Quirky Question #262, An update on Wisconsin non-competes

Question:

We are a Wisconsin employer that recently lost a number of employees to a direct competitor in our region.  As a result, we are now in the process of having all of our employees sign non-compete agreements prohibiting them from working for a competitor for a limited period of time after leaving our company.  Assuming that the non-compete agreement is reasonable, we are wondering whether we need to provide any additional compensation to each employee, or if simply having them sign the agreement on the condition that if they do not sign, we will terminate their employment, is sufficient.  We remember that you mentioned that Wisconsin law was unsettled in this area and are wondering if there have been any recent updates that could help us in our decision.

Answer:  By Kevin Ha and Joel O’Malley

Kevin Ha

Joe O’Malley

Last year, a Wisconsin employer asked us this same question about whether it would could require its current employees to sign non-compete agreements as a condition of continued employment.  The concern raised was the same as yours: whether continued employment was sufficient consideration under Wisconsin law to support a non-compete agreement or whether the employer might need to provide additional consideration aside from continued employment (such as a bonus or additional compensation) in order to support the non-compete agreement.  At the time, the law in Wisconsin was unclear and the Wisconsin Court of Appeals had certified the question for review to the Wisconsin Supreme Court.  We recommended that Wisconsin employers continue to provide additional consideration when having current employees sign non-compete agreements in order to ensure enforceability, at least until the Wisconsin Supreme Court definitively addressed the issue.  The Wisconsin Supreme Court finally addressed this issue recently in Runzheimer International, Ltd. v. Friedlen.

By way of background, Runzheimer was a lawsuit brought by an employer alleging that a former employee was violating his non-compete agreement.  In 2009, Runzeimer International required one of its employees, David Friedlen, to sign a non-compete agreement.  Friedlen had been employed by Runzheimer for nearly 20 years as an at-will employee.  Signing the non-compete agreement was required as a condition of his continued employment with the company, and no other consideration or benefit was provided other than the opportunity to continue working for Runzheimer as an at-will employee.  In 2011 – two years after Friedlen signed the non-compete agreement- his employment at Runzheimer was terminated.  Friedlen then began working for a competing company.  Soon after, Runzheimer brought suit seeking to enforce the terms of the non-compete agreement.  Friedlen moved to dismiss, arguing that the non-compete agreement was not enforceable because it lacked sufficient consideration, since the only consideration he had received was the opportunity to continue working as an at-will employee.

A Wisconsin circuit court granted Friedlen’s motion to dismiss, reasoning that continued employment was insufficient consideration to support a non-compete agreement since the promise of continued employment was illusory.  That is, in theory, an employer could have an employee sign a non-compete agreement and then immediately turn around and terminate that same employee.  On appeal, the Wisconsin Court of Appeals declined to address the issue, and instead certified the question to the Wisconsin Supreme Court, asking the Court whether “consideration in addition to continued employment [is] required to support a covenant not to compete entered into by an existing at-will employee.”

The Wisconsin Supreme Court held that continued employment is sufficient consideration to support a non-compete agreement.  While it is true that an employer could terminate an employee soon after signing a non-compete agreement, the fact that the employer was giving up the legal right to terminate the employee at that time and for that reason was sufficient to enforce a non-compete agreement.  The Court also explained that, in the event an employer was duplicitous, an employee could allege misrepresentation or breach of the covenant of good faith and fair dealing, and seek to void the terms of the agreement.  The Court reasoned that this would provide employees with sufficient protection from an employer that seeks out a non-compete agreement and then terminates the employee soon after.  In short, Wisconsin law now makes clear that a non-compete agreement supported only by continued at-will employment is generally enforceable.  Thus, you should be able to require your current employees to sign non-compete agreements as a condition of continued employment.

Wisconsin employers should take away the following practical implications in light of this decision:

• Under Wisconsin law, continued employment is sufficient consideration to support a non-compete agreement. However, employers should take care to make it explicitly clear in writing that signing the agreement is a condition of continued employment in order to avoid any issues that the agreement was not premised on continued at-will employment.
• This case did not change the law in Wisconsin regarding non-compete agreements entered into at the start of employment. Non-compete agreements entered into at the start of employment are still supported by adequate consideration based solely on the offer of employment.
• Employers should be cautious about terminating a current employee soon after he or she signs a non-compete agreement. While the court did not set any bright line rule as to how long an employer must continue an employ an employee after signing a non-compete agreement in order for it to be valid, the Wisconsin Supreme Court did note that employees could seek to void a non-compete agreement on the basis of misrepresentation or breach of the covenant of good faith and fair dealing. As a result, Wisconsin employers could consider providing extra consideration if there is a high probability that the employment relationship will end soon after signing a non-compete agreement.
• Wisconsin employers with operations in other states should be aware that state law varies as to whether continued at-will employment constitutes sufficient consideration for a non-compete agreement.  Some states like Minnesota require additional consideration in order to support a non-compete agreement entered into after the start of employment.  Other states like Illinois set a bright line rule that a non-compete agreement requires two years of continued employment in order to be enforceable.  Employers should consult the advice of legal counsel prior to entering into a non-compete agreement with new or current employees.