Viewpoint
Can employers force employees to sign
noncompete agreements as a condition of their employment?
The answer depends upon whether Wisconsin's restrictive
covenant statute, section 103.465, properly allocates the risks
associated with such agreements and provides enough protection
for employees.
By Michael J. Cohen & William
T. Stuart
Recently,
the Wisconsin Supreme Court has had an opportunity to analyze
whether an employer can force an employee to sign a noncompete
agreement as a condition of employment. In Tatge
v. Chambers & Owen Inc.1
the court implicitly held that section
103.465 of the Wisconsin
Statutes properly allocates the respective risks of the employer
and employee in signing restrictive covenants and that an employer
can force an employee to sign a noncompete as a condition of
continued employment.2
Emphasizing the significant distinction between an employee's
execution of a restrictive covenant and the employer's enforcement
of the agreement, the court, in a 5-2 decision, held that section
103.465 does not prevent an employer from requiring its employees
to sign even allegedly unreasonable restrictive covenants.
The dissent in Tatge urged that section 103.465 encompassed
a public policy consideration that requires the recognition of
a wrongful discharge claim if the court finds the agreement is
in fact unenforceable under the requirements of the statute.3 In arriving at this position,
the dissent focused on the risks placed upon an employee faced
with a request by an employer to execute a restrictive covenant
and concluded that the fairness considerations set forth in the
language and legislative history of section 103.465 required
that nearly all of the risks relating to the legality of the
agreement should fall on the employer.
This article examines this dynamic debate between the majority
and dissenting opinion, that could arguably provide a foundation
for future legislative enactments or additional judicial action,
by:
- recounting the historical development of Wisconsin's
judicially created exception to the at-will doctrine, which provides
the context for the court's decision in Tatge;
- providing a summary of the majority and dissenting opinions
in this important case; and
- explaining why the authors believe that section 103.465 does
in fact properly allocate the risks associated with restrictive
agreements between an employer and employee.
Brockmeyer and its progeny
A narrow exception to the employment at-will doctrine. The
employment at-will doctrine is deeply rooted and well established
in this state.4 It dictates
that where employment is for an indefinite term, an employer
may discharge an employee "for good cause, for no cause,
or even for cause morally wrong, without being thereby guilty
of legal wrong."5
However, recognizing "the need to protect workers who are
wrongfully discharged under circumstances not covered by any
legislation or whose job security is not safeguarded by a collective
bargaining agreement or civil service regulations," the
court in Brockmeyer created a "narrow public policy
exception" to the employment at-will doctrine.6
The exception provides that "an employee has a cause of
action for wrongful discharge when the discharge is contrary
to a fundamental and well-defined public policy as evidenced
by existing law."7
The court in Brockmeyer pronounced that the creation of
a narrowly circumscribed public policy exception "properly
balances the interests of employees, employers and the public."8 The Brockmeyer
court instructed the lower courts to proceed cautiously when
making public policy determinations and pronounced that "no
employer should be subject to suit merely because a discharged
employee's conduct was praiseworthy or because the public
may have derived some benefit from it."9
Since Brockmeyer, the Wisconsin Supreme Court has modified
the public policy exception to the employment at-will doctrine
on limited occasions. In Wandry v. Bull's Eye Credit
Union10 the court
extended Brockmeyer's wrongful discharge claim to include
the spirit, as well as the letter of a statutory provision.11 More specifically, the
court held that Brockmeyer does not require that a discharge
expressly violate the terms of a statute to constitute a claim
for wrongful discharge; it requires "only that the discharge
contravene the public policy evidenced in the statute."12 In Bushko v. Miller
Brewing Co.13 the
court refused to expand Brockmeyer's narrow cause
of action for wrongful discharge to include the discharge of
an employee for complaining about public policy matters, and
expressly limited the scope of the Brockmeyer exception to situations
where the employee is terminated for refusing a command, instruction,
or request of the employer to violate public policy as established
by existing law.14 Most
recently, the court expanded the public policy exception "beyond
the four corners of Bushko" in Hausman
v. St. Croix Care Center Inc.15
to include situations where an employee is terminated for complying
with an affirmative obligation under the law, regardless of whether
the employer has made an initial request, command, or instruction
that the reporting obligation be violated.16
In Hausman the court held that an employee could assert
a wrongful discharge claim for complying with the affirmative
obligation of a nursing home employee to prevent abuse or neglect
of residents.17
It is against this backdrop that the court in Tatge
addressed whether section 103.465 evidences a fundamental and
well-defined public policy that would support a claim for wrongful
discharge in Wisconsin.
Tatge
Requiring employees to sign a restrictive covenant does
not violate public policy. After 12 years of employment and
several changes to his job duties and compensation arrangement,
Tatge, an at-will employee,18
was asked by his employer, Chambers & Owen, to sign a "Management
Agreement." The Management Agreement contained both nondisclosure
and noncompete provisions. 19
Tatge, in an apparent effort to better his compensation arrangement,
objected to the agreement and discussed it with the company's
president, Owen.20 Tatge
contended that Owen told him that nothing would happen if he
refused to sign the agreement and was further told that his employment
would be ongoing and terminable only for what amounted to good
cause. At a subsequent meeting, Tatge was told that he would
be terminated if he refused to sign the agreement and ultimately
was terminated when he refused to do so.21
Tatge subsequently filed suit against Chambers & Owen
claiming wrongful discharge, breach of contract, and three forms
of fraudulent misrepresentation (intentional, negligent, and
strict liability).22
On joint motions for summary judgment, the circuit court dismissed
Tatge's wrongful discharge claim on the grounds that the
agreement did not violate section 103.465.23
The court of appeals affirmed, concluding, inter alia,
that an employer's discharge of an employee for failing
to sign a nondisclosure/noncompete agreement does not give rise
to a wrongful discharge claim.24
Tatge argued before the Wisconsin Supreme Court that section
103.465 evidences a fundamental and well-defined public policy
that unreasonable restraints, such as the restrictions that Chambers
& Owen attempted to foist upon him,25
not be placed upon employees.26
Although the court never reached the ultimate question of whether
the restraints in the Chambers & Owen agreement were unreasonable,
the court agreed that section 103.465 does in fact evidence a
strong public policy against the enforcement of trade
restraints that are determined to be unreasonable.27
The court parted company with Tatge in his proposition that the
statute evidences a public policy against an employer's
requirement that its employee sign a nondisclosure/noncompete
agreement that the employee considers unreasonable.28
The court stated that the clear public policy of section 103.465
is to protect the employee from complying with the terms of an
"unreasonable" restrictive covenant by rendering that
covenant void and unenforceable.29
Quoting the court of appeals, the court reiterated that "[w]hen
a restrictive covenant is unreasonable, the public policy of
Wisconsin is not to create a cause of action, but to void the
covenant." The court added that this "public policy
remains the same regardless of whether the agreement is reasonable
within the meaning of § 103.465." Therefore, the supreme
court concluded, although the statute does "evince a clear
public policy for this jurisdiction, Tatge has not identified
a fundamental and well-defined public policy sufficient to trigger
the Brockmeyer exception to employment-at-will."30
Citing prior precedent that holds the validity of a restrictive
covenant is to be established by an examination of the particular
circumstances that surround it - such as the specific information
sought to be protected, the length of the employee's employment,
and the nature of the competition - the court expressed
a concern that if Tatge's position was accepted, courts
would be required to engage in a factual intensive analysis of
the "reasonableness" of a restrictive covenant based
on hypothetical facts before the employer has even sought to
enforce the allegedly unreasonable agreement.31
The court declined to adopt such a "dubious and unpredictable
approach."32
The court also expressed a concern over the potential ramifications
of Tatge's position. The court stated, "[w]ere we to
apply the Brockmeyer exception to the facts of this case,
at-will employees could indiscriminately decline to sign nondisclosure/noncompete
agreements which in their own minds are 'unreasonable,'
and subsequently bring a wrongful discharge claim if terminated
for doing so."33
Again quoting the court of appeals, the supreme court noted that
"all restrictive covenant cases would become wrongful discharge
cases."34
In further support of its holding, the supreme court noted
that Tatge "gambles little by signing the agreement; in
the event that Chambers & Owen later sought to enforce the
agreement, Tatge could challenge it as unenforceable at that
time."35 The court
highlighted the fact that
section 104.465 imposes a heavy burden
on the employer who seeks to enforce a covenant not to compete
because the statute renders the entire covenant void if any portion
of it is deemed "unreasonable."36
Recognizing the legislative history of the statute, the court
added that this burden was specifically imposed to discourage
"employers possessing bargaining power superior to that
of the employees" from insisting "upon unreasonable
and excessive restrictions, secure in the knowledge that the
promise will be upheld in part, if not if full."37
In the dissenting opinion, Chief Justice Abrahamson took issue
with the majority's assessment of the risks facing an employee
when presented with a restrictive covenant he or she believes
is unreasonable, stating that an employee is forced into a "lose-lose
situation":
"If the employee refuses to sign the agreement, the employee
risks termination without any right to sue for wrongful discharge.
If the employee signs the agreement, the employee risks a lawsuit
and litigation expenses when he or she chooses to violate the
agreement. Alternatively, the employee who signs the agreement
may feel compelled to respect his or her contractual obligations
(regardless of the legality of the agreement), thereby forgoing
other employment opportunities in order to avoid litigation expenses.
Moreover, prospective employers may refuse to hire an employee
who has signed a nondisclosure agreement, regardless of their
assessment of the legality of the agreement, for fear of buying
themselves a lawsuit."38
The dissent criticized the majority opinion for placing all
the risk on an employee in this setting even though the employer
has drafted the agreement and has superior bargaining power.39 According to the dissent,
an employer actually enforces an illegal restrictive covenant
when it terminates an employee for refusing to sign the agreement,
not when the employer seeks to enforce the agreement in court.40 Stressing the fairness
considerations set forth in the statute's language and legislative
history, the dissent argued that the public policy reflected
in section 103.465 requires that an employer who terminates the
employment of an at-will employee on the basis of the employee's
refusal to sign a restrictive covenant be liable for wrongful
discharge if a court decides the agreement is unreasonable.41
Balancing risks: Section 103.465 is adequate. The issue
properly before the court in Tatge, as framed by Brockmeyer
and its progeny, was whether section 103.465 of the Wisconsin
Statutes evinces, by letter or "spirit," a fundamental
and well-defined public policy that is contrary to an employer's
requirement that an employee sign a noncompete or nondisclosure
agreement. As described above, the dissent in Tatge focused
largely on the risks placed upon an employee who is faced with
the request to sign such an agreement. In effect, the dissent
argues that section 103.465 does not adequately protect employees
such as Tatge, who have assumed all of the risks associated with
execution of a restrictive agreement, and that public policy
requires the court to realign the equities by creating a cause
of action under these circumstances. Although appealing on its
face, this hypothesis does not appear to be particularly well
founded.
Contrary to the dissent's position, section 103.465 does
in fact place a substantial risk on an employer who is overly
aggressive with the restrictions in its noncompete and nondisclosure
provisions: The employer cannot protect its business interests
through the agreement even if other portions of the restriction
are legitimate and reasonable.42
Wisconsin courts have regularly recognized the general principle
that "post-employment restraints are scrutinized with particular
care because they are often the product of unequal bargaining
power and because the employee is likely to give scant attention
to the hardship he may later suffer through the loss of livelihood."43 As stressed by the dissent,
this concern over unequal bargaining power led to the Wisconsin
Legislature's adoption of section 103.465.44
As documented by the dissent, the legislator who was a moving
force in obtaining the legislation wanted the bill drafted to
put the two contracting parties in more equal bargaining positions,
and to avoid giving "a green light" to employers in
writing agreements not to compete.45
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