The Wisconsin legislature may soon dramatically change the law that governs restrictive covenants, making them easier to enforce.
On March 5, 2015, State Senator Paul Farrow (R-Pewaukee) introduced Senate Bill 69, a measure that would replace Wisconsin Statute section 103.465, which applies to contract provisions that restrict competition by employees after the termination of an employment relationship. Such provisions, called “restrictive covenants” by the bill, include confidentiality (nondisclosure), noncompetition, and nonsolicitation provisions.
The bill includes the following provisions:
- The bill excludes from the definition of “restrictive covenant” certain confidentiality agreements that apply to confidential information that is not competitively valuable, and certain employee non-solicitation agreements.
- The bill requires courts to find that a restrictive covenant is supported by sufficient consideration if the agreement is executed at or near the beginning of the employment relationship and employment is contingent on the signing of the agreement;
- at or about the time of the termination of employment and provides the employee consideration of any value acceptable to the employee that is above and beyond any compensation already due to the employee; or
- at any other time and offers the employee (1) any monetary payment, bonus, incentive payment, additional paid time off, or access to a bonus or incentive program or pool; (2) continuation of employment at a rate of pay and benefits that is the same as or more than those received by the employee before execution of the agreement, if continued employment is contingent on signing the agreement, or (3) a promise to provide garden leave (which the bill defines as paid leave granted to the employee from the date on which the employee resigns or receives notice of termination and the date the employment relationship ends).
The issue of what constitutes sufficient consideration for a restrictive covenant is currently before the Wisconsin Supreme Court in Runzheimer International, Ltd. v Friedlen.
- The bill expressly defines a “legitimate business interest” that can support enforcement of a restrictive covenant to include
- a business’s trade secrets;
- confidential information;
- substantial relationships with existing and prospective customers;
- goodwill associated with a specific geographic location; and
- unique, extraordinary, or specialized training provided by a business as a result of the employment relationship.
- The bill sets forth the factors a court must consider when determining whether a restraint is reasonable and includes rebuttable presumptions that a court is required to apply. Courts shall presume that a post-termination restriction of six months or less after termination is reasonable and that a restriction of more than two years after termination is unreasonable. Additionally, if garden leave—paid leave after the termination of employment—is paid during the term of the restrictive covenant, the restrictive covenant will be presumed to be reasonable.
- If a court determines that a restrictive covenant is unreasonable, it can modify the restraint so that it is reasonable. This is a 180-degree change from current law, which prohibits such “blue penciling.”
If passed by the legislature and signed by Governor Scott Walker, SB 69 would first apply to any restrictive covenant entered into, extended, modified, or renewed after its effective date.