Wisconsin Supreme Court Ruling Could Invalidate Your Non-Compete Agreements

November 3, 2014

Employers often require employees to enter into a restrictive covenant, commonly referred to as a “non-compete agreement,” in an effort to protect key business relationships and confidential information. This may be done at the start of employment in exchange for being hired or, as often happens, an employer may present a non-compete agreement to a current employee in exchange for the opportunity to continue his or her employment. However, a case currently pending in the Wisconsin Supreme Court could jeopardize the validity of non-compete agreements signed by current employees in exchange for continued employment.

Like any contract, a non-compete agreement requires consideration (i.e., something of value given by each party). Wisconsin has long held that the opportunity to work at the start of employment satisfies this requirement as the employee is hired in exchange for his or her agreement to not compete when the employment relationship terminates. The question facing the Supreme Court is whether continued employment also satisfies the requirement. Specifically, in Runzheimer International, Ltd. v. David Friedlen, Appeal No. 2013-AP-1392, the Court is asked to decide whether a promise of continued at-will employment is sufficient to support a non-compete agreement entered into with a current employee.

Most employment relationships in Wisconsin are on an at-will basis such that the employer or employee can legally terminate the employment relationship at any time, and for any reason (absent discrimination or other foul play). As a result, an employer might legally fire the existing employee one second after entering into a non-compete agreement, thereby giving the employer the benefit of the non-compete provisions without the employee receiving any real “continued employment” in exchange for signing. In light of that possibility, the issue facing the Court is whether the employer should have to provide something more, which is referred to as “additional consideration.”

At oral arguments on October 1, 2014, some of the Justices asked whether a rule requiring “additional consideration” might be an unworkable standard from a practical standpoint. What is “additional,” and where is the line drawn? Is a $1,000 bonus sufficient? Is a $10 bonus sufficient? What about additional personal days or enhanced benefits? Perhaps it matters what industry or experience level the employee has, but how is that determined?  Further, the parties noted that the “additional consideration” rule might create an ill-advised incentive to fire an existing employee simply to re-hire him or her to create a valid non-compete agreement under a technically new employment relationship.

Regardless of the outcome in Runzheimer, non-compete agreements entered into at the start of employment do not appear to be impacted. However, if the Court rules in favor of the employee, employers in Wisconsin will have to look at the circumstances under which they entered into non-compete agreements with their current employees to determine whether anything of additional value was given at the time an agreement was signed. If not, employers with significant interests to protect should take steps to meet the potential new standard.

If you have any questions about how the information in this article may affect you or your business, please contact Peter Richter at prichter@stroudlaw.com or (608) 257‑2281 or your Stroud attorney. 

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.