Viewpoint
Can employers force employees to sign noncompete agreements as a
condition of their employment?
The answer depends upon whether Wisconsin's restrictive covenant
statute, section 103.465, properly allocates the risks associated with
such agreements and provides enough protection for employees.
By Michael J. Cohen & William T.
Stuart
Recently, the Wisconsin Supreme Court has had an
opportunity to analyze whether an employer can force an employee to sign
a noncompete agreement as a condition of employment. In Tatge v. Chambers & Owen
Inc.1 the court implicitly held
that section
103.465 of the Wisconsin Statutes properly allocates the respective
risks of the employer and employee in signing restrictive covenants and
that an employer can force an employee to sign a noncompete as a
condition of continued employment.2
Emphasizing the significant distinction between an employee's execution
of a restrictive covenant and the employer's enforcement of the
agreement, the court, in a 5-2 decision, held that section 103.465 does
not prevent an employer from requiring its employees to sign
even allegedly unreasonable restrictive covenants.
The dissent in Tatge urged that section 103.465 encompassed
a public policy consideration that requires the recognition of a
wrongful discharge claim if the court finds the agreement is in fact
unenforceable under the requirements of the statute.3 In arriving at this position, the dissent
focused on the risks placed upon an employee faced with a request by an
employer to execute a restrictive covenant and concluded that the
fairness considerations set forth in the language and legislative
history of section 103.465 required that nearly all of the risks
relating to the legality of the agreement should fall on the
employer.
This article examines this dynamic debate between the majority and
dissenting opinion, that could arguably provide a foundation for future
legislative enactments or additional judicial action, by:
- recounting the historical development of Wisconsin's judicially
created exception to the at-will doctrine, which provides the context
for the court's decision in Tatge;
- providing a summary of the majority and dissenting opinions in this
important case; and
- explaining why the authors believe that section 103.465 does in fact
properly allocate the risks associated with restrictive agreements
between an employer and employee.
Brockmeyer and its progeny
A narrow exception to the employment at-will doctrine. The employment
at-will doctrine is deeply rooted and well established in this state.4 It dictates that where employment is for an
indefinite term, an employer may discharge an employee "for good cause,
for no cause, or even for cause morally wrong, without being thereby
guilty of legal wrong."5 However,
recognizing "the need to protect workers who are wrongfully discharged
under circumstances not covered by any legislation or whose job security
is not safeguarded by a collective bargaining agreement or civil service
regulations," the court in Brockmeyer created a "narrow public
policy exception" to the employment at-will doctrine.6 The exception provides that "an employee has
a cause of action for wrongful discharge when the discharge is contrary
to a fundamental and well-defined public policy as evidenced by existing
law."7 The court in Brockmeyer
pronounced that the creation of a narrowly circumscribed public policy
exception "properly balances the interests of employees, employers and
the public."8 The Brockmeyer court
instructed the lower courts to proceed cautiously when making public
policy determinations and pronounced that "no employer should be subject
to suit merely because a discharged employee's conduct was praiseworthy
or because the public may have derived some benefit from it."9
Since Brockmeyer, the Wisconsin Supreme Court has modified
the public policy exception to the employment at-will doctrine on
limited occasions. In Wandry v. Bull's Eye Credit Union10 the court extended Brockmeyer's wrongful
discharge claim to include the spirit, as well as the letter of a
statutory provision.11 More specifically,
the court held that Brockmeyer does not require that a discharge
expressly violate the terms of a statute to constitute a claim for
wrongful discharge; it requires "only that the discharge contravene the
public policy evidenced in the statute."12
In Bushko v. Miller Brewing Co.13
the court refused to expand Brockmeyer's narrow cause of action
for wrongful discharge to include the discharge of an employee for
complaining about public policy matters, and expressly limited the scope
of the Brockmeyer exception to situations where the employee is
terminated for refusing a command, instruction, or request of the
employer to violate public policy as established by existing law.14 Most recently, the court expanded the
public policy exception "beyond the four corners of Bushko" in
Hausman v. St. Croix Care Center
Inc.15 to include situations where
an employee is terminated for complying with an affirmative obligation
under the law, regardless of whether the employer has made an initial
request, command, or instruction that the reporting obligation be
violated.16 In Hausman the court
held that an employee could assert a wrongful discharge claim for
complying with the affirmative obligation of a nursing home employee to
prevent abuse or neglect of residents.17
It is against this backdrop that the court in Tatge
addressed whether section 103.465 evidences a fundamental and
well-defined public policy that would support a claim for wrongful
discharge in Wisconsin.
Tatge
Requiring employees to sign a restrictive covenant does not
violate public policy. After 12 years of employment and several
changes to his job duties and compensation arrangement, Tatge, an
at-will employee,18 was asked by his
employer, Chambers & Owen, to sign a "Management Agreement." The
Management Agreement contained both nondisclosure and noncompete
provisions. 19 Tatge, in an apparent effort
to better his compensation arrangement, objected to the agreement and
discussed it with the company's president, Owen.20 Tatge contended that Owen told him that
nothing would happen if he refused to sign the agreement and was further
told that his employment would be ongoing and terminable only for what
amounted to good cause. At a subsequent meeting, Tatge was told that he
would be terminated if he refused to sign the agreement and ultimately
was terminated when he refused to do so.21
Tatge subsequently filed suit against Chambers & Owen claiming
wrongful discharge, breach of contract, and three forms of fraudulent
misrepresentation (intentional, negligent, and strict liability).22 On joint motions for summary judgment, the
circuit court dismissed Tatge's wrongful discharge claim on the grounds
that the agreement did not violate section 103.465.23 The court of appeals affirmed, concluding,
inter alia, that an employer's discharge of an employee for
failing to sign a nondisclosure/noncompete agreement does not give rise
to a wrongful discharge claim.24
Tatge argued before the Wisconsin Supreme Court that section 103.465
evidences a fundamental and well-defined public policy that unreasonable
restraints, such as the restrictions that Chambers & Owen attempted
to foist upon him,25 not be placed upon
employees.26 Although the court never
reached the ultimate question of whether the restraints in the Chambers
& Owen agreement were unreasonable, the court agreed that section
103.465 does in fact evidence a strong public policy against the
enforcement of trade restraints that are determined to be
unreasonable.27 The court parted company
with Tatge in his proposition that the statute evidences a public policy
against an employer's requirement that its employee sign a
nondisclosure/noncompete agreement that the employee considers
unreasonable.28
The court stated that the clear public policy of section 103.465 is
to protect the employee from complying with the terms of an
"unreasonable" restrictive covenant by rendering that covenant void and
unenforceable.29 Quoting the court of
appeals, the court reiterated that "[w]hen a restrictive covenant is
unreasonable, the public policy of Wisconsin is not to create a cause of
action, but to void the covenant." The court added that this "public
policy remains the same regardless of whether the agreement is
reasonable within the meaning of § 103.465." Therefore, the supreme
court concluded, although the statute does "evince a clear public policy
for this jurisdiction, Tatge has not identified a fundamental and
well-defined public policy sufficient to trigger the Brockmeyer
exception to employment-at-will."30
Citing prior precedent that holds the validity of a restrictive
covenant is to be established by an examination of the particular
circumstances that surround it - such as the specific information sought
to be protected, the length of the employee's employment, and the nature
of the competition - the court expressed a concern that if Tatge's
position was accepted, courts would be required to engage in a factual
intensive analysis of the "reasonableness" of a restrictive covenant
based on hypothetical facts before the employer has even sought to
enforce the allegedly unreasonable agreement.31 The court declined to adopt such a "dubious
and unpredictable approach."32
The court also expressed a concern over the potential ramifications
of Tatge's position. The court stated, "[w]ere we to apply the
Brockmeyer exception to the facts of this case, at-will
employees could indiscriminately decline to sign
nondisclosure/noncompete agreements which in their own minds are
'unreasonable,' and subsequently bring a wrongful discharge claim if
terminated for doing so."33 Again quoting
the court of appeals, the supreme court noted that "all restrictive
covenant cases would become wrongful discharge cases."34
In further support of its holding, the supreme court noted that Tatge
"gambles little by signing the agreement; in the event that Chambers
& Owen later sought to enforce the agreement, Tatge could challenge
it as unenforceable at that time."35 The
court highlighted the fact that section
104.465 imposes a heavy burden on the employer who seeks to enforce
a covenant not to compete because the statute renders the entire
covenant void if any portion of it is deemed "unreasonable."36 Recognizing the legislative history of the
statute, the court added that this burden was specifically imposed to
discourage "employers possessing bargaining power superior to that of
the employees" from insisting "upon unreasonable and excessive
restrictions, secure in the knowledge that the promise will be upheld in
part, if not if full."37
In the dissenting opinion, Chief Justice Abrahamson took issue with
the majority's assessment of the risks facing an employee when presented
with a restrictive covenant he or she believes is unreasonable, stating
that an employee is forced into a "lose-lose situation":
"If the employee refuses to sign the agreement, the employee risks
termination without any right to sue for wrongful discharge. If the
employee signs the agreement, the employee risks a lawsuit and
litigation expenses when he or she chooses to violate the agreement.
Alternatively, the employee who signs the agreement may feel compelled
to respect his or her contractual obligations (regardless of the
legality of the agreement), thereby forgoing other employment
opportunities in order to avoid litigation expenses. Moreover,
prospective employers may refuse to hire an employee who has signed a
nondisclosure agreement, regardless of their assessment of the legality
of the agreement, for fear of buying themselves a lawsuit."38
The dissent criticized the majority opinion for placing all the risk
on an employee in this setting even though the employer has drafted the
agreement and has superior bargaining power.39 According to the dissent, an employer
actually enforces an illegal restrictive covenant when it terminates an
employee for refusing to sign the agreement, not when the employer seeks
to enforce the agreement in court.40
Stressing the fairness considerations set forth in the statute's
language and legislative history, the dissent argued that the public
policy reflected in section 103.465 requires that an employer who
terminates the employment of an at-will employee on the basis of the
employee's refusal to sign a restrictive covenant be liable for wrongful
discharge if a court decides the agreement is unreasonable.41
Balancing risks: Section 103.465 is adequate. The
issue properly before the court in Tatge, as framed by
Brockmeyer and its progeny, was whether section 103.465 of the
Wisconsin Statutes evinces, by letter or "spirit," a fundamental and
well-defined public policy that is contrary to an employer's requirement
that an employee sign a noncompete or nondisclosure agreement. As
described above, the dissent in Tatge focused largely on the
risks placed upon an employee who is faced with the request to sign such
an agreement. In effect, the dissent argues that section 103.465 does
not adequately protect employees such as Tatge, who have assumed all of
the risks associated with execution of a restrictive agreement, and that
public policy requires the court to realign the equities by creating a
cause of action under these circumstances. Although appealing on its
face, this hypothesis does not appear to be particularly well
founded.
Contrary to the dissent's position, section 103.465 does in fact
place a substantial risk on an employer who is overly aggressive with
the restrictions in its noncompete and nondisclosure provisions: The
employer cannot protect its business interests through the agreement
even if other portions of the restriction are legitimate and
reasonable.42 Wisconsin courts have
regularly recognized the general principle that "post-employment
restraints are scrutinized with particular care because they are often
the product of unequal bargaining power and because the employee is
likely to give scant attention to the hardship he may later suffer
through the loss of livelihood."43 As
stressed by the dissent, this concern over unequal bargaining power led
to the Wisconsin Legislature's adoption of section 103.465.44 As documented by the dissent, the
legislator who was a moving force in obtaining the legislation wanted
the bill drafted to put the two contracting parties in more equal
bargaining positions, and to avoid giving "a green light" to employers
in writing agreements not to compete.45
In further recognition of the equities between the parties, Wisconsin
courts have adopted rigorous canons of construction for restrictive
covenants in employment contracts.46 In
addition, Wisconsin law places upon the employer a heavy burden in
establishing the reasonableness of these covenants.47 An employer attempting to enforce such an
agreement usually will be required to address public policy arguments
based upon encouraging employee mobility and the need for unrestrained
competition to further the welfare of the consumer and society in
general.48 In addition, Wisconsin courts
have determined that three additional factors must be considered in
determining the validity of nondisclosure provisions.49
Although overlooked by the dissent, the protections afforded by the
standards interpreting section 104.365 are available to the employee
whether the employee challenges the reasonableness of a restrictive
covenant in a wrongful discharge case, or whether the employee litigates
the issue post-termination in an enforcement action. As such, there is
no need to extend the breadth of section 104.365 to wrongful discharge
actions in an effort to provide greater protection for the employee.
![Cohen](/SiteCollectionImages/WisconsinLawyer/1999/05/cohen.jpg)
Michael J. Cohen ,
Marquette 1986, is a shareholder in the Milwaukee law firm of Meissner
Tierney Fisher & Nichols S.C. His practice emphasis is business,
environmental, and insurance coverage litigation.
![Stuart](/SiteCollectionImages/WisconsinLawyer/1999/05/stuart.jpg)
William T. Stuart , Marquette 1997, is an associate
with Meissner Tierney Fisher & Nichols S.C. He was former
editor-in-chief for the Marquette Law Review and focuses his
practice on business, environmental, and insurance coverage litigation
and real estate.
In sum, it is apparent from the burdens facing the employer that the
Legislature and the courts have well considered the respective risks
associated with restrictive covenants and have provided a proper balance
reflective of the equities between the parties and the circumstances
surrounding the execution of such arrangements.
Moreover, the majority noted, the position advocated by the dissent
is unworkable because it clearly puts the proverbial "cart before the
horse" by forcing courts to evaluate the reasonableness of a restrictive
covenant in a factual void and under circumstances in which the employer
has not even sought to enforce the agreement. Under Wisconsin law, the
validity of such agreements is to be determined on the basis of a
thorough examination of the particular circumstances that surround it.50 This also proves what is perhaps the most
critical flaw in the dissent's position: An employer does not enforce a
nondisclosure or noncompete provision by requiring an employee to sign
the agreement. As the majority opinion points out, enforcement can only
occur after: 1) the parties actually agreed to its terms; 2) the
employee sought to disclose allegedly confidential information or sought
to compete with the employer; and 3) the employer attempted to prevent
the disclosure or competition by calling upon the agreement.51
Finally, the dissent ignores the fact that it is the Legislature's
function to revise the protections afforded under section 103.465 if in
fact the statute does not adequately address the risks associated with
such agreements. To date the Legislature has not seen fit to do so and
there is no compelling reason for change.
Conclusion
The authors believe that the risks associated with restrictive
agreements are in fact properly balanced by the statute, which was
created to level the playing field in this arena. The employee is not
placed in a lose-lose situation when requested to sign a restrictive
agreement. If the employer's restrictions are unreasonable, the statute
will protect the employee regardless of whether the employee challenges
the restriction by declaratory judgment prior to actually competing, or
litigates the issue after the employment relationship has terminated. If
the employer abuses its bargaining power and is overly aggressive with
its covenant, the employer loses the restriction entirely, including
those portions of the covenant that may be reasonable. This creates a
balance that properly allocates the risks of the restrictive covenant as
between the parties.
Endnotes
1 Tatge v. Chambers & Owen
Inc., 219 Wis. 2d 99, 579 N.W.2d 217 (1998).
2 The court in Tatge also
addressed the issue of whether a cause of action for breach of an
employment contract is actionable in tort for misrepresentation under
Wisconsin law. Declining to give its "blessing to such an irreverent
marriage of tort and contract law," the court held that the breach of an
employment contract is not actionable in tort. Tatge, 219 Wis.
2d at 107.
3 Id. at 124-28.
4 Wisconsin first recognized the
employment at-will doctrine in Prentiss v. Ledyard, 28 Wis.
131, 133 (1871). See, e.g., Hausman v. St. Croix Care Center Inc.,
214 Wis. 2d 654, 662, 571 N.W.2d 393 (1997) ("The employment-at-will
doctrine is an established general tenet of workplace relations in this
jurisdiction.").
5 Brockmeyer, 113 Wis. 2d
at 567 (internal quotation marks and citations omitted).
6 Id. at 567-68. At the
time, the court in Brockmeyer joined the courts of 42 states in
recognizing exceptions to the employment-at-will doctrine. See
Wandry v. Bull's Eye Credit, 129 Wis. 2d 37, 40, 384 N.W.2d 325
(1996).
7 Brockmeyer, 113 Wis. 2d
at 572-73. The court concluded that the cause of action for wrongful
discharge created by its decision is a contract action rather than a
tort action. Id. at 575-76.
8 Id. at 574. In a
concurring opinion joined by justices Callow and Ceci, Justice Day
questioned whether the new rule set forth by the majority would in fact
result in a more stable market, positing that it was more likely that
more and more discharges previously viewed as nonactionable would be
"vehicles to test the ingenuity of the advocate to find some
constitutional, statutory or regulatory provision that can be cited in a
complaint for wrongful discharge." Id. at 580-81.
9 Id. at 573-74.
10 Wandry v. Bull's Eye
Credit, 129 Wis. 2d 37, 384 N.W.2d 325 (1996).
11 Id. at 46-47. The
court further expanded the Brockmeyer exception in
Winkelman v. Beloit Memorial Hosp., 168 Wis. 2d 12, 483 N.W.2d
211 (1992), when it determined that public policy also could be evinced
by an administrative rule.
12 Wandry, 129 Wis. 2d
at 46-47. Wandry involved section
103.455 of the Wisconsin Statutes, which prohibits an employer from
deducting certain work-related losses from an employee's wages without
following certain procedures to establish the responsibility for the
loss. Id. The court concluded that it did not need to determine
whether Bull's Eye, Wandry's employer, violated the statute to determine
whether Wandry's complaint constitutes a viable claim for wrongful
discharge. Id. at 46-47. Rather, the court concluded that the
statute articulates a fundamental and well-defined public policy
proscribing economic coercion by an employer upon an employee to bear
the burden of a work-related loss when the employee has no opportunity
to show that the loss was not caused by the employee's carelessness,
negligence, or willful misconduct, as was alleged by Wandry.
Id.
13 Bushko v. Miller Brewing
Co., 134 Wis. 2d 138, 396 N.W.2d 167 (1986).
14 Id. at 142. In
Bushko the employee conceded that he was not terminated for
refusing to violate any public policy. Id. Rather, the employee
claimed he was terminated because he complained about Miller's practices
in plant safety, hazardous wastes, and "honesty" involving personnel and
expense records. Id. As the court noted, the
Brockmeyer court previously had rejected the broader "acting
consistent with" public policy standard urged by the employee in Bushko.
Id. at 145.
15 Hausman v. St. Croix Care
Center, 214 Wis. 2d 654, 571 N.W.2d 393 (1997). Unlike the wrongful
discharge cases that preceded it, the court's opinion in
Hausman, authored by Justice Walsh Bradley, was unanimous.
16 Id. at 668. The court
in Hausman held that while the employees' actions were "not in
violation of a Bushko command, their actions were in response
to a more significant legal command, one imposed by the Legislature to
further promote the strong public policy of protecting nursing home
residents." Id. at 666-67. The Hausman court expressly declined
to adopt a "whistle-blower" exception to the at-will doctrine as being
"contradictory to established precedent," which undoubtedly referred to
Bushko. Id. at 665-66.
17 Id.
18 After several years of
employment with Chambers & Owen, Tatge signed an Employee Handbook
receipt that acknowledged his relationship was at-will. Tatge,
219 Wis. 2d at 102.
19 Id.
20 Id. at 103.
21 Id.
22 Id. at 104.
23 Id. The circuit court
also denied Chambers & Owen's motion to dismiss Tatge's breach of
contract and misrepresentation claims, concluding that the
misrepresentation claims should be tried only as to the alleged
statements that Tatge's employment would be ongoing and that he could
only be fired for cause. Id. At trial, which was bifurcated,
the jury determined that there was insufficient evidence of a contract
other than at-will, but found that Chambers & Owen made a
representation of fact that Tatge was entitled to ongoing employment and
termination only for cause. Id. The trial court subsequently
dismissed both the intentional and strict liability misrepresentation
claims, but allowed the negligent misrepresentation claim to go to the
jury, which found in favor of Tatge and assessed damages at $250,000.
Id. at 105. The court of appeals subsequently reversed this
award.
24 Id. The court of
appeals also held that a breach of employment contract is not actionable
in tort for misrepresentation.
25 The nondisclosure provision in
the Management Agreement did not contain a time limitation. See Gary
Van Zeeland Talent Inc. v. Sandas, 84 Wis. 2d 202, 267 N.W.2d 242
(1978) (nondisclosure agreement that does not contain a time limitation
is unreasonable and unenforceable under section 103.465).
26 Tatge, 219 Wis. 2d at
114.
27 Id. at 114-15. As an
initial matter, the court concluded, citing to its previous holding in
Van Zeeland as dispositive, that section 103.465 applies to the
nondisclosure provisions in the Management Agreement. Id. at 111-12.
28 Id.
29 Id. at 116.
30 Id.
31 Id. at 116-18.
32 Id. at 118.
33 Id. at 117-18.
34 Id.
35 Id. at 122-23.
36 Id. Section
103.465 states that covenants not to compete are "lawful and
enforceable only if the restrictions imposed are reasonably necessary
for the protection of the employer or principal." Wis. Stat. §
103.465 (1995). The statute further provides that "[a]ny such
restrictive covenant imposing an unreasonable restraint is illegal
and unenforceable even as to so much of the covenant or performance
as would be a reasonable restraint." Id. (emphasis added).
37 Id. at 123 (quoting
Streiff v. American Family Mut. Ins. Co., 118 Wis. 2d 602,
608-09, 348 N.W.2d 505 (1984)).
38 Id. at 127-28.
39 Id. at 128-29.
40 Id. at 124. The
majority calls this position "perplexing" and its reasoning "unfounded."
Id. at 116 n.9.
41 Id. at 128-29.
42 See Wis. Stat. §
103.465.
43 See, e.g., Van
Zeeland, 84 Wis. 2d at 219-20 (citing Restatement (Second) of
Contracts § 330 cmt. g (Tentative Draft No. 12, 1977)).
44 Tatge, 219 Wis. 2d at
124-25.
45 Id. at 125.
46 Restrictive covenants are
prima facie suspect; they must withstand close scrutiny to be considered
"reasonable"; they will not be construed to extend beyond their proper
import or further than the language of the contract absolutely requires;
and they are to be construed in favor of the employee. Streiff,
118 Wis. 2d at 611 (citations omitted).
47 The employer must prove that
the covenant: 1) is necessary for the protection of the employer, that
is, the employer must have a protectable interest justifying the
restriction imposed on the activity of the employee; 2) provides a
reasonable time limitation; 3) provides a reasonable territorial limit;
4) is not harsh or oppressive as to the employee; and 5) is not contrary
to public policy. Chuckwagon Catering Inc. v. Raduege, 88 Wis.
2d 740, 751, 277 N.W.2d 787 (1979).
48 See, e.g., Van
Zeeland, 84 Wis. 2d at 216-28.
49 1) The extent to which the
information sought to be protected is vital to the employer's ability to
conduct its business; 2) the extent to which the employee had access to
that information; and 3) the extent to which such information could be
obtained through other sources. Rollins Burdick Hunter of Wisconsin
Inc. v. Hamilton, 101 Wis. 2d 460, 470, 304 N.W.2d 752 (1981).
50 The dissent even acknowledged
that under the facts presented in Tatge there was some doubt about the
legality of the nondisclosure agreement at issue, which of course was
being reviewed without any operative facts as to what the employer
sought to protect. Tatge, 219 Wis. 2d at 126 n.3.
51 Id. at 116 n.9.
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