LRB-1822/1
GMM:sac&kjf:jf
2015 - 2016 LEGISLATURE
March 12, 2015 - Introduced by Representatives Rohrkaste, Knodl, Gannon and
Murphy, cosponsored by Senator Farrow. Referred to Committee on Labor.
AB91,1,2
1An Act to repeal and recreate 103.465 of the statutes;
relating to: restrictive
2covenants in employment and agency relationships.
Analysis by the Legislative Reference Bureau
Current law
Covenants not to compete. Under current law, a covenant by an employee or
agent not to compete with his or her employer or principal during the term of the
employment or agency, or after the termination of that employment or agency, within
a specified territory and during a specified time (covenant not to compete) is lawful
and enforceable only if the restrictions imposed are reasonably necessary for the
protection of the employer or principal. Currently, any covenant not to compete that
imposes an unreasonable restraint on an employee or agent is illegal, void, and
unenforceable even as to any part of the covenant that would be a reasonable
restraint.
The bill
Restrictive covenants. This bill repeals current law relating to covenants not
to compete and instead creates a new provision relating to restrictive covenants in
employment and agency relationships. Under the bill, "restrictive covenant" means
an agreement that restricts or prohibits competition by an employee or agent of a
business or professional practice during the term, or after the termination, of the
employment or agency relationship, but does not include an agreement that does not
restrict or prohibit competition by an employee or agent of a business or professional
practice, including any of the following:
1. An agreement restricting or prohibiting an employee or agent from
disclosing business or professional information that is valuable and confidential to
the employer or principal, but that is not valuable and confidential to a competitor
of the employer or principal or useful to the employee, the agent, or a competitor in
obtaining a competitive advantage over the employer or principal.
2. An agreement restricting or prohibiting the solicitation or hiring of an
employee or agent who is not privy to valuable and confidential business or
professional information of the business or professional practice, who does not have
substantial relationships with existing or prospective customers, patients, or clients
of the business or professional practice, and who has not received unique,
extraordinary, or specialized training provided by the business or professional
practice or otherwise obtained as a result of the employment or agency relationship
with the business or professional practice.
Reasonableness and valid consideration. Specifically, the bill provides
that a restrictive covenant is enforceable if the restrictive covenant is reasonable as
to time, area, and line of business and is supported by valid consideration (generally,
any payment or other thing of value given in exchange for entering into the
restrictive covenant). The bill requires a court to determine that a restrictive
covenant is supported by valid consideration if the court finds that any of the
following situations exists:
1. In the case of a restrictive covenant that was executed at, or within a
reasonable time after, the commencement of the employment or agency relationship,
that the offer of employment or agency, or of continuation of the employment or
agency relationship, was contingent on the execution of the restrictive covenant.
2. In the case of a restrictive covenant that was executed at or about the time
of termination of the employment or agency relationship, that the restrictive
covenant was supported by valid consideration acceptable to the employee or agent
above and beyond any compensation due the employee or agent and any
consideration provided for any other covenants, releases, or promises made by the
employee or agent.
3. In the case of a restrictive covenant that was executed at any other time, that
at or about the time of execution of the restrictive covenant the employee or agent
received in connection with the execution of the restrictive covenant valid
consideration, including a) monetary consideration; b) a bonus or incentive payment;
c) additional paid time off; d) access to a bonus or other incentive program or pool
through which the employee or agent receives additional compensation; e)
continuation of the employment or agency relationship at a rate of pay and benefits
that is equal to or greater than the pay and benefits received before the execution of
the restrictive covenant, if continuation of the employment or agency relationship is
contingent on execution of the restrictive covenant; or f) a promise to provide any
payment or other thing of value during the term of the restrictive covenant as
specified in a written agreement setting forth the circumstances under which that
payment or other thing of value will be provided, including a promise to provide paid
leave at the end of the employment relationship (commonly referred to in the
business community as "garden leave").
Legitimate business interest and reasonable necessity. The bill also
provides that a restrictive covenant is enforceable if the person seeking enforcement
of the restrictive covenant proves the existence of a legitimate business interest
justifying the restrictive covenant and that the restriction or prohibition on
competition specified in the restrictive covenant (restraint) is reasonably necessary
to protect that legitimate business interest.
The bill defines "legitimate business interest" to include: 1) a trade secret or
any other business or professional information that is valuable and confidential but
that does not qualify as a trade secret; 2) substantial relationships with specific
existing or prospective customers, patients, or clients; 3) customer, patient, or client
goodwill associated with a specific geographic location, a specific marketing or trade
area, or an ongoing business or professional practice; or 4) unique, extraordinary, or
specialized training provided by a business or professional practice or otherwise
obtained as a result of an employment or agency relationship with a business or
professional practice.
In determining whether a restraint is overbroad, overlong, or otherwise not
reasonably necessary to protect the legitimate business interests justifying the
restrictive covenant and, if so, how to modify the restraint so that the restrictive
covenant provides only such restraint as is reasonably necessary to protect those
interests, the bill requires a court to consider all of the following:
1. The duration, scope, and nature of the relationship between the person
seeking enforcement of the restrictive covenant and the person against whom
enforcement is sought prior to the commencement of the enforcement action.
2. The duration, scope, and nature of the potential harm to those legitimate
business interests that might result from a violation of the restrictive covenant.
3. Any conduct by the person against whom enforcement of the restrictive
covenant is sought, beginning on the date of execution of the restrictive covenant,
that is relevant to a determination of the proper duration, scope, and nature of the
restraint and to enforcement of the restraint.
4. Evidence of common practice with respect to the duration, scope, and nature
of restraints in the specific industry of the person seeking enforcement of the
restrictive covenant.
Rebuttable presumptions. In addition, the bill requires a court, in
determining the reasonableness of a restrictive covenant, to apply the following
rebuttable presumptions:
1. In the case of a restrictive covenant that applies after the termination of an
employment or agency relationship, that a restraint of six months or less is presumed
to be reasonable and a restraint of longer than two years is presumed to be
unreasonable.
2. In the case of a restrictive covenant the consideration for which consists of
a promise of garden leave during the term of the restrictive covenant, that the
restrictive covenant is presumed to be reasonable.
Third-party beneficiaries, assignees, and successors. Under the bill,
subject to certain conditions, a court may not refuse to enforce a restrictive covenant
on the ground that the person seeking enforcement of the restrictive covenant is a
third-party beneficiary of the restrictive covenant or is an assignee of or a successor
to a party to the restrictive covenant.
Enforcement considerations. The bill also requires a court, in determining
the enforceability of a restrictive covenant, to consider the effect of enforcement of
the restrictive covenant on the public health, safety, and welfare and to consider all
pertinent legal and equitable defenses, except that the court may not consider any
individualized economic or other hardship that might be caused to the person against
whom enforcement is sought, unless that person shows that exceptional personal
circumstances exist, and the court may consider as a defense to the enforcement of
the restrictive covenant the fact that the person seeking enforcement is no longer in
business in the area or line of business that is the subject of the action to enforce the
restrictive covenant only if the discontinuance of business is not the result of a
violation of the restrictive covenant.
Construction of restrictive covenants. Moreover, the bill requires a court
to construe a restrictive covenant in favor of providing reasonable protection to all
legitimate business interests established by the person seeking enforcement of the
restrictive covenant and not to employ any rule of contractual interpretation that
requires a restrictive covenant to be construed narrowly, against the restraint, or
against the drafter of the restrictive covenant.
Public policy. Further, the bill prohibits a court from refusing to enforce an
otherwise enforceable restrictive covenant on the ground that the restrictive
covenant violates public policy unless the court specifically articulates the public
policy and finds that the public policy substantially outweighs the policy underlying
the bill and the need to protect the legitimate business interests established by the
person seeking enforcement of the restraint.
Disputes resolved by agreement. Additionally, the bill permits parties that
reach an agreement resolving a pending or threatened action for enforcement of a
restrictive covenant to file that agreement with the court and request the court to
adopt the agreement as the resolution of the parties' dispute. If the court finds that
the agreement is reasonable and consistent with the policy underlying the bill, the
court may incorporate the terms of the agreement into an order resolving the action.
Remedies; costs and attorney fees. Finally, the bill provides: 1) that if a court
determines that a restrictive covenant is enforceable, the court must enforce the
restrictive covenant by any appropriate and effective remedy, including a temporary
or permanent injunction (injunctive relief); 2) that the court may not require a party
seeking enforcement of a restrictive covenant to post a bond as a condition to
obtaining injunctive relief, but may order that party to provide to the party enjoined
security against any damages that he or she may sustain by reason of the injunctive
relief in an amount that is sufficient to protect his or her interests; 3) that if a
restrictive covenant contains a contractual provision authorizing the award of costs
and attorney fees, a court must award costs and attorney fees in accordance with that
contractual provision; and 4) that, in the absence of a contractual provision
authorizing the award of costs and attorney fees, a court may award costs and
attorney fees to the prevailing party.
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:
AB91,1
1Section
1. 103.465 of the statutes is repealed and recreated to read:
AB91,5,3
2103.465 Restrictive covenants in employment and agency
3relationships. (1) Definitions. In this section:
AB91,5,74
(a) "Garden leave" means paid leave granted to an employee from the date on
5which the employer receives notice of resignation of the employee from the
6employment relationship or provides notice to the employee of termination of the
7employment relationship to the date on which the employment relationship ends.
AB91,5,88
(b) "Legitimate business interest" includes all of the following:
AB91,5,119
1. A trade secret, as defined in s. 134.90 (1) (c), or any other business or
10professional information that is valuable and confidential to a business or
11professional practice but that does not qualify as a trade secret.
AB91,5,1312
2. Substantial relationships with specific existing or prospective customers,
13patients, or clients of a business or professional practice.
AB91,5,1714
3. Customer, patient, or client goodwill associated with a specific geographic
15location; a specific marketing or trade area; or an ongoing business or professional
16practice by way of a trade name, trademark, service mark, or trade dress that
17identifies a good or service with the business or professional practice.
AB91,5,2018
4. Unique, extraordinary, or specialized training provided by a business or
19professional practice or obtained as a result of an employment or agency relationship
20with a business or professional practice.
AB91,6,2
1(c) "Posttermination restrictive covenant" means a restrictive covenant that
2applies after termination of an employment or agency relationship.
AB91,6,43
(d) "Restraint" means a restriction on or prohibition against competition
4provided in a restrictive covenant.
AB91,6,105
(e) "Restrictive covenant" means an agreement that restricts or prohibits
6competition by an employee or agent of a business or professional practice during the
7term of the employment or agency relationship or after the termination of that
8relationship. "Restrictive covenant" does not include an agreement that does not
9restrict or prohibit competition by an employee or agent of a business or professional
10practice, including any of the following:
AB91,6,1511
1. An agreement restricting or prohibiting an employee or agent from
12disclosing business or professional information that is valuable and confidential to
13the employer or principal, but that is not valuable and confidential to a competitor
14of the employer or principal or useful to the employee, the agent, or a competitor in
15obtaining a competitive advantage over the employer or principal.
AB91,6,2216
2. An agreement restricting or prohibiting the solicitation or hiring of an
17employee or agent who is not privy to valuable and confidential business or
18professional information of the business or professional practice, who does not have
19substantial relationships with existing or prospective customers, patients, or clients,
20and who has not received unique, extraordinary, or specialized training provided by
21the business or professional practice or otherwise obtained as a result of the
22employment or agency relationship with the business or professional practice.
AB91,7,2
23(2) Enforcement of restrictive covenants. (a)
Reasonableness and valid
24consideration. Subject to sub. (3), a restrictive covenant is enforceable if the
1restrictive covenant is reasonable as to time, area, and line of business and is
2supported by valid consideration, as determined under par. (b).
AB91,7,63
(b)
Determination of valid consideration. In any action for the enforcement of
4a restrictive covenant, a court shall determine that the restrictive covenant is
5supported by valid consideration if the court finds that any of the following situations
6exists:
AB91,7,107
1. That the restrictive covenant was executed at, or within a reasonable time
8after, the commencement of the employment or agency relationship and that the offer
9of employment or agency, or of continuation of the employment or agency
10relationship, was contingent on the execution of the restrictive covenant.
AB91,7,1511
2. That the restrictive covenant was executed after the time frame specified in
12subd. 1., but before the time frame specified in subd. 3., and that at or about the time
13of execution of the restrictive covenant the employee or agent received in connection
14with the execution of the restrictive covenant any payment or other thing of value,
15including any of the following:
AB91,7,1616
a. Monetary consideration.
AB91,7,1717
b. A bonus or incentive payment.
AB91,7,2118
c. In the case of an employee, additional paid time off, if the employee
19acknowledged at the time of execution of the restrictive covenant that the amount
20of additional paid time off is adequate consideration to support the restrictive
21covenant.
AB91,7,2522
d. Access to a bonus or other incentive program or pool through which the
23employee or agent receives additional compensation, if the employee or agent would
24not have had access to the program had he or she not executed the restrictive
25covenant.
AB91,8,4
1e. Continuation of the employment or agency relationship at a rate of pay and
2benefits that is equal to or greater than the pay and benefits received before the
3execution of the restrictive covenant, if continuation of the employment or agency
4relationship is contingent on execution of the restrictive covenant.
AB91,8,105
f. A promise made at the time of execution of the restrictive covenant to provide
6any payment or other thing of value during the term of the restrictive covenant as
7specified in a written agreement setting forth the circumstances under which that
8payment or other thing of value will be provided, if the employer or principal fulfills
9that promise when those circumstances occur. This subd. 2. f. includes a promise to
10provide garden leave during the term of the restrictive covenant.
AB91,8,1611
3. That the restrictive covenant was executed at or about the time of
12termination of the employment or agency relationship and that the restrictive
13covenant was supported by valid consideration acceptable to the employee or agent
14above and beyond any compensation due the employee or agent and any
15consideration provided for any other covenants, releases, or promises made by the
16employee or agent.
AB91,8,2017
(c)
Legitimate business interest. In any action for the enforcement of a
18restrictive covenant, a court may enforce the restrictive covenant if the restrictive
19covenant is in writing and signed by the person against whom enforcement is sought
20and the person seeking enforcement proves all of the following:
AB91,8,2321
1. The existence of one or more legitimate business interests justifying the
22restrictive covenant. Any restrictive covenant not supported by a legitimate
23business interest is illegal, void, and unenforceable.
AB91,9,824
2. That the restraint specified in the restrictive covenant is reasonably
25necessary to protect the legitimate business interest justifying the restrictive
1covenant. If the person seeking enforcement of the restrictive covenant establishes
2a prima facie case that the restraint is reasonably necessary, the person against
3whom enforcement is sought has the burden of establishing that the restraint is
4overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate
5business interest established by the person seeking enforcement. If the restraint is
6overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate
7business interest, the court shall modify the restraint and grant only such relief as
8is reasonably necessary to protect that legitimate business interest.
AB91,9,149
(d)
Determination of reasonable necessity of restraint. In determining whether
10a restraint specified in a restrictive covenant is overbroad, overlong, or otherwise not
11reasonably necessary to protect the legitimate business interests justifying the
12restrictive covenant and, if so, how to modify the restraint so that the restrictive
13covenant provides only such restraint as is reasonably necessary to protect those
14interests, a court shall consider all of the following:
AB91,9,1715
1. The duration, scope, and nature of the relationship between the person
16seeking enforcement of the restrictive covenant and the person against whom
17enforcement is sought prior to the commencement of the enforcement action.
AB91,9,1918
2. The duration, scope, and nature of the potential harm to those legitimate
19business interests that might result from a violation of the restrictive covenant.
AB91,9,2320
3. Any conduct by the person against whom enforcement of the restrictive
21covenant is sought, beginning on the date of execution of the restrictive covenant,
22that is relevant to a determination of the proper duration, scope, and nature of the
23restraint and to enforcement of the restraint.
AB91,10,3
14. Evidence of common practice with respect to the duration, scope, and nature
2of restraints in the specific industry of the person seeking enforcement of the
3restrictive covenant.
AB91,10,54
(e)
Rebuttable presumptions. In determining the reasonableness of a
5restrictive covenant, a court shall apply the following rebuttable presumptions:
AB91,10,136
1. In the case of a posttermination restrictive covenant, the court shall presume
7a restraint of 6 months or less from the termination of the employment or agency
8relationship to be reasonable and a restraint of longer than 2 years from the
9termination of the employment or agency relationship to be unreasonable. This
10subdivision does not preclude a court from finding that a restraint of longer than 2
11years from the termination of the employment or agency relationship is reasonable
12if the court determines that clear and convincing evidence exists to support that
13finding.