Employers Beware: Court of Appeals Strikes Down Two Non-Compete Clause

WDC Journal Edition: Summer/Fall 2008
By: Carrie E. Turner

Recently, two decisions came down from the Wisconsin Court of Appeals, finding that the employee non-compete provisions in each instance were invalid and unenforceable. Although neither decision created any new restrictions for employers regarding the use of non-competes, the cases highlight the growing trend of employee challenges on non-compete agreements and the court’s strict application of Wis. Stat. § 103.465, the statute that governs restrictive covenants in employment contracts.

Under Wis. Stat. § 103.465, a restrictive covenant is illegal, void and unenforceable if any part of the restriction is unreasonable. The well-established law in Wisconsin holds that a covenant not to compete must meet five requirements in order for it to be enforceable:

the agreement must be necessary for the employer’s protection;
the agreement must provide a reasonable time period;
the agreement must cover a reasonable geographic territory;
the agreement must not be unreasonable to the employee; and
the agreement must not be unreasonable as to the general public.

See Chuck Wagon Catering, Inc. v. Raduege, 88 Wis.2d 740, 751, 277, N.W.2d 787 (1979)

In Fox Valley Thoracic Surgical Associates SC v. Ferrante, Wis. Ct. App., No. 2006AP3201, 2/19/08 (not recommended for publication), the court found that both the territory and activity restrictions constituted unreasonable restraints when it held that a physician’s non-compete was unenforceable.

Dr. Ferrante was employed by Fox Valley Thoracic Surgical Associates, S.C., d/b/a Thoracic Surgical Associates (“Surgical Associates”) in Appleton, Wisconsin, as a heart surgeon. His employment contract included a non-compete clause that prohibited him from engaging in the practice of heart surgery or thoracic medicine for one year immediately following the termination of his employment within the city limits of Appleton, Neenah or Menasha, Wisconsin, as well as within a 30 mile radius of the city limits of each of these cities.

Dr. Ferrante resigned and opened his own surgical practice in the same building as Surgical Associates. Following Dr. Ferrante’s departure, Surgical Associate’s referrals decreased. Surgical Associates ultimately closed its practice and filed suit against Dr. Ferrante alleging, among other things, a breach of his non-compete agreement.

The trial court held, and the Court of Appeals affirmed, that the geographic restriction in the non-compete agreement, which extended thirty miles beyond the outer limits of three different cities, was far greater than reasonably necessary to protect the employer’s interests. Although the employer submitted zip code information of the patients it served, the court found that the employer could not establish that the broad territory restriction accurately reflected the geographic area from which the employer drew its patients when the patients were almost exclusively from one referral source.

In addition, the non-compete provision was unreasonable to the physician because it restricted the physician from practicing both heart surgery and thoracic medicine, despite the fact that the physician only practiced heart surgery for the employer. The court held that the restriction was overly-broad as to the prohibited activities and found that the restrictive covenant was also unenforceable on these grounds.

In Davidson v. Bay Area Nuclear Medicine SC, Wis. Ct. App. No. 2007AP1445 2/19/08 (not recommended for publication), the court struck down a non-compete clause because the employer failed to demonstrate that it was necessary for the employer’s protection against its former nuclear medicine specialist. Bay Area Nuclear Medicine (“BANM”) employed Dr. Davidson to provide nuclear medicine services. BANM had an exclusive contract with a local hospital to provide nuclear medicine services. The local hospital terminated the contract and, as a result, BANM terminated Dr. Davidson. BANM lost essentially its entire patient base as a result and, at the time of the hearing, had yet to reestablish its practice.

Dr. Davidson was offered a position with the practice that took over the exclusive nuclear medicine services contract with the hospital, but the practice wanted confirmation that Dr. Davidson would not be violating his non-compete with his former employer, BANM, if he worked for the practice. Dr. Davidson filed an action against BANM, seeking a declaration from the court that the non-compete was invalid. The court held that the non-compete was invalid and unenforceable because BANM no longer had a valid interest to protect once it lost the contract.

As these decisions illustrate, the determination as to whether a non-compete provision complies with Wis. Stat. § 103.465 and case law is extremely fact-specific. To sustain scrutiny, a restrictive covenant must meet each of the five requirements set forth in Chuck Wagon Catering as they are applied to the facts at the time of enforcement. A failure to meet just one requirement will render the entire non-compete void and unenforceable. Accordingly, employers must exercise care in drafting non-compete agreements and periodically review them to ensure that they will be enforceable in light of any new court decisions or changes in the factual circumstances surrounding the employer’s protectable interest.