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The Wisconsin Court of Appeals Deals Another Blow To Post-Employment Restrictions By Invalidating A Common Confidentiality/Non-Disclosure Provision
Wisconsin courts do not like post-employment restrictions and this most recent decision attacks a very common requirement intended to prevent employees from stealing confidential information. We have long advised our clients about these court practices and we recommend employers regularly review and assess their restrictive covenants.
In this most recent decision, the Wisconsin Court of Appeals invalidated a common confidentiality and non-disclosure provision by concluding the particular definition of “confidential information” was overbroad. Diamond Assets v. Godina, 2021AP1079 (Wis. Ct. App. 07/14/22).
A COMMON TALE
Carlos Godina was a former employee of Diamond Assets, an “asset management organization” that runs “buy-back programs for … information technology devices.” Mr. Godina worked in sales and signed an agreement containing a non-compete provision and a confidentiality and non-disclosure provision. As is often the case with restrictive covenant lawsuits, the relationship soured.
On June 17, 2020, Mr. Godina told Diamond Assets he was quitting. Mr. Godina did not show for work on June 18 and, on that same day, emailed “confidential information” to a third party. Mr. Godina then contacted a customer of Diamond Assets seeking employment in violation of the non-compete provision.
Diamond Assets sued Mr. Godina to protect its business and its business records. Mr. Godina responded by filing a motion to dismiss, arguing the non-compete and confidentiality provisions were unenforceable under Wisconsin’s statute which imposes strict limits on employer-employee restrictive covenants.
The circuit court ruled in favor of Mr. Godina and granted his motion to dismiss. The Court of Appeals overturned the trial court’s decision as it applied to the non-compete provision, but found the confidentiality provision unenforceable as a matter of law under WIS. STAT. § 103.465.
CONFIDENTIALITY PROVISIONS ARE RESTRICTIVE COVENANTS
The Court of Appeals noted all post-employment restrictions, including confidentiality and non-disclosure provisions are subject to WIS. STAT. § 103.465. The court made clear, the employer seeking to enforce a restrictive covenant has the burden to show it is reasonable in all respects. In this case, the confidentiality provision contained several sections regarding what was and what was not considered “confidential information” under the agreement. The court noted the employer had the burden with regard to every single aspect of that definition.
Citing Wisconsin Supreme Court cases, the court held, to be enforceable, “the restraint must”:
(1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;
(2) provide a reasonable time limit;
(3) provide a reasonable territorial limit;
(4) not be harsh or oppressive as to the employee; and
(5) not be contrary to public policy.
In this case, the confidentiality provision consisted of four paragraphs detailing what was and was not considered “confidential information” and prohibiting use and/or disclosure of any item falling within that definition. The “included as confidential information” paragraphs stated as follows:
The Confidential Information will include all data and information relating to the business and management of the Employer, including but not limited to, proprietary and trade secret technology and accounting records to which access is obtained by the Employee, including Work Product, Computer Software, Other Proprietary Data, Business Operations, Marketing and Development Operations, and Customer Information.
The Confidential Information will also include any information that has been disclosed by a third party to the Employer and is governed by a non-disclosure agreement entered into between that third party and the Employer. (Emphasis added.)
THE “HYPOTHETICAL” PROBLEM
The court took issue with the language in italics because, using hypotheticals, the definition could include virtually anything. In other words, the Court of Appeals held the agreement would be invalid if it could contrive a hypothetical situation in which its application was too broad. Even if the restrictions were reasonable in reality and even if Diamond Associates was seeking reasonable protections in court, the entire restriction could be thrown out if the court could find a hypothetical situation in which it might be applied in an overly broad manner.
Applying this standard of looking for hypothetical problems, the Court of Appeals looked to the following definition of “business operations”:
“Business Operations” means operational information, including but not limited to, internal personnel and financial information, vendor names and other vendor information (including vendor characteristics, services and agreements) purchasing and internal cost information, internal services and operational manuals, and the manner and methods of conducting the Employer’s business. (Emphasis added.)
The court then found the phrase “’the manner and methods of conducting [Diamond’s] business’ is virtually without limit.” The court stated, “If enforceable, it would make Godina liability for sharing any detail of Diamond’s workplace operation, even the most mundane minutiae.” The court went on to state, “the restraint on divulging vendor ‘characteristics’ would seem to prevent Godina from even making general comments regarding the kind of office products that Diamond bought from vendors such as, for example, the kind of pens purchased for office use.”
The takeaways from this decision are significant:
- Although this is a Wisconsin Court of Appeals decision, we are seeing similar movement in federal courts and courts in other states.
- Wisconsin courts continue their attack on post-employment restrictions.
- While these attacks started on non-compete provisions, they quickly expanded to non-solicitation provisions and have now focused on confidentiality and non-disclosure provisions.
- Courts will use hypotheticals, even to the point of absurdity, well beyond the clear intent of the parties, to find a post-employment restriction overbroad and, thus, unenforceable.
- The law in this area is rapidly changing and will continue to do so.
Now is the time for all employers to review and, if necessary, revise their non-compete, non-solicitation, and/or confidentiality/non-disclosure agreements to ensure the language is up-to-date and enforceable.
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