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  • October 04, 2022

    Appeals Court: Dismissal of Complaint Over Non-compete Clause was Improper

    A trial court’s decision to dismiss a lawsuit seeking to enforce a non-compete agreement was improper, the Wisconsin Court of Appeals has ruled.
    A White Man’s Hand Holding A Pen And Signing A Non-Compete Agreement

    ​​Oct. 4, 2022 – A trial court’s decision to dismiss a lawsuit seeking to enforce a non-compete agreement was improper, the Wisconsin Court of Appeals has ruled.

    In Diamond Assets LLC v. Godina, 2021AP1079 (July 14, 2022), a three-judge panel noted that a customer-based “territorial” limitation did not make the agreement unenforceable, and the employer’s complaint allowed an inference of facts necessary to establish that the agreement’s restrictions were necessary to protect the employer. 

    However, the panel also held that a confidentiality agreement was unenforceable, and thus dismissal as to the confidentiality agreement was proper because there were no facts to infer that the agreement’s restrictions were necessary to protect the employer.

    Non-compete, Confidentiality Agreements

    In 2016, Diamond Assets LLC (Diamond Assets) hired Carlos Godina as a salesman. Diamond Assets manages buy-back programs for Apple devices.

    Jeff M. Brown Jeff M. Brown is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.

    Several months after Godina was hired, he signed a non-compete agreement and a confidentiality agreement. The non-compete agreement bound Godina for two years after the end of his employment with Diamond Assets.

    On June 17, 2020, Godina told Diamond Assets that he was quitting. The company asked him to reconsider.

    Godina didn’t show up for work the next day. He also sent an email to a third party that contained information covered by the confidentiality agreement he’d signed.

    Because of that email, Diamond Assets fired Godina on June 18, 2020.

    Godina remained in possession of information covered by the confidentiality agreement. Additionally, he contacted one of the company’s customers looking for a job – a violation of the non-compete agreement.

    Lawsuit and Dismissal

    Diamond Assets sued Godina in Rock County Circuit Court for breach of contract and anticipatory breach of contract. The company claimed that Godina had violated the terms of the non-compete agreement and the confidentiality agreement.

    Godina moved to dismiss the complaint. He argued that, as a matter of law, both agreements were unenforceable under Wis. Stat. section 103.465.

    The circuit court agreed and dismissed the complaint. Diamond Assets appealed.

    Standard for Dismissal

    On appeal, Godina argued that under Wisconsin case law, a party can establish that an employer-imposed restrictive covenant is invalid based solely on the covenant’s text, regardless of what extrinsic evidence might be presented at trial.

    Diamond Assets argued that the circuit court improperly dismissed its complaint because evidence extrinsic to the agreements related to the totality of circumstances is always relevant in determining whether employer-imposed restrictive covenants are enforceable.

    Diamond also argued that under Wisconsin case law, a court should determine whether there exists a provable set of facts under which all of the restraints imposed by an employer-imposed restrictive covenant are reasonable.

    If such facts exist, Diamond argued, the covenant is enforceable and dismissal as a matter of law is improper.

    ‘Totality of the Circumstances’

    In his opinion for a three-judge panel, Judge Brian Blanchard explained that Wisconsin Court of Appeals precedent interpreting section 103.465 requires an employer-imposed restrictive covenant to, among other things:

    •        provide a reasonable time limit;

    •        provide a reasonable territorial limit; and

    •        be necessary for the employer’s protection.

    Blanchard also noted that precedent requires a court to look to the totality of the circumstances to determine whether an employer-imposed restrictive covenant is enforceable.

    Non-Compete Agreement not Unenforceable

    The Wisconsin Supreme Court has held that whether a restriction in a non-compete agreement is reasonable can depend on evidence extrinsic to the agreement, Judge Blanchard pointed out.

    “The text of the covenant establishes the nature of the restraint based on familiar contract interpretation principles,” Blanchard wrote.

    “But its reasonableness cannot necessarily be determined based solely on the text of the covenant, without reference to extrinsic evidence.”

    It was possible for a non-compete agreement to be per se invalid, Blanchard reasoned – say, if it contained an unlimited territorial or temporal limit, or some combination of otherwise unreasonable restrictions.

    But here, Judge Blanchard concluded, Diamond Assets had pointed to facts that, if proved, could demonstrate that each of the restrictions on in the non-compete agreement were reasonable.

    Blanchard pointed out that the non-compete agreement was limited to two years. He also pointed out that it was territorially limited to a set of customers, and noted that the Wisconsin Supreme Court has held that territorial limitations defined by activities or customer lists instead of geography are reasonable.

    As a result, Judge Blanchard explained, the circuit court was wrong to conclude that the non-compete agreement was unenforceable, and it was improper to dismiss the complaint on that basis.

    Confidentiality Agreement is Unenforceable

    However, Blanchard concluded that the confidentiality agreement was unenforceable.

    The agreement had a “complex structure,” Judge Blanchard noted, and contained a “multi-faceted definition of what is ‘confidential.’”

    “This creates different restraints and, under Wis. Stat. section 103.465, Diamond must show that each is enforceable,” Blanchard wrote.

    If any single restraint was proved to be unenforceable, Judge Blanchard pointed out, the entire agreement is unenforceable.

    “Because the entire confidentiality covenant is unenforceable if any one of its restraints is unenforceable, we narrow our focus to one aspect of the covenant highlighted by Godina. As we now explain, we agree with him that this aspect is unenforceable, rendering the covenant as a whole unenforceable,” Judge Blanchard explained.

    Included in the agreement’s definition of “confidential information,” Blanchard pointed out, was information related to “‘the manner and methods of conducting the Employer’s business.’”

    “We agree with Godina and the circuit court that the phrase ‘manner and methods of conducting [Diamond’s] business’ is virtually without limit,” Judge Blanchard wrote.

    “If enforceable, it would make Godina liable for sharing any detail of Diamond’s workplace and operations, even the most mundane minutiae.”

    As a result, Blanchard concluded, the confidentiality agreement was unenforceable and the circuit court properly dismissed Diamond Assets’ complaint with regard to it.

    “Diamond fails to suggest any provable facts, including any fact inferable from the allegations in the complaint, that it could rely on to justify the ‘manner and methods’ … restraint,” Judge Blanchard wrote.

    The court of appeals affirmed the circuit court’s ruling in part and reversed in part, and remanded the case to the circuit court.

    ​​​​



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    WisBar Court Review, published by the State Bar of Wisconsin, includes summaries and analysis of decisions from the Wisconsin Supreme Court, the Wisconsin Court of Appeals, and the U.S. Court of Appeals for the Seventh Circuit, as well as other court developments. To contribute to this blog, contact Joe Forward.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

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