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  • May 16, 2018

    Wisconsin Supreme Court Takes Aim at Non-solicitation Clauses

    With a decision in a recent case, the Wisconsin Supreme Court imposed significant limitations on employers who use non-solicitation provisions in employment contracts. Jeremy Klang discusses the decision and what it means for businesses in Wisconsin.

    Jeremy M. Klang

    How does a business stop a former employee from poaching its employees? Typically, employers enter into a contract with the employee that includes a restriction called a “non-solicitation provision.”

    In a recent case, The Manitowoc Company, Inc., v. Lanning, the Wisconsin Supreme Court made a landmark decision that imposes significant limitations on employers with respect to non-solicitation provisions in employment contracts pursuant to Wis. Stat. section 103.465.

    The Manitowoc Company, Inc., v. Lanning

    Lanning was an experienced, well-connected engineer for The Manitowoc Company, Inc. (Manitowoc) a company that manufacturers construction cranes and food service equipment.

    After working for Manitowoc in its construction crane division for more than 25 years, Lanning left to work for a competitor. During his time with Manitowoc, he and Manitowoc had executed an agreement by which Lanning agreed that he would not, for a period of two years after the termination of his employment with Manitowoc:

    “solicit, induce or encourage any employee(s) to terminate their employment with Manitowoc or to accept employment with any competitor, supplier or customer of Manitowoc.” (emphasis added)

    Within the restricted two-year period after Lanning’s departure, Manitowoc alleged that Lanning breached this covenant by engaging in competitive activities, such as actively recruiting (or poaching) some of Manitowoc employees to work for his new company.

    Manitowoc then sued Lanning for violation of the above quoted provision in the agreement. Lanning argued that the provision was unreasonable and violated Wis. Stat. section 103.465 (the statute governing restrictive covenants in employment agreements), which would thereby make the whole provision unenforceable.

    The Circuit Court ruled that the provision did not violate the statute, but Lanning appealed, and the Court of Appeals reversed, stating that the non-solicitation provision was unreasonably overbroad and violated section 103.465.

    The Supreme Court’s Decision

    The Wisconsin Supreme Court agreed with the Court of Appeals, holding that, because the clause in the agreement restricted Lanning from soliciting, inducing, or encouraging any employee of Manitowoc to leave their employment, it was overbroad, and an unreasonable restriction on Lanning that violated section 103.465.

    Jeremy M. Klang Jeremy M. Klang, Marquette 2016, is an associate attorney with Schober Schober & Mitchell, S.C., Oconomowoc, where he practices in real estate and business transactional law.

    The court determined that common law provides that no business has a legally protectable interest in preventing the poaching of all of its employees from a stranger, and therefore, the statute made the same type of provision illegal and unenforceable.

    The court went on to state that an employer only has a legally protectable interest in preventing the poaching of some of its employees, and those employees are limited to certain classes. The court set forth some examples of these classes of employees that might warrant protection, such as top-level employees, employees with special skills or special knowledge important to the employer’s business, or employees with skills that might be difficult to replace. The court did not elaborate any further beyond those general examples or apply them to Manitowoc, specifically.

    What Does This Mean for Wisconsin Employers?

    The court for the first time expressly acknowledged what many in the legal community had already predicted – that non-solicitation clauses in employment contracts are subject to the notoriously restrictive Wisconsin statute section 103.465. If there was any question about it, the question is now answered.

    The most obvious takeaway is that employers can no longer prohibit a departed employee’s solicitation of “all” employees in non-solicitation clauses. As such, all current agreements with employees containing restrictive covenants should be reviewed.

    If the agreements contain language prohibiting solicitation of anything other than specific groups of employees, the agreement should be amended, and additional consideration for the amendment must be provided to the employee in exchange for the amendment.

    Any language prohibiting solicitation of “all” employees should be removed, and all future agreements should be drafted without this broad prohibition to avoid having the agreement ruled unenforceable.

    Be Specific

    The other major takeaway is that non-solicitation clauses in employment related agreements must now identify specific employees or classes of employees that an employee is prohibited from soliciting after the employment relationship ends.

    These specific employees or classes of employees must be those in which the employer has a “protectable interest.” Determining what employees fall within these classes may be challenging, given that the court did not provide much guidance on the permissible scope of these classes of employees that warrant protection. This will be fact-intensive for each business, and will warrant an in-depth discussion with clients regarding the nature of its employment base. This is likely to be a controversial area of law in the future, probably to be tested soon in the courts given the lack of guidance on this point by the supreme court in Lanning.

    Potentially Unintended Consequences

    This decision creates potentially unintended consequences for small businesses in Wisconsin.

    A majority of businesses in Wisconsin are small and medium sizes. A large business with 13,000 employees like the Manitowoc Company may not actually suffer significant detriment from losing entry level employees, and a restriction preventing solicitation of all of those employees probably is broader than necessary to protect its competitive interests.

    However, the loss of any employee for a small business may be significant. As such, it is possible that a restriction to prevent solicitation of all of a small business’ workforce might be reasonable in certain circumstances, but the court’s holding may deter small employers from including such language in their non-solicitation agreements with employees.

    This article is originally posted in the Wisconsin Business Law Blog, published by Schober Schober and Mitchell, S.C.

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