Is Your Non-Competition Agreement Enforceable?
By: Scott C. Baumbach
Phone: (262) 956-6543
Fax: (262) 956-6565
Email: scbaumbach@mbf-law.com
When employers hire employees, oftentimes they do so knowing that the employee will learn certain secrets or acquire confidential information about the company, such as customer lists and marketing strategies, that could be used to compete against them at a later date. In order to protect against unfair competition by a departing employee, some employers require their employees to sign non-competition agreements when they begin their employment. However, a poorly drafted non-compete agreement could ultimately leave the employer unprotected.
Non-compete agreements are regarded with suspicion by courts in Wisconsin because the law seeks to encourage mobility of workers. As a result, non-compete agreements that attempt to restrict an employee from competing will be liberally construed in favor of the employee. That being said, certain types of non-compete agreements are enforceable under State law. For example, a narrowly-tailored non-solicitation of certain clients, or non-disclosure of confidential information agreement could be enforceable against the employee.
Wisconsin courts have set forth a five-factor test to determine whether a non-compete agreement is enforceable:
1. The agreement must be necessary for the protection of the employer;
2. The agreement must have a reasonable time period;
3. The agreement must have a reasonable territorial restriction, either in geographic scope or scope of customers or competitors;
4. The agreement cannot be harsh or oppressive to the employee; and
5. The agreement cannot violate public policy.
Although Wisconsin courts will examine non-compete agreements utilizing these factors, what is reasonable varies from case to case and what may be unreasonable in one instance may be reasonable in another. Thus, non-compete agreements do not fall into a “one size fits all” category.
So, how does an employer know whether its non-compete agreement is enforceable? What is a reasonable time period or territorial restriction? The courts have brought some clarity to these issues.
With regards to the first element, necessary for the protection of the employer, the courts have said that legitimate and ordinary competition that a stranger could give may not be protected. In other words, the employer must have some additional facts and circumstances which render the non-compete agreement necessary for the protection of the employer’s business. The best examples would be customer contacts and goodwill, or confidential information. The employee must present a substantial risk either to the employer’s relationships with its customers or to the confidential business information.
The reasonableness of a time restriction depends upon the period of time required for the employer’s customers to disassociate the employee from the former employer. As you can imagine, Wisconsin law contains no firm rule of what time limit is reasonable, but the courts have indicated that two years may be the limit. Any non-compete agreement that seeks to prohibit an employee from competing for a period longer than 2 years risks being struck down by a court as unenforceable.
Territorial restrictions are usually expressed in terms of forbidden customers, particular activities, or territories where the employee worked. As long as the restriction is not broader than that which the employee was subjected to with the employer, the restriction can be reasonable. For example, an employer most likely will not be able to prevent the employee from soliciting clients in other states if the employee’s territory was the State of Wisconsin.
And finally, with regards to being reasonable to the employee and not contrary to public policy, the agreement should not prevent the employee from pursuing all employment in his or her specific field or trade. Further, the agreement cannot be harmful to society by creating a shortage of employees in an important field in which the public is being underserved.
When drafting non-compete agreements, employers should be aware that under Wisconsin law, all sections of a non-compete agreement must meet the five-factor test. Unlike other states, Wisconsin does not allow courts to “blue-pencil” or fix problematic provisions in order to save the agreement. Thus, if any portion is found unreasonable by the court, the entire non-compete agreement will be struck down.
