions and requires courts to invalidate them in their entirety if any part of the restriction is unreasonable.

• Forbids Wisconsin courts from considering the “individualized economic or other hardship” that might be caused by enforcing the restrictive covenant against an individual (unless the individual can show that exceptional personal circumstances exist).

• Prohibits Wisconsin courts from utilizing any form of statutory interpretation that would enable them to interpret the scope of a restrictive covenant narrowly or against an employer and limits the ability of courts to invalidate a restrictive covenant on public policy grounds.

• Finally, the proposed law provides that in the event a court finds that a restrictive covenant is enforceable, it must enforce it by any appropriate and effective remedy, including a temporary or permanent injunction, which cannot be conditioned on a bond. Further, it requires courts to enforce contractual provisions regard attorneys’ fees and costs and in the absence of such contractual provisions, permits a court to award costs and attorneys’ fees to the prevailing party.

While it remains to be seen whether the Wisconsin legislature and Governor Walker will ultimately enact S.B. 69, it appears the proposed bill has the support of powerful business associations including Wisconsin Manufacturers and Commerce. We will continue to provide updates on the status of this legislation, as well as other developments regarding Wisconsin non-compete law including the Supreme Court’s decision in Runzheimer once reached.

If you have questions or would like to discuss the proposed legislation and its possible impact, please contact Sean Scullen at 414-277-5421 / sean.scullen@quarles.com, Steve Kruzel at 414-277-5645 / steven.kruzel@quarles.com, Nicole Druckrey at 414-277-5777 / nicole.druckrey@quarles.com or your Quarles & Brady attorney. Mr. Scullen, Mr. Kruzel, and Ms. Druckrey are members of Quarles & Brady LLP’s Trade Secrets and Unfair Competition Team--a collaboration of the firm’s Labor & Employment, Intellectual Property, and Commercial Litigation Groups--which can help you draft and implement restrictive covenants.