E-Newsletter

January 2008

"Our Restrictive Covenants Are Enforceable, Aren't They?"

In H&R Block Eastern Enterprises, Inc. v. Swenson et al., the Wisconsin Court of Appeals affirmed a trial court's dismissal of an employer's efforts to enforce its restrictive covenants with a number of former employees because of a provision extending the duration of the covenant "by any period of violation." In doing so, the Court again highlighted that restrictive covenants must comply with Wisconsin law in all respects and any failure will render the contract unenforceable. Wisconsin employers should ensure their covenants would survive a judicial review. Anything less signals an employer's restrictive covenants may be just an idle threat that is unenforceable when you need it most.

H&R Block Eastern Enterprises, Inc.'s noncompetition and nonsolicitation covenants contained a provision that extended their two-year duration "by any period of violation." The Court held that this extension language rendered the covenants unenforceable. First, the Court found the extension provision left unanswered many questions for a departing employee as to how the covenant could be extended or what actions could form a basis for extending the covenant. Second, because an employee would not know whether particular conduct could be a "violation" and, thus, form a basis for an extension of the duration, the duration of the covenant was not fixed or definite but rather, contingent upon "outcomes the employee cannot predict." The Court also echoed the trial court's ruling that the twenty-four month duration of the restraint was more than was necessary to protect the employer and, as a result, the extension provision which could push the restriction past the twenty-four month threshold rendered the covenant plainly invalid.

Employers should review their restrictive covenants and remove any extension provisions. The reality today in Wisconsin is that restrictive covenants are regularly invalided by Wisconsin courts for a variety of reasons. However, the more salient point for Wisconsin employers is that your employees know the reality that restrictive covenants are difficult to enforce. When the time comes and an employee decides to seek a greener pasture, your best sales employee or your director of research and new product development could use this current state of the law to escape the restrictive covenant that they voluntarily agreed to earlier.

As a result, Wisconsin employers must be vigilant in reviewing and revising all aspects of their restrictive covenants on a regular basis. Otherwise, restrictive covenants will continue to be invalidated by Wisconsin courts and your investment in new products and research and development may migrate to your competitors along with, possibly, your largest customer accounts.

For more information about this decision and restrictive covenants, contact educational services at (414)423-1330.