Are Non-Competition Agreements Always Enforceable?

Julia Potter | 02.18.16

Many Wisconsin employers have new hires sign non-competition agreements to protect confidential information and valuable customer lists. Fewer employers know that when courts are deciding whether to enforce such agreements, they do not treat these agreements just like any other contract.

In Wisconsin, the enforceability of covenants not to compete (also called ​“non-compete clauses” or ​“non-competition agreements”) is governed by Section 103.465 of the Wisconsin Statutes. This statute provides that such agreements between employees and employers are ​“lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer.” Wisconsin courts have interpreted Section 103.465 as imposing a five-part test for the enforceability of non-compete agreements:

1. The agreement must be necessary for the protection of the employer. This means that an employer must have a protected interest, most commonly customer goodwill or confidential information, that justifies the restriction imposed on a former employee’s activity.
2. The agreement must contain a reasonable time limit. There is no hard and fast rule about how long is ​“reasonable” because courts look to the facts and circumstances of each individual case, but two years has emerged as a rule of thumb.
3. The agreement must provide a reasonable territorial limit. The territorial limit is often expressed in terms of geographic limitations (e.g., within Dane County).
4. The agreement must not be harsh or oppressive as to the employee. Courts consider factors like the employee’s age, education, and general economic conditions to ensure that the non-compete agreement will not make it unreasonably difficult for an employee to get another job that makes use of his or her particular skills.
5. The agreement must not be contrary to public policy. This final factor is rarely determinative, but courts may consider whether the non-compete agreement would create a monopoly, or whether it would prevent an employee from taking a job in an area in which there is a shortage of qualified workers.

See Lakeside Oil Co. v. Slutsky, 8 Wis. 2d 157 (1959); Star Direct, Inc. v. Dal Pra, 319 Wis. 2d 274 (2009).

When a non-competition agreement is challenged in court, it is the employer who has the burden of proving that the agreement is reasonable. Because these agreements restrict free-market competition, courts ​“regard them with suspicion” and scrutinize them carefully, construing them narrowly and in the favor of the employee. If any part of the agreement fails the five-part test for reasonableness, the court is empowered to declare the entire agreement unenforceable.

Any business that is considering making use of non-compete agreements would be well advised to avoid a ​“one-size-fits-all” approach. Instead, it is worth taking the time to think carefully about your industry and the legitimate business interests the agreement is designed to protect, and to tailor its terms, including the time and territorial limit, as narrowly as possible to meet those interests in a way a court would deem ​“reasonable.”

• Contracts