Aug. 22, 2016 – A nonsolicitation of employees agreement, which prohibited an employee from encouraging other employees to leave their jobs, is unenforceable under the state’s no compete law, a state appeals court has ruled.
Engineer John Lanning was a “big fish” at Manitowoc Company Inc. for about 25 years. In 2010, he signed a nonsolicitation of employees (NSE) agreement.
Specifically, it prohibited him from indirectly or directly soliciting, inducing, or encouraging any other employee to terminate their employment with Manitowoc or to accept employment with a Manitowoc competitor, supplier, or customer. The NSE agreement applied while Lanning worked at Manitowoc, and for two years after he left.
After Lanning quit his job at Manitowoc, the company sued him. Manitowoc argued that Lanning violated the NSE agreement by recruiting multiple Manitowoc employees to leave and join Lanning’s new employer, a direct Manitowoc competitor.
Lanning did not argue that he contacted Manitowoc employees. Instead, he argued that the NSE agreement was unenforceable. A circuit court ruled in favor of Manitowoc Company, awarding almost $100,000 in damages and $1 million in attorney fees.
But in The Manitowoc Company Inc. v. Lanning, 2015AP1530 (Aug. 17, 2016), a three-judge panel for the District II Appeals Court reversed, concluding the agreement was unenforceable under state law governing restrictive covenants in employment contracts.
Wis. Stat. section 103.465 says a no compete agreement that restricts current or former employees from competing with the employer for a period of time within a specified territory is lawful and enforceable “only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” One unreasonable provision can void the entire agreement even if other provisions of the agreement are reasonable.
First, Manitowoc argued that section 103.465 does not apply to nonsolicitation of employee agreements, only to no compete agreements. But the panel noted that the statute applies to any employment agreements that “seek to restrain competition.”
“While the NSE provision does not circumscribe Lanning’s own employment opportunities, it nevertheless limits how Lanning – now employed by a direct competitor – can compete with Manitowoc,” wrote Appeals Court Judge Brian Hagedorn.
Joe Forward, Saint Louis Univ. School of Law 2010, is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6161.
“In short, the NSE provision does not allow for the ordinary sort of competition attendant to a free market, which includes recruiting employees from competitors. Regardless of how it is labeled, we hold that the NSE provision must comply with § 103.465.”
The panel next ruled that Manitowoc’s NSE agreement violated the statute because it “restricts an incredible breadth of competitive and noncompetitive activity.”
For instance, the panel noted that the NSE agreement prevents Lanning from encouraging a friend who worked at Manitowoc to leave and join a Manitowoc customer, even if the customer did not compete with Manitowoc. Or it would prohibit him from encouraging someone to retire from Manitowoc to spend more time with family.
“Manitowoc has offered no reason why it needs protection from the solicitation of employees to work for businesses that do not compete with it or in positions that do not pose a competitive risk,” Judge Hagedorn wrote. “[T]he provision it drafted is far too sweeping to withstand the close scrutiny we give such restrictive covenants.”
The appeals court panel reversed the circuit court’s award of $100,000 in damages, $1 million in attorney fees, and more than $30,000 in costs. It directed the circuit court, on remand, to enter summary judgment in favor of Lanning.