Wednesday, August 12, 2009

The Blue Pencil Comes to Wisconsin

BluePencil62097 [Cross-posted on the Marquette Law Faculty Blog]

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!


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Blue penciling creates the wrong incentives for employers. Under it, an employer can impose the broadest covenant with little risk that it will be left completely unenforceable. Many employees will not contest the broad covenant so the employer has the bonus of vast overenforcement of anything that might be called reasonable.

The new Employment Restatement has so far taken the same backward position. The better rule is to create incentive for employers to impose the most limited covenants because of the risk of a complete strikedown if the employer overreaches.

Posted by: Mike Zimmer | Aug 12, 2009 6:27:27 PM

The economic case for any enforcement of noncompetes grows weaker with every bit of research. Check out the recent Samila and Sorenson SSRN posting showing what many of us had intuited: more enforcement of noncompetes equals less venture capital, fewer startups, slower growth.

Of course Star Direct does not necessarily raise these policy questions. The court could, for example, have applied the statute the way the legislature wrote it: a noncompete is void if any portion of it is void. What part of that is hard to understand?

Posted by: Alan Hyde | Aug 13, 2009 6:56:53 AM

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