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Increasing Enforceability of Noncompete Agreements

Capitol Region Business Journal
June 27, 2005

Many businesses seek to protect their confidential information, trade secrets and customer relationships through noncompete or nondisclosure agreements.

Wisconsin is one of the toughest states in the nation to enforce these types of agreements. While it is possible to draft enforceable restrictive covenant agreements in Wisconsin, the odds are against Wisconsin businesses.

The public policy of the state clearly disfavors such agreements. Section 103.465 of the Wisconsin Statutes governs noncompete and nondisclosure agreements in Wisconsin. The statute requires that the agreements be reasonable in time and geographic scope and narrowly drafted to protect an employer's business interests. Section 103.465 covers agreements between both employers and employees and independent consultants and their contractors.

Under Wisconsin law, courts may not amend or "blue pencil" a noncompete to make it reasonable. This means that if any one provision of a noncompete covenant is too broad, the entire restrictive covenant will not be enforceable. Wisconsin employers should consider the following points to increase the enforceability of their noncompete and nondisclosure agreements:

  • Noncompete agreements, like other contracts, need consideration to be enforceable. For new hires, the commencement of employment ? if the restrictive covenant is an express condition of employment ? is sufficient consideration. But for current employees, no case under Wisconsin law has held that continuing employment alone is valid consideration.

    Accordingly, agreements for current employees should be tied to some tangible employee benefit, such as a bonus, additional vacation or stock options. Employers who want to update old agreements or enter into new agreements with their current work force will need to offer those employees some consideration to increase the probability that the noncompete will be valid and enforceable.

  • New cases that are decided each year provide helpful drafting guidelines. Businesses should analyze their noncompete agreements at least every two years to determine their continuing enforceability. Agreements drafted two or three years ago may not be enforceable under current legal developments or because of changing business interests. Also, when these types of provisions are contained only in employers' handbooks, they often are not enforceable after the termination of an employee's employment.

  • Noncompetes must be narrowly drafted to protect a legitimate business interest. Employers need to identify clearly the competitive threat they are trying to protect against and then draft a provision that specifically addresses that legitimate business interest. Drafting broad and overreaching noncompetes solely to have a deterrent effect is usually not effective. Word spreads fast when former employees who compete are not pursued or lawsuits are lost because of unenforceable noncompete provisions.

  • Geographic restraints also need to be narrowly drafted to a geographic region that can be justified in relation to a customer base or places that an employer is actually doing business. For example, arbitrarily assigning a 50-mile geographic scope risks enforcement if 90 percent of an employer's business is conducted within a 20-mile radius. Nationwide or worldwide noncompetes have not been recognized under Wisconsin case law. Customer restrictions may be enforceable without a more traditional geographic scope if they are drafted carefully to protect only those customer relationships where the employee interacted with a current customer of the employer rather than prohibiting an employee from contacting any customer or prospective customers of the business.

  • Agreements must distinguish between trade secrets and other confidential information. Trade secrets are governed by the Wisconsin Uniform Trade Secret Act and may be protected from disclosure during employment and at all times thereafter. Nondisclosure of other confidential information must be limited by a reasonable and justifiable time period.

  • Noncompete agreements should be limited to two years or less after the termination of employment in Wisconsin. A shorter period may be appropriate if information changes or loses its competitive advantage quickly or a business otherwise exists in a rapidly changing competitive environment.

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