Vol. 82, No. 10, October 2009
Noncompete Agreements – Enforceability
Star Direct Inc. v. Dal Pra, 2009 WI 76 (filed 14 July 2009)
Star Direct distributes novelties and sundries to convenience stores, service stations, truck stops, and travel centers throughout the Midwest. This business is highly competitive, and its business model is premised on the relationship between route salespeople and their customers. The salespeople regularly visit current and potential customers and work to understand their customers’ businesses and to build long-term personal and professional relationships with them.
Dal Pra was a route salesperson for Star Direct. His employment contract with the company included three restrictive covenants prohibiting certain post-termination activities. A “business clause” noncompete provision prohibited Dal Pra’s engagement in a “substantially similar or competitive” business within the sales territory he covered for Star. A “customer clause” noncompete provision barred Dal Pra from interfering with or endeavoring to entice away current and recent past customers for whom he had performed services, with whom he had dealt, or about whom he had obtained special knowledge over the course of his employment. A “confidentiality clause” barred Dal Pra from disclosing or using certain information such as confidential marketing techniques, customer lists, and trade secrets (see ¶ 1). [Editors’ Note: The actual language of the lengthy contract provisions is included in the opinion but not reproduced here.]
After Dal Pra voluntarily left Star Direct to begin his own distribution company, Star Direct sued him for breach of the noncompete clauses and sought both damages and injunctive relief. The circuit court granted Dal Pra’s motion for summary judgment, concluding that all three restrictive covenants were unreasonable and therefore unenforceable. The circuit court also concluded that each one of the clauses was indivisible from the others. In an unpublished decision the court of appeals agreed with the circuit court that the business clause was unenforceable. It also agreed that the business clause was indivisible from the customer clause and thus held that both clauses were unenforceable. In a majority opinion authored by Justice Gableman, the supreme court affirmed in part and reversed in part the court of appeals’ decision.
The enforceability of restrictive covenants is governed by Wis. Stat. section 103.465, which contains two main principles. First, pre- and post-termination noncompete agreements are “lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer” (¶ 20). Second, “[a]ny covenant ... imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint” (¶ 21).
In this case the court concluded that the “customer clause” described above is enforceable. It is necessary for Star Direct’s protection “because without it there is nothing preventing Dal Pra from taking advantage of all of Star Direct’s investment in its route and customers for his own benefit and to Star Direct’s detriment” (¶ 52). The court further held that the confidentiality clause is likewise enforceable. “The only reasonable construction of the [confidentiality] clause considered in its totality is that it prohibits Dal Pra’s use of confidential information of the type identified in the examples [articulated in the clause, like trade secrets, customer lists, marketing techniques not generally known in the business community, special pricing information, and so on] – information of a confidential and sensitive nature that, if made public or used by Dal Pra, would be deleterious to Star Direct’s business. Prohibiting Dal Pra from exploiting or disclosing this information is reasonably necessary for Star Direct’s protection” (¶¶ 63-64).
The court also concluded, however, that the business-clause noncompete provision was overbroad and unenforceable. Said the court, “The only reasonable way to read the contract language giving meaning to every phrase is that it attempts to bar Dal Pra not only from competitive enterprises, but also from engaging in a business that is substantially similar to Star Direct’s business yet not competitive” (¶ 55). The court did not believe it is reasonably necessary for the protection of Star Direct to prevent noncompetitive or otherwise nondeleterious business activity by its former employees (see ¶ 56).
Lastly, the court considered the divisibility of the restrictive covenants. “The foundational inquiry for determining whether a covenant is divisible is whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced. This inquiry will be fact-intensive and depend on the totality of the circumstances. In the context of multiple non-compete provisions in a contract, indivisibility will usually be seen by an intertwining, or inextricable link, between the various provisions via a textual reference such that one provision cannot be read or interpreted without reference to the other. Restrictive covenants are divisible when the contract contains different covenants supporting different interests that can be independently read and enforced” (¶ 78).
In this case the business clause, customer clause, and confidentiality clause do not reference each other. Compliance with or the benefits of one clause are not dependent on compliance with or the benefits of the other; each deals with different interests (see ¶ 79). While there is substantial overlap among these provisions, “the interests the clauses protect are (with the exception of the overbroad provisions of the business clause) legitimate and separate interests. The provisions are also not textually linked, intertwined, or mutually entangled in any way. In other words, one need not refer to the business clause or confidentiality clause, for example, to determine one’s rights under the customer clause. The business clause, customer clause, and confidentiality clause may each be read, evaluated, and applied independently” (¶ 81). “For these reasons, the three clauses at issue here are separate, independent, and divisible covenants. As such, the customer clause and confidentiality clause, which we have found to be reasonable, are independently enforceable despite the overbroad and unenforceable business clause” (¶ 82).
Justice Bradley filed an opinion concurring in part and dissenting in part that was joined by Chief Justice Abrahamson. The Chief Justice also filed a separate dissent.
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Public Records Law
Provisions in Collective Bargaining Agreement with State Employees Union Insufficient to Amend Public Records Law
Milwaukee Journal Sentinel v. Department of Admin., 2009 WI 79 (filed 15 July 2009)
This case concerns a provision (Article 2/4/4) in a collective bargaining agreement between the Wisconsin State Employees Union (WSEU) and the state that purports to prohibit the disclosure to the press of the names of WSEU-represented employees. The ultimate question was whether the action of the legislature in approving this provision as part of the collective bargaining agreement was sufficient to amend Wisconsin’s Public Records Law, Wis. Stat. sections 19.31–.39.
The matter was before the supreme court on certification from the court of appeals. The certified questions were as follows: “(1) Whether courts have jurisdiction to review legislative action to determine if that action was sufficient to amend the Public Records Law; and (2) If so, whether the action taken by the legislature in ratifying a collective bargaining agreement between the Wisconsin State Employees Union (WSEU) and the State of Wisconsin was sufficient to amend the Public Records Law” (¶ 1).
In a majority decision authored by Justice Roggensack, the supreme court concluded as to the first question that “courts have jurisdiction to review whether the legislature’s ratification of a collective bargaining agreement under Wis. Stat. § 111.92(1)(a), without introducing a companion bill to specifically amend the Public Records Law, is sufficient to effect a change in that law. We so conclude because courts have jurisdiction to determine the meaning of statutes, here § 111.92(1)(a), and of constitutional provisions, here Article IV, Section 17(2) of the Wisconsin Constitution” (¶ 3). (Section
111.92(1)(a) requires the legislature’s Joint Committee on Employment Relations to “introduce in a bill or companion bills ... that portion of the tentative [collective bargaining] agreement which requires legislative action for implementation, such as ... any proposed amendments, deletions or additions to existing law.” Article IV, section 17(2) of the Wisconsin Constitution states: “No law shall be enacted except by bill. No law shall be in force until published.”)
As to the second question the supreme court concluded that “ratification of the collective bargaining agreement was insufficient to amend the Public Records Law because Article 2/4/4 of the collective bargaining agreement was not ‘introduce[d] in a bill or companion bills’ within the meaning of § 111.92(1)(a), as that meaning is driven by the requirements of Article IV, Section 17(2) of the Wisconsin Constitution. Accordingly, the ratification of the collective bargaining agreement did not create an exception to the Public Records Law” (¶ 68).
The court also considered whether Article 2/4/4’s prohibition on the disclosure of WSEU-represented employees’ names may nevertheless be enforced under Wis. Stat. section 111.93(3) as a “condition of employment,” thereby superseding the Public Records Law’s disclosure requirement. Section 111.93(3) provides in pertinent part as follows: “[I]f a collective bargaining agreement exists between the employer and a labor organization representing employees in a collective bargaining unit, the provisions of that agreement shall supersede the provisions of civil service and other applicable statutes … related to wages, fringe benefits, hours, and conditions of employment....” WSEU argued that the agreement not to disclose employees’ names falls within the conditions of employment provision of section 111.93(3).
The court disagreed. “Section 111.93(3) plainly states that it is the statutory provision that is being superseded by the collective bargaining agreement that must relate to ‘conditions of employment.’ The Public Records Law’s disclosure requirement, Wis. Stat. § 19.35(1)(a), however, relates to informing the public about the affairs of government through the provision of public records. See Wis. Stat. § 19.31. That is, § 19.35(1)(a) does not relate to conditions of employment as that term is used in § 111.93(3)”
(¶ 49). Further, looking to the policies underlying the Public Records Law, the court indicated that “we cannot accept WSEU’s argument that parties may, through the collective bargaining process, contract away the public’s rights under Wis. Stat. § 19.35(1)(a). To hold otherwise would be contrary to the public interest, and would have the potential to eviscerate the Public Records Law through private agreements. Accordingly, under Wis. Stat. § 111.93(3)’s plain language, and the express policies of the Public Records Law and statutory collective bargaining procedures, § 111.93(3) does not cause Article 2/4/4 of the collective bargaining agreement to supersede § 19.35(1)(a)” (¶ 53).
Justice Bradley filed a concurring opinion. Chief Justice Abrahamson filed a dissent.
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Appraisals – Enforcement of Appraisal Awards – Discovery
Farmers Auto. Ins. Ass’n v. Union Pac. Ry. Co., 2009 WI 73 (filed 10 July 2009)
This case involved a dispute between an insurer and an insured over the proper replacement value of a home that had burned down. The insured’s homeowner’s insurance policy contained an appraisal clause permitting either the insured or the insurer to demand an appraisal of the loss in the event the parties failed to agree on the amount of the loss and spelled out a procedure according to which the appraisal was to be conducted. The insured filed suit in circuit court alleging that the insurance company refused to pay him the replacement value of his home pursuant to the policy’s terms. The insurer then demanded an appraisal. The insured agreed but indicated that he would only continue the appraisal process if it were not conducted pursuant to the insurance policy and would not be deemed binding on the parties. The insurer then sought a court order to enforce the appraisal agreement in the insurance policy, and the circuit court granted the motion. The appraisal proceeded, but the insured was unhappy with the award. He filed a motion to have the award vacated or modified, and he informed the court of his desire to depose the appraisers. The circuit court quashed the discovery requests, denied the insured’s motion to modify or vacate the appraisal award, and ultimately granted summary judgment in favor of the insurer. In a published decision the court of appeals affirmed the circuit court’s decision. See 2008 WI App 116, 313 Wis. 2d 93, 756 N.W.2d 461. In a majority opinion authored by Justice Gableman, the supreme court affirmed.
Three issues were before the supreme court in this case: “First, did the circuit court err when it compelled [the insured] to participate in the binding appraisal process? Second, should the appraisal award be vacated or modified? Third, did the circuit court err in denying [the insured’s] request to depose the appraiser and a third party contractor who assisted in the appraisal process?” (¶ 2).
The court concluded as to the first issue that the appraisal provision in the policy is plain and unambiguous. “It provides for an appraisal process that may be invoked by either party. If and when one party invokes this clause, the other side must abide by it. Each party then selects its own appraiser, and the appraisers select an umpire (or if they cannot, a judge does so). The appraisers work to determine the amount of loss, and the amount agreed upon by any two appraisers ‘will set the amount of loss.’ The text of the provision clearly provides for an appraisal process that may be invoked by either party and ‘will set the amount of loss’ upon its completion” (¶ 34). Said the court, the insured “is simply wrong that the Policy’s appraisal process is non-binding” (id.).
The court next considered whether the circuit judge should have vacated or modified the appraisal award. The insured argued that the award should be vacated because the appraisers did not understand their task. The court began its analysis of this issue by noting that appraisals are presumptively valid. “An appraisal may be set aside only upon the showing of fraud, bad faith, a material mistake, or a lack of understanding or completion of the contractually assigned task” (¶ 44). Review of an appraisal award should usually be limited to the face of the award. “If fraud, bad faith, material mistake, or a lack of understanding of the process are reasonably implicated, it is within a judge’s discretion to allow further inquiry or discovery” (¶ 45). In this case the court concluded that the face of the award demonstrates that the appraisers understood and accomplished their contractual task. The appraisal award itemized the components of the valuation and gave the replacement cost and actual cash value for each. “Nothing on the face of the award demonstrates that the appraisers lacked understanding of their task” (¶ 46).
Lastly, the court considered whether the circuit judge erred when he denied discovery of the appraisal process. The supreme court agreed that “if the challenger of the award shows prima facie evidence of a reviewable claim – fraud, bad faith, material mistake, or a failure to understand or complete the contractually assigned task – then discovery is potentially available. Even so, the circuit court is vested with discretion on discovery disputes. The record here is clear that the trial judge examined the relevant facts, applied a proper standard of law, and reached a conclusion that a reasonable judge could reach in precluding [the insured] from deposing the appraisers and the third-party contractor. The trial judge did not believe the appraisers’ communications displayed a misunderstanding of their task, and this was a reasonable conclusion. Therefore, we hold that the trial court did not erroneously exercise its discretion when it denied [the insured’s] discovery requests” (¶ 52) (citations omitted).
Justice Bradley filed a dissenting opinion that was joined by Chief Justice Abrahamson.
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