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:

1. 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;
2. providing a summary of the majority and dissenting opinions in this important case; and
3. 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.

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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