Feb. 1, 2018 – Under state law that governs restrictive covenants, a company cannot enforce an employment agreement against an employee who agreed not to poach other employees from the company, a Wisconsin Supreme Court majority (5-2) has ruled.
John Lanning was chief engineer for Manitowoc Company for 25 years. In 2008, he signed an employment agreement that included a nonsolicitation of employees (NSE) provision. Two years later, Lanning became engineering director for a direct competitor.
Manitowoc filed a lawsuit, arguing that Lanning violated the employee nonsolicitation provision of his agreement by trying to recruit Manitowoc Company employees for his new company, SANY America.
The nonsolicitation provision said Lanning could not, for two years following his termination, solicit, encourage, or induce any Manitowoc Company employees to terminate their employment there to work for a competitor, supplier, or customer.
The circuit court granted summary judgment to the Manitowoc Company and awarded $97,844 in damages, $1 million in attorney fees, and $37,246 in costs against Lanning.
But the appeals court reversed, concluding the agreement was unenforceable under Wis. Stat. section 103.465 governing restrictive covenants in employment contracts.
In The Manitowoc Company, Inc. v. Lanning, 2018 WI 6 (Jan. 19, 2018), a majority affirmed the appeals court but offered differing reasons for that conclusion. Other aspects of the decision drew alignments that are signposts for future cases.
Justice Shirley Abrahamson wrote a lead opinion, concluding the nonsolicitation provision was a restraint of trade that was unenforceable under Wis. Stat. section 103.465 because it was not reasonably necessary to protect the Manitowoc Company.
“It restricts Lanning (and any employee of Manitowoc Company) from freely competing against Manitowoc Company in the labor market by insulating any Manitowoc employee from Lanning’s solicitations,” Justice Abrahamson wrote.
That form of “restraint of trade” is governed by section 103.465, Justice Abrahamson noted, and it is not enforceable based on prior decisions interpreting the statute.
A 1959 decision established five prerequisites for an enforceable restraint of trade. There must be reasonable territorial and time limits. It cannot be harsh or oppressive to the employee or contrary to public policy. And “the employer must have a protectable interest justifying the restriction imposed on the activity of the employee.”
As to the Manitowoc Company’s protectable interest, Justice Abrahamson said the employee nonsolicitation provision sweeps too wide and is not reasonably necessary.
“Lanning’s nonsolicitation of employees provision covers each of the 13,000 Manitowoc Company employees regardless of the business unit in which they work or where in the world they are located,” wrote Abrahamson, joined by Justice A.W. Bradley.
“The cases and the literature explain that ordinarily an employer’s protectable interest is limited to retaining top-level employees, employees who have special skills or special knowledge important to the employer’s business, or employees who have skills that are difficult to replace,” Justice Abrahamson wrote.
In a concurrence, Justice Rebecca Bradley affirmed the appeals court decision. Justices Daniel Kelly and Michael Gableman joined to form a five-justice majority affirming.
The trio agreed with the conclusion that the NSE, in this case, “is not reasonably necessary for Manitowoc’s protection.” That is, it restricts Lanning’s ability to recruit for his new employer and applies to any Manitowoc employee in any circumstance.
“The NSE applies not only to key employees but ‘any employee(s)’ and the NSE prohibits not only the raiding of ‘key’ employees but also, for example, encouraging an entry-level employee to terminate his or her employment to pursue higher education,” wrote Justice R. Bradley, agreeing that such provisions are not reasonably necessary.
But the concurrence departed from the lead opinion on other aspects. For instance, Abrahamson’s lead opinion partially relied on Heyde v. Cos. Inc. v. Dove Healthcare, LLC, a 2002 Wisconsin Supreme Court decision in which a majority (5-2) ruled that a no-hire provision between two employers was unenforceable because it placed an unreasonable restraint of trade on the employees without their consent or knowledge.
“I would overrule Heyde as unsound in principle and reinstitute a plain language interpretation of the statute, confining its application to an employee’s covenant not to compete with an employer,” Justice R. Bradley wrote.
Chief Justice Patience Roggensack wrote a dissent, joined by Justice Annette Ziegler, concluding the NSE was enforceable because section 103.465 does not apply.
“Using restraint of trade as the matter being regulated has permitted the Wisconsin Supreme Court to find a violation of § 103.465 in a contract between two companies, where no employee was involved,” wrote Roggensack, referring to Heyde.
She said section 103.465 only regulates restrictive covenants between employers and employees and the NSE in this case “does not come within the provisions of § 103.465 because it is not a covenant that prohibits Lanning from competing with Manitowoc.”
“Employers will be harmed by the lead opinion’s expansive interpretation of Wis. Stat. § 103.465, because employers will be unable to prevent the raiding of their key employees by a former employee who knows which employees are important to the former employer’s operations,” Chief Justice Roggensack wrote.
The concurrence disagreed with this concern. “Employers are not so hamstrung,” R. Bradley wrote. “The NSE Lanning signed could have been narrowly drawn to protect a legitimate interest of Manitowoc and to satisfy the other prerequisites identified. …”