Noncompete News: Tolling Provision Renders Noncompete Void in Wisconsin

After a restful end to 2007, we begin 2008 with a look at Wisconsin and Georgia noncompete law. Like Georgia courts, Wisconsin courts will not modify an overbroad restrictive covenant between an employer and an employee. In other words, under Wisconsin law, restrictive covenant agreements live and die on how they are drafted.

Specifically, whether a restrictive covenant is valid in Wisconsin involves the application of Wisconsin Statute §103.465. That statute provides that a restrictive covenant between an employer and employee within a specified territory and during a specified time is lawful if the restrictions imposed are reasonably necessary to protect the employer. If the restraint is unreasonable, however, the entire restrictive covenant is struck down.

In Vergerant v. H&R Block Eastern Enterprises, a Wisconsin Court of Appeals recently had the opportunity to apply §103.465 to restrictive covenant agreements that contained a tolling provision. When a few employees left H&R Block to start a competing business, H&R Block sued the employees under the agreement. The noncompete prohibited the employees, for a 2-year period post-employment, from providing tax-related services to any customer of H&R Block within the employee’s district of employment. The agreement also contained a covenant prohibiting the employee, for a 2-year period post-employment, from soliciting H&R Block customers within the employee’s district of employment. Finally, the agreement contained a “tolling provision” that extended the time restriction in the covenants “by any period(s) of violations” of these covenants.

The Court of Appeals initially reasoned that H&R Block had a legitimate interest in protecting its client base with reasonable restrictions on tax professionals that leave their employment. It further assumed that the 2-year period was reasonable. It then focused on “the extension” of the 2-year period “by any period(s) of violation.”

The Court concluded that the extension rendered the duration of the covenants unreasonable (and therefore the entirety of the covenants unreasonable) for two reasons: (1) an employee cannot tell on the face of the agreement how long the extension would be, i.e., the extension could be for a day, a month, a year, or more, but with no certainty as to the length of the term; and (2) because the parties may have legitimate disputes over whether particular conduct violates the clauses, an employee necessarily could not know until the dispute is resolved by a court whether the conduct is or is not a violation; only then would the employee know if the 2-year term has been extended and, if so, for how long.

At bottom, the court reasoned that the effect of “the extension” made the duration of the covenants indefinite and, therefore, unenforceable. In so doing, it rejected holdings from other state courts, like in Michigan, that have allowed “tolling” or “extension” provisions. And in so doing, it joined Georgia courts which have determined that a tolling provision extending indefinitely the time period of a restrictive covenant renders the entire covenant void. See, for example, ALW Marketing Corp. v. Hill, a 1992 decision, where a Georgia Court of Appeals held that a tolling provision (“[t]he running of the [noncompete] period shall be tolled and suspended while [the defendant] is in violation of this covenant”) rendered the noncompete unenforceable because it “potentially extends the time of such a covenant perpetually.”

The lesson is a simple one: be very careful in how you draft restrictive covenants in those states that refuse to blue-pencil, or re-write, otherwise overbroad covenants. We look forward to visiting with you in our next Noncompete News!