By: James B. Sherman, Esq.
In 2014 Minnesota’s legislature entertained a bill that would have severely limited the use of employment agreements restricting competition; thankfully, it failed to become law. By contrast in 2015 Wisconsin – a state with existing laws that disfavor noncompetition agreements – has pending legislation that, if enacted, would re-write its laws to actually favor such employment agreements. Under the current Wisconsin law, to be enforceable in court agreements that restrict employees from competing, soliciting, etc. during and after employment, must be reasonably limited as to time and geographic scope and be reasonably necessary for the protection of the employer. If a non-compete agreement is found by a court to be unreasonable as to time or geographic scope, Wisconsin’s current statute provides that the entire agreement must be declared null and void. Supporters of the proposed bill say that protecting employers from employee poaching and other unfair competition, can attract technology and other high-tech manufacturing business to that state.
Some of the key provisions of the new legislation, which stands a very good chance of being enacted into law this spring, given the political climate in Wisconsin, can be summarized as follows:
Reasonable Post-Employment Restrictions – Under the proposed legislation, the restriction would still have to be reasonable as to time, area, and line of business, but the new law would define what is “reasonable” in many instances. For example, the proposed language states that any restriction for less than 6 months is presumed to be reasonable, and longer than 2 years is presumed to be unreasonable but the presumption may be overcome by evidence of industry standards.
Defining “Consideration” – Another significant provision of the new legislation seeks to define by statute what constitutes valid “consideration.” Common law in most states requires that for any contract to be enforceable it must be supported by something of value in exchange for agreeing to the restriction; i.e. “consideration.” Oftentimes even well written noncompetition agreements are tossed from court because they lacked this important element of enforceability. For example, courts in many states have held that agreements signed after employment began (even one day later) cannot be supported by employment alone as the necessary consideration. The new Wisconsin legislation specifically states that valid consideration will be found in any of the following circumstances:
- If entered into at or within a reasonable time after the beginning of the employment relationship, then the employment or continued employment, if contingent on the execution of the agreement, will be sufficient.
- If entered into at or near the end of the employment relationship, then any consideration acceptable to the employee, above and beyond any compensation already due to the employee, or used to support any other covenants, releases, or promises made by the employee will be sufficient.
- If entered into during the employment relationship, sufficient consideration would be anything of value given in connection with and in exchange for agreeing to the restriction. Examples of such things include: a bonus or incentive payment, additional paid time off that the employee agrees is adequate to support the restrictive covenant, access to a bonus or incentive program that the employee would otherwise not have access to, or continuation of employment if conditioned on execution of the agreement.
These provisions would take a great deal of uncertainty out of how employers implement enforceable noncompetition, non-solicitation, confidentiality and other restrictive employment agreements with their employees.
Re-Writing/”Blue-Penciling” Unreasonable Provisions – The new law would allow courts essentially to eliminate or rewrite any specific provisions found to be unreasonable and enforce the agreement as amended, rather than declaring the entire agreement null and void under the current law. For example, if a judge were to determine that a two year post employment noncompetition agreement was unreasonably long under the circumstances of a particular case, the new law would allow the judge to declare the agreement enforceable but only for a shorter length of time deemed reasonable (e.g. 1 year, 6 months, etc.).
Summary – This new law would only apply to restrictive covenants entered into after passage of the legislation and therefore, it would not apply to any agreements already in existence. Again, there is a high likelihood this legislation will be signed into law this year. Employers who use or might wish to use noncompetition, non-solicitation, confidentiality and other restrictive agreements with their employees in Wisconsin will want to closely monitor the progression of this new legislation. In the meantime, now is a good time for employers who are already using these agreements, to have them audited for enforceability. If existing agreements are unreasonable and thus unenforceable under current Wisconsin law the new legislation will not operate retroactively to save them. Therefore, now is a good time to review employment agreements to determine if updates are in order to take advantage of the new law if, as expected, it goes into effect soon.
Questions about non-competition agreements or any related matters? Please contact James B. Sherman at (952) 746-1700 or firstname.lastname@example.org.