May 4, 2015 – The Wisconsin Supreme Court has upheld a restrictive covenant agreement, despite an employee’s argument that it was unenforceable as a condition of continued employment and thus lacked consideration to support a contract.
David Friedlen joined Runzheimer International Limited in 1993 as a business development consultant. He was an at-will employee for 16 years.
In 2009, Runzheimer required all its employees to sign restrictive covenants, preventing them from working for competitors for two years after employment with Runzheimer ended. Friedlen ultimately signed it. His employment was terminated two years later.
A month later, after Friedlen’s counsel advised that the restrictive covenant agreement was unenforceable, Friedlen began working for a Runzheimer competitor.
Runzheimer filed suit to enforce the restrictive covenant agreement and sought damages, claiming Friedlen misappropriated Runzheimer’s trade secrets. It also alleged that the Friedlen’s new employer tortiously interfered with the restrictive covenant.
The circuit court judge in Milwaukee County ruled that Runzheimer’s promise of continued employment was not lawful consideration to support the agreement, but noted that prior Wisconsin case law did not squarely address whether the promise of continued employment for at-will employees constituted lawful consideration.
The Wisconsin Court of Appeals certified the case for review, and in Runzheimer International Ltd. V. Friedlen, 2015 WI 45 (April 30, 2015), the Wisconsin Supreme Court reversed, concluding that a promise of continued employment constitutes lawful consideration to support restrictive covenant agreements with existing employees.
“We hold that an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant,” wrote Justice David Prosser for a six-justice majority.
Friedlen argued that conditioning continued employment on signing a restrictive covenant agreement is illusory, since it would not stop the employee from being fired after signing it. More consideration was needed, Friedlen argued, to be enforceable.
However, the supreme court majority addressed that concern. “Although, theoretically, an employer could terminate an employee’s employment shortly after having the employee sign a restrictive covenant, the employee would then be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing, so the restrictive covenant could not be enforced,” Justice Prosser wrote.
Ordinarily, employees sign restrictive covenant agreements when they begin employment. Runzheimer argued that existing at-will employees should be treated no different than new at-will employees when it comes to restrictive covenants.
Friedlen argued that new employees are different, because the employer expends resources to hire and onboard the new employee, and the employee is receiving the benefits of a new employment relationship. However, employers don’t expend extra resources to keep existing employees, other than continued compensation and benefits.
The supreme court noted that jurisdictions are split on the issue, but a “distinct minority” hold that the promise of continued employment is not lawful consideration to support a no-compete agreement. The court followed the majority of jurisdictions instead.
“If we were to hold that consideration beyond continued employment is necessary in cases like this, an employer might simply fire an existing at-will employee and then re-hire the employee the next day with a covenant not to compete,” Prosser explained.
“It is of no consequence that Runzheimer’s promise not to fire Friedlen was for an indeterminate period of time because the length of the promise’s duration goes to the adequacy of consideration, not the existence of lawful consideration. We have previously stated that we will not address the adequacy of consideration. …”
The court noted that restrictive covenants can still be unenforceable if employers act in bad faith, and rejected Friedlen’s claim that employees would be over-burdened if required to prove the employer acted in bad faith in these types of cases.
Justice Shirley Abrahamson wrote a concurring opinion. She said the majority’s holding is “ambiguous and troublesome” but agreed if construed under her view.
“[T]o hold that the covenant not to compete is supported by consideration from Runzheimer, and to hold that the doctrines of fraudulent inducement and good faith and fair dealing would protect Friedlen if he were fired shortly after signing the covenant not to compete, the majority opinion in effect transforms the parties’ at-will employment contract into an employment contract for a reasonable duration,” Justice Abrahamson wrote. “Understood this way, I agree with the majority opinion.”
Sweeping Restrictive Covenant reform Introduced in the Wisconsin Legislature – WisBar InsideTrack (April 1, 2015).