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:

1. 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;
2. providing a summary of the majority and dissenting opinions in this important case; and
3. 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

CLE Books State Bar book covers restrictive covenants Case Law Tatge v. Chambers & Owen Inc. Hausman v. St. Croix Care Center Inc.

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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