In a fairly significant ruling in state employment law, the Wisconsin Supreme Court expanded the circumstances under which an employee covenant not to compete will be enforced in Wisconsin.
Previously,covenants had to not only be reasonable and necessary to be enforced (under Wis. Stat. § 103.465, non-compete agreements are lawful only if the restriction is “reasonably necessary for the protection of the employer”), but all provisions of the covenant had to meet those requirements. In other words, Wisconsin judges could not “blue pencil” out the offending, unreasonable part of the covenant, and had to hold the entire document unenforceable. Now, after the decision in Star Direct v. Dal Pra, 2009 WI 76 (WI. July 14, 2009), the blue pencil exists for judges to save otherwise unenforceable covenants not to compete.
Here is an excerpt on the case from the State Bar of Wisconsin website:
The Wisconsin Supreme Court adopted on July 14 new standards that tend to save contracts aimed at preventing ex-employees from competing with their former employers.
In Star Direct v. Dal Pra, 2009 WI 76, the court announced that portions of a restrictive covenant may be enforced even after another section is deemed unenforceable, so long as the surviving provisions remain understandable and capable of independent enforcement.
Dissenting justices criticized part of the majority’s analysis for assuming that a court signals approval of issues it could have addressed, but did not. The dissent warned that this new interpretative tool defies precedent and judicial restraint.
So, ladies and gentlemen of the Wisconsin judiciary, blue pencils out!
I was downright stunned by the holding and dicta in Star Direct v. Dal Pra. I have written a fair number of memoranda on non-compete agreements and have researched the issue extensively. The biggest shock is the outcome directly contradicts the statute. Specifically, s. 103.465 states, “[a]ny covenant, described in this subsection, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.” The last sentence of the statute strictly forbids the blue line rule.
After examining the decision closely one can see how the majority arrived at the decision. They considered the agreements separate, and therefore an unenforceable clause in one did not preclude enforcement of the other agreement(s). However, I think their analysis completely flies in the face of the statutory history and all the case law surrounding non-compete and non-disclosure agreements. I will not even bother to comment on the level of judicial activism present and the slippery slope the majority unlocked.
Looks like that memo I wrote as a 1L for LAWR1 is no longer accurate. The Law is alive.
In my former life, I sought both to enforce and avoid these as well as to draft them. As a matter of policy, I liked the rule against the blue pencil. It had a sobering effect on draftsmanship and, although the potential for blue penciling could cut for and against certainty (which I think is of extremely high value here), the discipline of learning not to ask for what you might not get contributed to the predictability of outcomes.
Of course, when I was asked to enforce them, it tended to be against a sales person who was fired for poor performance and then went to work for the other guys. One of my first questions was always “Isn’t this precisely the guy you want selling against you?”
Professor Secunda,
I disagree that this opinion announces new standards or endorses the blue-penciling concept for covenants not to compete.
First, the opinion does not announce new standards; instead, the court interpreted and applied existing common law (along with the statute which embodies the common law) principles and applied them to this case. In particular, the court based its opinion on a careful reading of Streiff, 118 Wis. 2d 602, and Brass, 242 Wis. 2d 733, to determine what those cases required and what they did not. As Judge Vergeront discussed in her concurrence in the court of appeals (and was reiterated in the supreme court majority opinion at par. 74) the previous courts left open the question of “‘whether a restraint which is reasonable as to activity, duration, and territory is enforceable under sec.103.465, when the agreement includes a second restraint which is unreasonable as to activity, duration, and territory and is unenforceable under sec. 103.465.'” Quoting Streiff, 118 Wis. 2d 613. In the present case, the overall agreement had several separate provisions, or restraints, that were not interrelated and therefore could be interpreted without reference to the other restrictive provisions. This is unlike Brass or Streiff, where the entire agreement was struck down because the over-broad provisions could not be read without reference to the other restrictive provisions. Therefore, in those cases, if one restrictive covenant was determined illegal, then the other restrictive covenants were also illegal because they were intertwined. Because the provisions were not intertwined in the present case, the court announced no “new standards.” It simply applied old standards to a new fact situation.
Moreover, the court’s majority opinion does not in any way endorse “blue-penciling.” Blue-penciling takes place when a court attempts to save an over-broad provision from being invalidated by simply crossing out words, phrases, or sentences within the provision to make it compliant with the law. Black’s (7th ed.) 166 states that “only offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them, as opposed to changing, adding, or rearranging words.” In the present case, the court did not blue-pencil the agreement in question. Rather, it held one provision enforceable, while holding a separate, unrelated provision unenforceable. It did not get the blue pencils out to cross out offending portions of a provision to make the rest of the provision enforceable. These are two very different concepts, and the court correctly recognized this to be the case.
Josh:
I think we will have to agree to disagree. You do a fine job re-emphasizing the points that Judge Gableman made for the majority, but I don’t buy it. I think the statute is clear on its face, and whether you call it blue-penciling or not, the legislature seems to have forbidden what the court does here.
It will be interesting to see if the Wisconsin legislature responds to this decision with a more specific disavowal of this type of approach to covenants not to compete. I would favor such legislation much for reasons Prof. Esenberg points out above.
Prof. Secunda
Professor, You are correct, we will have to agree to disagree because the statute simply states that “[a]ny covenant, described in this subsection, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of
the covenant or performance that would be a reasonable restraint.” Wis. Stat. 103.465. The key word is “covenant.” If you interpret that word to envelop the entire agreement, then you are correct that the statute would forbid the court’s conclusion. However, I don’t think there is any evidence from the face of the statute that the word should be interpreted so expansively. A covenant is a promise, i.e., there can be many covenants in one agreement (like in Star Direct). The court held some covenants over-broad and others not. You would have to read into the statute a requirement that, if one covenant is illegal, then the entire agreement is illegal.
Your suggestion of legislative action, in my opinion, is a must if the legislature truly intended a different result. But the current statute does not mandate a different result, at least on its face. Thanks for your time.