May 6, 2015 – Daniel Finerty’s commendable April 1, 2015 InsideTrack article1 about the current Republican-sponsored effort to legislatively repeal almost 60 years of Wisconsin statutory and common law respecting noncompetes and other restrictive covenant agreements is noticeably silent about the negative public policy implications of this effort.
The identical Senate Bill 69 and Assembly Bill 91 (“Legislation”), however, will dramatically harm the interests of workers and the public by creating perverse anticompetitive incentives for employer overreach in the drafting and enforcement of such contracts.
Return of Contract Reformation
Wis. Stat. section 103.465 presently prohibits reformation or “blue-penciling” of unreasonable restrictive covenants: “Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint.”
Bradden C. Backer (U.W. 1981) is a shareholder at Albrecht Backer Labor & Employment Law, S.C. He represents employers in employment law matters and employees in negotiations concerning employment and separation agreements. Backer drafts restrictive covenant agreements and represents those seeking to enforce and invalidate restrictive covenant agreement. He regularly serves as a mediator in employment disputes. Reach him by email or by phone at (414) 278-1396.
The heart of the Legislation will turn this rule on its head: “If the restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest, the court shall modify the restraint and grant only such relief as is reasonably necessary to protect that legitimate business interest.”2
This proposed change is all about incentives. Under current law, employers and principals have a strong motive to be temperate in seeking to impose noncompetition restrictions. They must carefully weigh the restrictions against their business interests because they will end up with nothing if they overreach; an unreasonable restriction is completely void, along with any other indivisible restrictions contained in the agreement.
If the Legislation becomes law, employers and principals will have no such incentive to draft reasonable restrictive covenants. An unchallenged unreasonable restrictive covenant will deliver full, unjustifiable benefits at the expense of the employee and public, and a successful challenge merely will result in a revised, properly narrowed restriction. The public interest is definitely implicated in these agreements, as for example, in the case of health care employees who switch employers and are rendered “off limits” to the patients they serve.
This proposed change is also about enhanced uncertainty. How is an employee to assess a noncompete when the scope of a facially unreasonable restriction only will be determined after a court rewrites the contract?
Lack of Balance
The Legislation’s prohibition against long-standing rules of contract interpretation, like that requiring construction against the drafter, reflects an intent to heavily stack the deck in favor of the party seeking to impose such restrictions.3
Also reflecting a lack of balance, the Legislation’s unprecedented granting persuasive weight to the “restraints in the specific industry of the person seeking enforcement of the restrictive covenant,”4 which will foster an incremental “race to the bottom” through increasingly burdensome, self-justifying restrictive covenants.
Similarly, the Legislation lessens the employer’s burden in obtaining injunctive relief by establishing an unprecedented “presumption of irreparable injury to the person seeking enforcement of the restrictive covenant.”5
Virtually all employees involved in litigation over restrictive covenant agreements – whether as defendants accused of violating them or plaintiffs seeking declaratory relief – are at a strategic disadvantage given the usual disparity in the parties’ respective resources. Frequently, under existing law, contract provisions that grant the employer recovery of costs and attorney fees if it prevails in litigation involving the agreement exacerbate this inequality in resources.
The Legislation multiplies this imbalance by affirming “prevailing party” contract provisions that award costs and attorney fees, making the shift of such costs and fees discretionary in the absence of such a contract provisions and invalidating any contract provision “limiting the court’s authority” to award such costs and fees.6
The Legislation’s failure to define “prevailing party,” combined with its restoration of “blue-penciling,” also creates the troubling possibility that such fee-shifting only will operate in favor of employers and principals. How could an employee or independent contractor ever be a “prevailing party” when even an unreasonable restrictive covenant will be enforced to the extent a court deems reasonable?
Attorney Finerty correctly commented that the Legislation “arguably moves Wisconsin from a venue to avoid when litigating [restrictive covenant] disputes to the top of the list of states with strong enforcement statutes.”
He also correctly observed that “[s]ome business interests believe the legislation will lure high-tech manufacturing, biomedical research, and other employers that are heavily dependent upon research and development and need greater protection for the investment personnel.” This belief, however, is unfounded. California, for example, has been far more successful than Wisconsin in fostering and “luring” such businesses, yet its laws make most noncompetition agreements void and unlawful.7
The current section 103.465 was adopted in 1957 “to reverse Fullerton Lumber Co. v. Torborg, 270 Wis. 133, 70 N.W.2d 585 (1955), in which the court enforced the reasonable aspects of an invalid covenant not to compete. [Republican] Representative [Richard E.] Peterson explained his concerns about Fullerton as follows: ‘[a]t the time the contract was entered into, the bargaining position of the two contractors appears to me to be relatively unequal in that the party seeking employment must, if he desires employment with the contracting party, consent to almost any restrictive covenant imposed. The effect [of the Fullerton decision] is to give to the employer complete latitude’ in setting forth the terms of the agreement, including the geographical and time limits imposed.”8
Who can maintain that the relative bargaining positions of employers and employees have reversed since 1957? Who can fairly characterize the Legislation as pro-business when the Legislation fails to consider its likely effect of driving highly talented employees out of Wisconsin? Who can justify such a “Christmas stocking” of such anticompetitive “benefits” that serve to limit employee mobility?
1 Daniel Finerty, Sweeping Restrictive Covenant Reform Introduced in the Wisconsin Legislature, InsideTrack (April 1, 2015).
2 Legislation, Section 1, Section 103.465(2)(c)2.
3 Id., Section 103.465(2)(h).
4 Id., Section 103.465(d)4.
5 Id., Section 103.465(k).
6 Id., Section 103.465(L) [SIC].
7 California Business and Professions Code §§ 16600, 16601, 16602 and 16602.5.
8 Tatge v. Chamber & Owen, Inc., 219 Wis. 2d 99, 124-25, ¶ 59, 579 N.W.2d 217 (1998) (J. Abrahamson, dissenting).