2023 Wisconsin Statutes & Annotations › Chapter 103 - Employment regulations. › 103.465 - Restrictive covenants in employment contracts.

103.465
Restrictive covenants in employment contracts.
A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.
History:  1995 a. 225; 1997 a. 253; 2015 a. 197 s. 51.
A provision in an employer's profit-sharing and retirement plan that calls for the forfeiture of benefits by employees who engage in competitive enterprises is valid and enforceable only if it meets the requirements of this section. Holsen v. Marshall & Ilsley Bank, 52 Wis. 2d 281, 190 N.W.2d 189 (1971).
A provision of a pension plan denying benefits if the retired employee accepted any employment in the same industry without limit as to time or area was void. Estate of Schroeder v. Gateway Transportation Co., 53 Wis. 2d 59, 191 N.W.2d 860 (1971).
This section, limiting the enforceability of covenants not to compete to those containing restrictions reasonably necessary for the protection of the employer or principal, incorporates pre-existing common law principals that contracts in restraint of trade are viewed with disfavor. Behnke v. Hertz Corp., 70 Wis. 2d 818, 235 N.W.2d 690 (1975).
A profit-sharing plan that provided for forfeiture in the event that a covered employee worked for a “competitive business" was construed to apply only to businesses that seek out and appeal to the same customers and offer substantially identical services. Zimmerman v. Brennan, 78 Wis. 2d 510, 254 N.W.2d 719 (1977).
The basic requirements for an enforceable restrictive covenant are that the agreement must: 1) be necessary for the protection of the employer; 2) provide a reasonable time period; 3) cover a reasonable territory; 4) not be unreasonable to the employee; and 5) not be unreasonable to the general public. Chuck Wagon Catering, Inc. v. Raduege, 88 Wis. 2d 740, 277 N.W.2d 787 (1979).
A covenant prohibiting an executive employee from contacting company clients with whom the employee had had no previous contact was not unreasonable per se. Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis. 2d 460, 304 N.W.2d 752 (1981).
A covenant not to compete is not automatically voided by the presence of an unreasonable provision for liquidated damages. Whether specific restraints as to area and time are necessary to protect the employer is a question of law to be resolved on the basis of the facts. Fields Foundation, Ltd. v. Christensen, 103 Wis. 2d 465, 309 N.W.2d 125 (Ct. App. 1981).
An agreement requiring agents of an insurance company to forfeit their extended earnings if after termination they engaged in certain competitive practices was unenforceable. Streiff v. American Family Mutual Insurance Co., 118 Wis. 2d 602, 348 N.W.2d 505 (1984).
Territorial limits in a restrictive covenant need not be expressed in geographical terms. General Medical Corp. v. Kobs, 179 Wis. 2d 422, 507 N.W.2d 381 (Ct. App. 1993).
An employer is not entitled to protection against ordinary competition of the type a stranger would give. There must be special facts that render the covenant necessary for the protection of the employer's business. Wausau Medical Center, S.C. v. Asplund, 182 Wis. 2d 274, 514 N.W.2d 34 (Ct. App. 1994).
A valid covenant not to compete requires consideration. Continued employment, absent a requirement that the employment requires executing the agreement, is not consideration. NBZ, Inc. v. Pilarski, 185 Wis. 2d 827, 520 N.W.2d 93 (Ct. App. 1994).
This section sets out its own remedy. A violation does not grant an automatic right to pursue a wrongful discharge claim, but voids the covenant. Tatge v. Chambers & Owen, Inc., 210 Wis. 2d 51, 565 N.W.2d 150 (Ct. App. 1997), 95-2928.
It would be an exercise in semantics to overlook this section merely because a contract provision is labeled a non-disclosure provision rather than a covenant not to compete. This section does not create an exception to the at-will employment doctrine that would allow an employee to refuse to sign a non-disclosure or non-compete clause that the employee considers to be unreasonable. Tatge v. Chambers & Owen, Inc., 219 Wis. 2d 99, 579 N.W.2d 217 (1998), 95-2928.
Any part of an indivisible covenant, even if reasonable on its own, will not be given effect if any other part is unreasonable. A provision that an insurance agent was to have no contact with company clients without geographic restriction was overbroad, as was a provision that the agent not work for a named competitor in any capacity. Mutual Service Casualty Insurance Co. v. Brass, 2001 WI App 92, 242 Wis. 2d 733, 625 N.W.2d 648, 00-2681.
“Specified territory" in this section encompasses customer lists as well as geographic locations. A covenant not to compete based on a customer list limitation is not invalid per se. Farm Credit Services of North Central Wisconsin v. Wysocki, 2001 WI 51, 243 Wis. 2d 305, 627 N.W.2d 444, 99-1013.
A covenant not to compete cannot escape the requirement of territorial reasonableness by not including any geographical parameters. A covenant without any specified territory is void. Equity Enterprises, Inc. v. Milosch, 2001 WI App 186, 247 Wis. 2d 172, 633 N.W.2d 662, 00-2827.
A penalty provision in a contract that is invoked if there is a violation of an unreasonable covenant not to compete must be read with, and is intertwined with, the covenant. As such, it is an unreasonable covenant itself. Equity Enterprises, Inc. v. Milosch, 2001 WI App 186, 247 Wis. 2d 172, 633 N.W.2d 662, 00-2827.
An employer is not allowed to circumvent the protections under this section by restricting the employment opportunities of its employees through contracts with other employers without employee knowledge and consent. An employer cannot indirectly restrict employees in a way that it cannot do directly under this section. Heyde Cos. v. Dove Healthcare, LLC, 2002 WI 131, 258 Wis. 2d 28, 654 N.W.2d 830, 01-0863.
A provision extending the time period in a noncompete clause “by any period(s) of violations" was unreasonable and rendered the clause entirely void under this section. The effect of the extension provision made the duration of the restraint not a fixed and definite time period but a time period contingent upon outcomes the employee could not predict. H&R Block Eastern Enterprises, Inc. v. Swenson, 2008 WI App 3, 307 Wis. 2d 390, 745 N.W.2d 421, 06-1210.
A clause that prohibited a former employee from contacting “past customers," defined as those who purchased from the former employer within one year prior to the employee's termination, was reasonable and enforceable. Star Direct, Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898, 07-0617.
A clause that prohibited a former employee from engaging “in any business which is substantially similar to or in competition with" the former employer was unreasonable and unenforceable. As the disjunctive “or" plainly separates a substantially similar business from one “in competition with" the employer, the only reasonable reading, giving meaning to every phrase, is that it attempts to bar the former employee not only from competitive enterprises, but also from engaging in a business that is not competitive. Star Direct, Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898, 07-0617.
The legislative history and text of this section do not eliminate or modify the common law rules on divisibility. In the context of multiple non-compete provisions in a contract, indivisibility will usually be seen by an intertwining, or inextricable link, between the various provisions via a textual reference such that one provision cannot be read or interpreted without reference to the other. Restrictive covenants are divisible when the contract contains different covenants supporting different interests that can be independently read and enforced. Overlap, even substantial overlap, between clauses is not necessarily determinative. Star Direct, Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898, 07-0617.
The common law's rule of reason, not this section, governed the validity of the covenant not to compete contained in the stock option agreement in this case. This section has been applied in circumstances where the restrictive covenant is contained in a document other than the employment agreement, but the employer nonetheless enjoys a bargaining advantage over employees. Here the employer had no bargaining advantage, there were no consequences attached to a refusal to accept the agreement, and the employee received the benefit of his bargain. Selmer Co. v. Rinn, 2010 WI App 106, 328 Wis. 2d 263, 789 N.W.2d 621, 09-1353.
An employer's forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for a restrictive covenant. Although, theoretically, an employer could terminate an employee's employment shortly after having the employee sign a restrictive covenant, the employee would then be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing, so that the restrictive covenant could not be enforced. Runzheimer International, Ltd. v. Friedlen, 2015 WI 45, 362 Wis. 2d 100, 862 N.W.2d 879, 13-1392.
This section, which explicitly refers to a “covenant not to compete," applied to a non-solicitation of employees provision that prohibited the defendant, a former employee of the plaintiff, from soliciting, inducing, or encouraging any employee of the plaintiff to terminate his or her employment with the plaintiff or to accept employment with a competitor, supplier, or customer of the plaintiff. Manitowoc Co. v. Lanning, 2018 WI 6, 379 Wis. 2d 189, 906 N.W.2d 130, 15-1530.
The following two-step test applies to motions to dismiss: 1) the court should first interpret the covenant as a contract; and 2) then, the court should determine whether there is a provable set of facts in which all of its restraints are reasonable and should consider the allegations in the pleadings, to the extent that they might be relevant to the analysis. In the posture of a motion to dismiss, the issue presented is whether there is at least one evident or hypothetical application of the covenant's plain text that is unreasonable because no facts could be proven that would render the protection created by the restraint reasonably necessary to the former employer. Diamond Assets LLC v. Godina, 2022 WI App 47, 404 Wis. 2d 404, 979 N.W.2d 586, 21-1079.
A restrictive covenant was not overbroad. Brunswick Corp. v. Jones, 784 F.2d 271 (1986).
An agreement to accept an education loan funded by certain employers on the condition that the recipient repay it in kind by working for a contributor or repaying it in cash if the recipient accepts employment with a non-contributor was not a covenant subject to this section. Milwaukee Area Joint Apprenticeship Training Committee v. Howell, 67 F.3d 1333 (1995).
An obligation to repay an employer's costs for training an employee if the employee did not remain employed for a specified time was not a covenant not to compete under this section. This section applies only to the extent a consequence is linked to working for the employer's competition. Heder v. City of Two Rivers, 295 F.3d 777 (2002).
This section does not apply to franchisees under franchise agreements. H&R Block Eastern Tax Services, Inc. v. Vorpahl, 255 F. Supp. 2d 930 (2003).
The public policy underlying this section is that Wisconsin law favors the mobility of workers. Compliance with a contractual obligation to return property already belonging to an employer does not violate public policy concerning employee mobility. Genzyme Corp. v. Bishop, 463 F. Supp. 2d 939 (2006).
Nondisclosure agreements at issue in this case were not covered by this section. Even if a nondisclosure provision restricts disclosure of trade secret information, if it also restricts disclosure of information that is not a trade secret, this section requires a time limitation on the provision. Friemuth v. Fiskars Brands, Inc., 681 F. Supp. 2d 985 (2010).
In this case, a high-ranking employee received additional compensation for agreeing to a non-compete clause. The clause was neither unreasonable nor unduly harsh to the employee. Faced with the choice, many key employees would rationally take the extra money in exchange for a reasonable restraint on their post-employment activities. A reasonably drafted non-compete that holds up in court is not just a one-sided victory for employers; it is a means of preserving and enhancing the ability of employees to obtain additional compensation for being key employees in the first place. Schetter v. Newcomer Funeral Service Group, Inc., 191 F. Supp. 3d 959 (2016).
Trade secrets under s. 134.90 are an exception to the rule that non-disclosure agreements require geographical and temporal limits. Charles Schwab & Co. v. Lagrant, 483 F. Supp. 3d 625 (2020).
Drafting and Enforcing Restrictive Covenants Not to Compete. Richards. 55 MLR 241 (1972).
Turning Wisconn Valley into the Next Silicon Valley: Reforming Wisconsin Non-Compete Law to Attract High-Tech Employers. Krause. 103 MLR 237 (2019).
Offers You Can't Refuse: Post-Hire Noncompete Agreement Insertions and Procedural Unconscionability Doctrine. Enger. 2020 WLR 769.
Drafting enforceable covenants not to compete. Nettesheim. WBB Oct. 1986.
Viewpoint: Can Employers Force Employees to Sign Noncompete Agreements as a Condition of Their Employment? Cohen & Stuart. Wis. Law. May 1999.
Protecting Business Interests With Covenants Not to Compete. McNeilly & Krzoska. Wis. Law. May 2006.
Star Direct Takes Restrictive Covenant Law in a New Direction. Backer. Wis. Law. Nov. 2009.
Reining It In: Limits to Employee Nonsolicit Covenants. Kreiter, Cook, & Lopez. Wis. Law. Apr. 2018.