Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Wisconsin

Wisconsin law permits restrictive covenants as long as the terms are reasonable and necessary to protect certain business interests of the employer such as customer relations, trade secrets or confidential information. Factors considered when determining reasonableness include whether the employer uses such agreements in a systematic manner, the percentage of the employer’s customers with whom the employee had contact, and the restrictions placed on time, territory and activity of the former employee.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Wisconsin courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. As to non-competition agreements signed after employment has begun, the Wisconsin Supreme Court has stated that the question of consideration is to be determined based on the facts of each case.  They will look for evidence that both parties intended to be bound by the contract.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it will invalidate the entire agreement because the statute states:

“Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant … as would be a reasonable restraint.”

Examples of non-compete agreements that Wisconsin courts have found to be reasonable include:

• A 1-year restriction against an insurance agent from soliciting the former employer’s policyholders in his district because those policyholders constituted only 5% of all insurance policyholders in the area.
• A 1-year restriction against the former employee of a pain-management clinic from competing within 20 miles of the clinic even though most of the patients lived within 5-7 miles because advertising generated numerous patients from within a 20-mile radius.
• A 50-mile radius restriction against a physician where 62% of the former employer’s business originated.

The courts have found the following restrictive covenants unreasonable:

• An 18-month restriction against soliciting actual and potential customers with no geographic limitation.
• A 2-year, 39-county restriction against a former salesperson of liquid cattle feed because it severely limited the employee’s ability to earn a living.
• A 3-year restriction against a former employee of a nationwide joint, sealant and concrete restoration service from competing in any market the former employer had performed work in during the three years prior to the employee’s termination.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.