Wisconsin Lawyer
Vol. 79, No. 5, May 2006

• Protecting Business Interests With Covenants Not to Compete

Hints to Drafting Enforceable Covenants Not to Compete

Employment Context

The terms of a covenant not to compete in the employment context are critical to its enforceability. An excellent resource to help you become familiar with noncompete cases and covenant terms is chapter 15, "Post Employment Competition," in Wisconsin Employment Law, published by the State Bar of Wisconsin (3rd Edition, 2004). Follow these steps when drafting covenants not to compete in the employment context:

• Thoroughly investigate the employer's business and the jobs of the employees who will be asked to sign the covenant. What interests is the employer seeking to protect? What information and experience will the employee obtain that can be used to compete with the employer?
• Ensure that the covenant contains the contractual element of consideration. With current employees, it may be wise to condition a promotion, bonus, or other compensation on the execution of a covenant.
• It is not sufficient to merely tailor the covenant to the particular type of business or the particular employer. You need to consider each type of employee, and each individual employee, because what is a reasonable covenant for one type of employee or individual employee may not be reasonable for another. For example, many insurance companies will want to prevent both sales people and managers from competing, but each type of employee has access to different information and has different relationships to the business's customers. As a result, a covenant that is reasonable for managers will not necessarily be reasonable for sales people, and vice versa.
• Use a separate agreement to cover items of information that qualify as trade secrets under the Uniform Trade Secrets Act, Wis. Stat. section 134.90. In contrast to Wis. Stat. section 103.465, which covers covenants not to compete, the Uniform Trade Secrets Act protects trade secrets regardless of any time or geographic limits.
• When possible, use a traditional noncompete. The statute governing employee covenants not to compete is directed at the traditional noncompete, and trial courts find these types of agreements the easiest to understand. In contrast to a traditional noncompete, enforceable confidentiality and nonsolicitation agreements are more difficult to structure.
• Draft the covenant narrowly to increase the likelihood that it will be enforced. Inform your client that the mere existence of a covenant not to compete oftentimes is enough to intimidate an employee from competing.

Business Context

The terms of a covenant not to compete in the business sale context usually are not crucial, because: 1) often the seller is retiring, or at least retiring from the type of business being sold, and therefore is not particularly concerned about the terms and almost never ends up competing with the buyer; and 2) the court has the discretion to amend the covenant and will enforce it "to the extent necessary and reasonable under the circumstances."

Follow these steps when drafting covenants not to compete in the business sale context:

• If the seller will remain in business in the same geographic area as the buyer, carefully draft the definition of the business in which the seller is prohibited from being involved to protect both parties' interests.
• Use the traditional noncompete for the sale of a business with a local customer base, such as a restaurant. It usually is not necessary to include nonsolicitation or confidentiality clauses with these sales.
• With businesses whose customers do not come from a defined geographical area, such as Internet-based businesses, use of a nonsolicitation covenant, a confidentiality covenant, or a combination of the two may be necessary to protect the parties' interests. In sales of these types of business, it is critical to define which customers are not to be solicited and what information the seller cannot use.

Wisconsin Lawyer