For First Time in Decades, Wisconsin State Court Blue-Pencils Non Compete Agreement

August 27, 2009 By: Luke L. Glisan

For the first time in over half a century, the Supreme Court of Wisconsin has approved a form of "blue penciling" of employee noncompetition agreements, potentially making at least some noncompetition agreements significantly easier to enforce in the state. Star Direct, Inc. v. Dal Pra.

In most states, employee noncompetition agreements are enforceable only to the extent that a court finds that the restrictions in the agreement are reasonably necessary to protect an employer from unfair competition by a former employee. In some states, including Illinois, if a court finds that a noncompetition agreement is overly broad but otherwise enforceable, the court can re-structure the agreement -- for example, by reducing its duration or the geographic area covered -- and enforce the agreement as revised. However, other states do not allow any modification of an overbroad noncompetition agreement, meaning that if a court finds any part of such an agreement to be overbroad, the entire agreement may be unenforceable. In Wisconsin, a state statute provides that "[a]ny covenant ... imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable covenant." Wis. Stat. § 103.465. Wisconsin courts have long held that this provision prohibits any form of modification or "blue penciling" of overbroad noncompetition agreements.

When Eugene Dal Pra left his sales position with Star Direct and started his own distribution company selling products to the same stores he had previously serviced, Star Direct filed a lawsuit in Wisconsin alleging that he had violated the noncompetition provisions contained in his employment agreement. The trial court found all three of these provisions unenforceable, and the court of appeals agreed.

On review, the Supreme Court of Wisconsin found only one of the clauses to be unenforceable. Significantly, reversing the lower courts, the court found that clause to be divisible from the others. Navigating around Wis. Stat. § 103.465, the court held that the three noncompetition provisions were separate and divisible "covenants," despite the fact that they all appeared in the same agreement, because they supported different interests and could each be "independently read and enforced." The court reached this conclusion even though it found "substantial overlap" in the activities restricted by the three clauses.

This decision is an important victory for Wisconsin employers seeking to enforce restrictive covenants. Through careful drafting, Wisconsin employers may be able to avoid complete invalidation of an employee noncompetition agreement even if a court finds one or more noncompetition provisions in the agreement to be overbroad. This decision is also an excellent example of how the enforceability of a noncompetition agreement may vary from state to state, and can turn upon what may seem to be minor technicalities. Because the law of employee noncompetition agreements is complex and evolving, employers are strongly advised to consult experienced legal counsel when preparing employee noncompetition agreements, or when deciding whether to hire a candidate who has such an agreement with a former employer.

For questions regarding employee noncompetition agreements and related issues, please contact Edward N. Druck, Michael A. Warner, Jr., William R. Pokorny or any Franczek Radelet attorney.