Non-Compete Decision Favors Employers

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On July 13, the Wisconsin Court of Appeals gave employers another victory in the realm of non-compete agreements. Just one year ago, the Wisconsin Supreme Court interpreted Wisconsin’s restrictive covenant statute in a manner favorable to employers. The court of appeals has followed suit with a decision that Wisconsin’s non-compete statute does not apply to restrictive covenants contained in stock option agreements that are not inextricably tied to the employment relationship. That means the restrictive covenants contained in these agreements are subject to the common law’s rule of reason, rather than the stricter non-compete statute.

Keep in mind that this decision may not be the final word on this matter. It can be appealed to the Wisconsin Supreme Court. If the Supreme Court agrees to review the matter, the decision could be overturned or changed.

What does this mean to employers?
Employers who have legitimate protectable interests should continue to use restrictive covenant agreements that conform to the requirements of Wisconsin’s non-compete statute, preferably from the start of the employment relationship. Employers who offer stock option agreements with restrictive covenants post-employment should also review these agreements to maximize the potential benefits of this decision.

Employers should take note of five key issues raised by the Court of Appeals decision:
1.    The company did not offer the employee the opportunity to purchase stock in its parent company with the intention of forcing him to accept the agreement or face termination. The fact that he could have refused the offer without losing his job removed any bargaining advantage the company would otherwise have. For this reason, courts will likely continue to subject agreements that require acceptance of restrictive covenants as a condition of employment to the requirements of Wisconsin’s non-compete statute.

2.    The court may have been more willing to enforce the stock option agreement because of this individual’s status as a key employee. Although it is possible to offer stock option agreements containing restrictive covenants to all employees, employers should tailor the restrictive covenants so that they are not overly burdensome for lower-level employees.

3.    The court also focused on the fact that the stock option agreement did not restrict the employee’s ability to work with the company’s competitors, but it did not rule out the possibility of incorporating such a restriction into a similar agreement. Before including such a restriction into a post-employment stock option agreement, employers should carefully weigh the risks that a later court might apply, complying with requirements of Wisconsin’s non-compete statute.

4.    The court of appeals did not address the fact that the non-disclosure provision had no time limitation. Restrictive covenant agreements, at least those subject to Wisconsin’s non-compete statute, must contain reasonable time limitations. Despite the court’s willingness to uphold this particular provision, it is still appropriate to include a reasonable time limitation even if they are part of a stock option agreement. Employers should consult with an attorney to determine the appropriate time limitations for any particular situation.

5.    Finally, employers should also not assume they can simply offer an employee one share of company stock to avoid the strict requirements of the non-compete statute. Restrictive covenants are always analyzed under the totality of the circumstances standard and must be supported by adequate consideration. Consequently, employers should carefully consider the circumstances under which they offer restrictive covenants to each employee and the adequacy of the consideration for accepting the restrictions.

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