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Can employers force employees to sign noncompete agreements as a condition of their employment?

In further recognition of the equities between the parties, Wisconsin courts have adopted rigorous canons of construction for restrictive covenants in employment contracts.⁴⁶ In addition, Wisconsin law places upon the employer a heavy burden in establishing the reasonableness of these covenants.⁴⁷ An employer attempting to enforce such an agreement usually will be required to address public policy arguments based upon encouraging employee mobility and the need for unrestrained competition to further the welfare of the consumer and society in general.⁴⁸ In addition, Wisconsin courts have determined that three additional factors must be considered in determining the validity of nondisclosure provisions.⁴⁹

Although overlooked by the dissent, the protections afforded by the standards interpreting section 104.365 are available to the employee whether the employee challenges the reasonableness of a restrictive covenant in a wrongful discharge case, or whether the employee litigates the issue post-termination in an enforcement action. As such, there is no need to extend the breadth of section 104.365 to wrongful discharge actions in an effort to provide greater protection for the employee.

In sum, it is apparent from the burdens facing the employer that the Legislature and the courts have well considered the respective risks associated with restrictive covenants and have provided a proper balance reflective of the equities between the parties and the circumstances surrounding the execution of such arrangements.

Moreover, the majority noted, the position advocated by the dissent is unworkable because it clearly puts the proverbial "cart before the horse" by forcing courts to evaluate the reasonableness of a restrictive covenant in a factual void and under circumstances in which the employer has not even sought to enforce the agreement. Under Wisconsin law, the validity of such agreements is to be determined on the basis of a thorough examination of the particular circumstances that surround it.⁵⁰ This also proves what is perhaps the most critical flaw in the dissent's position: An employer does not enforce a nondisclosure or noncompete provision by requiring an employee to sign the agreement. As the majority opinion points out, enforcement can only occur after: 1) the parties actually agreed to its terms; 2) the employee sought to disclose allegedly confidential information or sought to compete with the employer; and 3) the employer attempted to prevent the disclosure or competition by calling upon the agreement.⁵¹

Finally, the dissent ignores the fact that it is the Legislature's function to revise the protections afforded under section 103.465 if in fact the statute does not adequately address the risks associated with such agreements. To date the Legislature has not seen fit to do so and there is no compelling reason for change.

Conclusion

The authors believe that the risks associated with restrictive agreements are in fact properly balanced by the statute, which was created to level the playing field in this arena. The employee is not placed in a lose-lose situation when requested to sign a restrictive agreement. If the employer's restrictions are unreasonable, the statute will protect the employee regardless of whether the employee challenges the restriction by declaratory judgment prior to actually competing, or litigates the issue after the employment relationship has terminated. If the employer abuses its bargaining power and is overly aggressive with its covenant, the employer loses the restriction entirely, including those portions of the covenant that may be reasonable. This creates a balance that properly allocates the risks of the restrictive covenant as between the parties.

Endnotes

¹ Tatge v. Chambers & Owen Inc., 219 Wis. 2d 99, 579 N.W.2d 217 (1998).

² The court in Tatge also addressed the issue of whether a cause of action for breach of an employment contract is actionable in tort for misrepresentation under Wisconsin law. Declining to give its "blessing to such an irreverent marriage of tort and contract law," the court held that the breach of an employment contract is not actionable in tort. Tatge, 219 Wis. 2d at 107.

³ Id. at 124-28.

⁴ Wisconsin first recognized the employment at-will doctrine in Prentiss v. Ledyard, 28 Wis. 131, 133 (1871). See, e.g., Hausman v. St. Croix Care Center Inc., 214 Wis. 2d 654, 662, 571 N.W.2d 393 (1997) ("The employment-at-will doctrine is an established general tenet of workplace relations in this jurisdiction.").

⁵ Brockmeyer, 113 Wis. 2d at 567 (internal quotation marks and citations omitted).

⁶ Id. at 567-68. At the time, the court in Brockmeyer joined the courts of 42 states in recognizing exceptions to the employment-at-will doctrine. See Wandry v. Bull's Eye Credit, 129 Wis. 2d 37, 40, 384 N.W.2d 325 (1996).

⁷ Brockmeyer, 113 Wis. 2d at 572-73. The court concluded that the cause of action for wrongful discharge created by its decision is a contract action rather than a tort action. Id. at 575-76.

⁸ Id. at 574. In a concurring opinion joined by justices Callow and Ceci, Justice Day questioned whether the new rule set forth by the majority would in fact result in a more stable market, positing that it was more likely that more and more discharges previously viewed as nonactionable would be "vehicles to test the ingenuity of the advocate to find some constitutional, statutory or regulatory provision that can be cited in a complaint for wrongful discharge." Id. at 580-81.

⁹ Id. at 573-74.

¹⁰ Wandry v. Bull's Eye Credit, 129 Wis. 2d 37, 384 N.W.2d 325 (1996).

¹¹ Id. at 46-47. The court further expanded the Brockmeyer exception in Winkelman v. Beloit Memorial Hosp., 168 Wis. 2d 12, 483 N.W.2d 211 (1992), when it determined that public policy also could be evinced by an administrative rule.

¹² Wandry, 129 Wis. 2d at 46-47. Wandry involved section 103.455 of the Wisconsin Statutes, which prohibits an employer from deducting certain work-related losses from an employee's wages without following certain procedures to establish the responsibility for the loss. Id. The court concluded that it did not need to determine whether Bull's Eye, Wandry's employer, violated the statute to determine whether Wandry's complaint constitutes a viable claim for wrongful discharge. Id. at 46-47. Rather, the court concluded that the statute articulates a fundamental and well-defined public policy proscribing economic coercion by an employer upon an employee to bear the burden of a work-related loss when the employee has no opportunity to show that the loss was not caused by the employee's carelessness, negligence, or willful misconduct, as was alleged by Wandry. Id.

¹³ Bushko v. Miller Brewing Co., 134 Wis. 2d 138, 396 N.W.2d 167 (1986).

¹⁴ Id. at 142. In Bushko the employee conceded that he was not terminated for refusing to violate any public policy. Id. Rather, the employee claimed he was terminated because he complained about Miller's practices in plant safety, hazardous wastes, and "honesty" involving personnel and expense records. Id. As the court noted, the Brockmeyer court previously had rejected the broader "acting consistent with" public policy standard urged by the employee in Bushko. Id. at 145.

¹⁵ Hausman v. St. Croix Care Center, 214 Wis. 2d 654, 571 N.W.2d 393 (1997). Unlike the wrongful discharge cases that preceded it, the court's opinion in Hausman, authored by Justice Walsh Bradley, was unanimous.

¹⁶ Id. at 668. The court in Hausman held that while the employees' actions were "not in violation of a Bushko command, their actions were in response to a more significant legal command, one imposed by the Legislature to further promote the strong public policy of protecting nursing home residents." Id. at 666-67. The Hausman court expressly declined to adopt a "whistle-blower" exception to the at-will doctrine as being "contradictory to established precedent," which undoubtedly referred to Bushko. Id. at 665-66.

¹⁷ Id.

¹⁸ After several years of employment with Chambers & Owen, Tatge signed an Employee Handbook receipt that acknowledged his relationship was at-will. Tatge, 219 Wis. 2d at 102.

¹⁹ Id.

²⁰ Id. at 103.

²¹ Id.

²² Id. at 104.

²³ Id. The circuit court also denied Chambers & Owen's motion to dismiss Tatge's breach of contract and misrepresentation claims, concluding that the misrepresentation claims should be tried only as to the alleged statements that Tatge's employment would be ongoing and that he could only be fired for cause. Id. At trial, which was bifurcated, the jury determined that there was insufficient evidence of a contract other than at-will, but found that Chambers & Owen made a representation of fact that Tatge was entitled to ongoing employment and termination only for cause. Id. The trial court subsequently dismissed both the intentional and strict liability misrepresentation claims, but allowed the negligent misrepresentation claim to go to the jury, which found in favor of Tatge and assessed damages at $250,000. Id. at 105. The court of appeals subsequently reversed this award.

²⁴ Id. The court of appeals also held that a breach of employment contract is not actionable in tort for misrepresentation.

²⁵ The nondisclosure provision in the Management Agreement did not contain a time limitation. See Gary Van Zeeland Talent Inc. v. Sandas, 84 Wis. 2d 202, 267 N.W.2d 242 (1978) (nondisclosure agreement that does not contain a time limitation is unreasonable and unenforceable under section 103.465).

²⁶ Tatge, 219 Wis. 2d at 114.

²⁷ Id. at 114-15. As an initial matter, the court concluded, citing to its previous holding in Van Zeeland as dispositive, that section 103.465 applies to the nondisclosure provisions in the Management Agreement. Id. at 111-12.

²⁸ Id.

²⁹ Id. at 116.

³⁰ Id.

³¹ Id. at 116-18.

³² Id. at 118.

³³ Id. at 117-18.

³⁴ Id.

³⁵ Id. at 122-23.

³⁶ Id. Section 103.465 states that covenants not to compete are "lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal." Wis. Stat. § 103.465 (1995). The statute further provides that "[a]ny such restrictive covenant imposing an unreasonable restraint is illegal and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint." Id. (emphasis added).

³⁷ Id. at 123 (quoting Streiff v. American Family Mut. Ins. Co., 118 Wis. 2d 602, 608-09, 348 N.W.2d 505 (1984)).

³⁸ Id. at 127-28.

³⁹ Id. at 128-29.

⁴⁰ Id. at 124. The majority calls this position "perplexing" and its reasoning "unfounded." Id. at 116 n.9.

⁴¹ Id. at 128-29.

⁴² See Wis. Stat. § 103.465.

⁴³ See, e.g., Van Zeeland, 84 Wis. 2d at 219-20 (citing Restatement (Second) of Contracts § 330 cmt. g (Tentative Draft No. 12, 1977)).

⁴⁴ Tatge, 219 Wis. 2d at 124-25.

⁴⁵ Id. at 125.

⁴⁶ Restrictive covenants are prima facie suspect; they must withstand close scrutiny to be considered "reasonable"; they will not be construed to extend beyond their proper import or further than the language of the contract absolutely requires; and they are to be construed in favor of the employee. Streiff, 118 Wis. 2d at 611 (citations omitted).

⁴⁷ The employer must prove that the covenant: 1) is necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; 2) provides a reasonable time limitation; 3) provides a reasonable territorial limit; 4) is not harsh or oppressive as to the employee; and 5) is not contrary to public policy. Chuckwagon Catering Inc. v. Raduege, 88 Wis. 2d 740, 751, 277 N.W.2d 787 (1979).

⁴⁸ See, e.g., Van Zeeland, 84 Wis. 2d at 216-28.

⁴⁹ 1) The extent to which the information sought to be protected is vital to the employer's ability to conduct its business; 2) the extent to which the employee had access to that information; and 3) the extent to which such information could be obtained through other sources. Rollins Burdick Hunter of Wisconsin Inc. v. Hamilton, 101 Wis. 2d 460, 470, 304 N.W.2d 752 (1981).

⁵⁰ The dissent even acknowledged that under the facts presented in Tatge there was some doubt about the legality of the nondisclosure agreement at issue, which of course was being reviewed without any operative facts as to what the employer sought to protect. Tatge, 219 Wis. 2d at 126 n.3.

⁵¹ Id. at 116 n.9.