Amending Wisconsin’s Non-Compete Agreement Statute

Current Law

A bill that would amend Wisconsin’s current statute governing non-compete agreements has been introduced to the legislature and if passed would preemptively override the State Supreme Court decision on Runzheimer Int’l v. Friedlen (2013AP1392).

Wis. Stat. § 103.465 is Wisconsin’s current statute governing non-compete agreements. The current law allows employers to restrict the ability of employees to compete within a certain geographic area, in a certain professional field, for a limited amount of time after the termination of employment. These restraints are only enforceable if they are reasonably necessary for the protection of the employer. If one portion of the agreement is found unreasonable by the courts, then the entire agreement is unreasonable unless the clauses are separate enough that one can be struck down and others upheld and the non-compete can still work (this is a judicial innovation).

Recent Wisconsin Supreme Court Case

The state supreme court heard the case Runzheimer Int’l v. Friedlen (2013AP1392) dealing with non-compete agreements last October. In that case, Runzheimer Int’l, Ltd. updated its non-compete agreement with its employees. Each at-will employee was informed that in order to continue employment at Runzheimer they had to sign the new non-compete agreement. David Friedlen signed the new non-compete agreement in exchange for continued employment and continued access to the Runzheimer incentive plan. Two years later Friedlen’s employment was terminated, and then he went to work for a Runzheimer competitor.

Runzheimer argued that by working for a competitor Friedlen violated the non-compete agreement. Friedlen asserted that because he was an at-will employee, and therefore could have been terminated at any time, that the offer of continued employment and continued access to the incentive package is illusory.

The trial court agreed with Friedlen holding that continued employment and continued access to the benefits plan was not sufficient consideration to support a non-compete agreement.

Proposed Changes

On March 5th Senator Paul Farrow introduced 2015 Senate Bill 69, which if passed, will amend Wis. Stat. § 103.456 in multiple significant ways:

  1. Including At-will Employment: First, SB 69 would include continued at-will employment as valid consideration for a non-compete agreement provided that the employee’s pay and benefits are equal before and after entering the agreement. Continued employment is only valid consideration if it is contingent on the execution of the non-compete agreement (meaning the employer actually terminates the employment of those employees who refuse to sign the agreement). This would preemptively override the state supreme court decision in Runzheimer.
  2. Defining “Legitimate Business Interests”: The bill defines “legitimate business interests” as: (1) a trade secret, (2) substantial relationships with specific existing or prospective customers, (3) customer, patient, or client goodwill associated with a specific geographic area, (4) unique, extraordinary, or specialized training provided by the business or obtained because of employment.
  3. Time Restriction: The bill creates a rebuttal presumption that a time restriction on being employed in the same field as they previously worked of six months or less on the employee is presumed reasonable while a time restriction of more than two years is presumed unreasonable.
  4. Revisions by the Court: Changes made by the bill would enable Wisconsin courts to revise a non-compete agreement by amending sections that are considered unreasonable (known as “blue-penciling”) when necessary to protect the employer’s legitimate business interest(s).
  5. Prohibiting “Individualized Economic Hardship”: The changes also prohibit a court from considering “individualized economic hardship” of the former employee when determining whether the non-compete should be enforced or not. The changes also limit the ability of a court to use statutory interpretation to interpret the scope of the non-compete narrowly or to invalidate the non-compete on public policy rationales.