Wisconsin Lawyer: Reining It In: Limits to Employee Nonsolicit Covenants:

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    Reining It In:
    Limits to Employee Nonsolicit Covenants

    A January 2018 Wisconsin Supreme Court decision makes it more difficult for employers to enforce restrictive covenants in employment contracts that prohibit the signer from hiring away former coworkers.

    Maria L. Kreiter, Erin M. Cook & Rebeca M. Lopez

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    On Jan. 19, 2018, the Wisconsin Supreme Court issued a landmark decision, Manitowoc Co. v. Lanning,1 applying Wisconsin’s notoriously strict restrictive covenant statute and holding that a provision prohibiting solicitation of employees of Manitowoc Co. was invalid and unenforceable.

    In a 2-3-2 split decision, the court concluded that a nonsolicitation of employees provision was overbroad on its face because it applied to the solicitation of “any” employee. According to the court, the particular covenant at hand failed to limit solicitation based on considerations such as the nature and competitive threat associated with the solicited employee’s position or the restricted employee’s personal familiarity with, or influence over, the solicited employee. For these reasons, the nonsoliciation provision was unenforceable under Wis. Stat. section 103.465.

    For Manitowoc Co., the decision meant that its judgment of more than $1 million against its former employee, John Lanning, would remain reversed and it would have no recourse against Lanning, despite his alleged recruitment of more than nine employees to join his new employer, a direct Manitowoc Co. competitor.

    For Wisconsin employers looking to prevent departing employees from recruiting others to work for a competitor, Lanning is the new law of the land. As such, to the extent Wisconsin employers have nonsolicitation of employee provisions in their employment agreements that are similar in breadth to the provision deemed unenforceable in Lanning, it is imperative that those employers revisit their restrictive covenant agreements without delay.

    Employee Nonsolicitation and Wisconsin’s Restrictive Covenant Law

    Many states recognize an employer’s interest in maintaining a stable workforce and thus enforce nonsolicitation of employee provisions such as the one at issue in Lanning, which broadly prohibited a departing employee from soliciting other employees to resign. Such provisions have been justified on the grounds that many employers spend considerable resources to locate, train, and retain their workforce, and, when a valued employee resigns, the employer not only loses its investment but also must spend time and effort to replace the employee.

    Maria Kreitercom mkreiter gklaw Maria Kreiter, Marquette 2004, is a shareholder in the Litigation Practice Group in the Milwaukee office of Godfrey & Kahn S.C.

    Erin (Maggie) CookErin (Maggie) Cook, U.W. 2009, is a member of the Litigation Practice Group in the firm’s Milwaukee office.

    Rebeca LópezRebeca López, Marquette 2012, is a member of the firm’s Labor, Employment & Immigration Law Practice Group in the Milwaukee office.

    The harm associated with losing a key employee is compounded when the employee goes to work for a competitor and solicits former coworkers to join the competitor as well. Before Lanning, neither the Wisconsin Court of Appeals nor the Wisconsin Supreme Court had addressed whether nonsolicitation of employee covenants are subject to Wis. Stat. section 103.465.

    By way of background, Wis. Stat. section 103.465 is the Wisconsin statute that governs restrictive covenants between employers and employees and between companies and independent contractors. The statute reads as follows:

    “A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.”

    The public policy underlying the statute is to enhance employee mobility by limiting the effect of unreasonable covenants. It follows that for restrictive covenants governed by the statute to be enforced, they must be “reasonable.” In a 1959 decision, Lakeside Oil Co. v. Slutsky, the Wisconsin Supreme Court set out a five-factor test for determining the reasonableness of restrictive covenants.2 To be enforceable, the restraint must:

    (1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;

    (2) provide a reasonable time limit;

    (3) provide a reasonable territorial limit;

    (4) not be harsh or oppressive as to the employee; and

    (5) not be contrary to public policy.3

    If any portion of the restrictive covenant fails to satisfy all five factors, the entire covenant is unenforceable.4 This approach in Wisconsin is significantly different than the approach of courts in most other states, which allow some form of reformation or blue penciling – that is, the court can save an otherwise overreaching and unenforceable restrictive covenant by rewriting the covenant (reformation) or eliminating unenforceable components of a covenant but still enforcing the remaining terms (blue penciling).

    Moreover, the Wisconsin Supreme Court has extended the application of Wis. Stat. section 103.465 beyond traditional noncompete restrictions. For example, in Gary Van Zeeland Talent Inc. v. Sandas, the court applied Wis. Stat. section 103.465 to render unenforceable a nondisclosure/confidentiality agreement between an employer and an employee.5 In Heyde Cos. v. Dove Healthcare LLC, the court further held that an agreement between two employers not to hire each other’s employees was likewise covered by the statute and subject to the five-factor test.6

    And, in Star Direct Inc. v. Dal Pra, the court held that a provision barring solicitation of an employer’s customers was a restraint of trade subject to Wis. Stat. section 103.465.7

    With the supreme court’s recent decision in Lanning, the reach of Wisconsin’s restrictive covenant statute now extends to employee nonsolicitation provisions that act as restraints of trade.

    Manitowoc Co. v. Lanning Background

    Lanning worked for Manitowoc Co. as an engineer for more than 25 years before resigning and becoming the director of engineering for a Manitowoc Co. competitor. While Lanning did not have a traditional noncompete agreement, his employment agreement with Manitowoc Co. did contain a nonsolicitation of employees covenant that stated the employee could not, “for a period of two years … (either directly or indirectly) 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….”8

    Two years after signing the agreement, Lanning went to work for a competitor and, according to Manitowoc Co., solicited at least nine of Manitowoc Co.’s employees for potential employment with his new employer.

    Employers must draft the restriction to serve a “legitimate and unique competitive interest.”

    Manitowoc Co. filed suit against Lanning in Manitowoc County Circuit Court, alleging violation of the employee nonsolicitation provision. Following extensive discovery and briefing, the circuit court granted summary judgment in favor of Manitowoc Co., awarding it $97,844 in damages and more than $1 million in attorney fees and costs.

    The Wisconsin Court of Appeals reversed the circuit court’s ruling, holding that the employee nonsolicitation provision was a restraint of trade governed by Wis. Stat. section 103.465 and unenforceable under that statute.

    On Jan. 19, 2018, a divided Wisconsin Supreme Court affirmed the court of appeals.

    Supreme Court’s Two-Step Analysis

    The Lanning decision, authored by Justice Shirley Abrahamson and joined by Justice Ann Walsh Bradley, applied a two-step analysis to conclude that Lanning’s employee nonsolicitation provision was unenforceable.

    First, the court analyzed whether Lanning’s employee nonsolicitation provision acted as a restraint of trade such that it would be subject to Wisconsin’s restrictive covenant statute. Although Wis. Stat. section 103.465 refers specifically to a covenant by an employee “not to compete” with the employer after the termination of employment, it also provides that “[a]ny covenant … imposing an unreasonable restraint is illegal.”

    Readily acknowledging that Lanning’s employee nonsolicitation provision does not conform to “textbook examples” of covenants not to compete, the lead opinion cited Star Direct (customer nonsolicit),9 Gary Van Zeeland (nondisclosure/confidentiality agreement),10 and Heyde Cos. (no-hire agreement between employers)11 as precedent to “focus[] on the effect of the provision of an employment agreement rather than its label to determine whether it constitutes a restraint of trade governed by Wis. Stat. § 103.465.”

    Focusing on the effect of Lanning’s employee nonsolicitation provision, the court concluded that it acted as a restraint of trade because it restricted the ability of Lanning and Manitowoc Co.’s competitors to freely compete “for the best talent in the labor pool.”12 The provision inhibited the mobility of employees and, therefore, restrained competition, making it subject to Wis. Stat. section 103.465.

    Employers considering updating their restrictive covenant agreements with current employees should keep in mind that changes to existing agreements must be supported by consideration.

    The court next scrutinized the reasonableness of the provision under Wis. Stat. section 103.465 and, more particularly, the five prerequisites to an enforceable restraint of trade identified nearly 60 years ago in Lakeside Oil Co. v. Slutsky.13 Finding the provision failed to satisfy even the first prerequisite – that it was necessary for the protection of the employer – the court concluded that Lanning’s employee nonsolicitation provision was overbroad on its face.14

    Specifically, the court stated that the provision created “a sweeping prohibition that prevents Lanning from encouraging any Manitowoc Company employee, no matter the employee’s job or location, to terminate his or her employment with Manitowoc Company for any reason, or soliciting any Manitowoc Company employee to take any position with any competitor, supplier, or customer of Manitowoc Company.”15

    Further, “[w]ithout a specified territory or class of employees, the provision restricts Lanning’s conduct as to all employees of Manitowoc Company everywhere” such that the 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.”16 In short, the provision was not “reasonably necessary for the protection of the employer.”

    Notably, it was of no import that Manitowoc Co. sought to enforce the employee nonsolicitation provision more narrowly than compelled by its plain language: Manitowoc Co. “could have tailored the language to its specific needs” and should have done so because “[e]nforcing an overbroad restraint to the extent it can be reasonably enforced is exactly what § 103.465 was enacted to prevent.”17 The court remanded the case to the circuit court with the instruction that judgment be entered in Lanning’s favor.

    Manitowoc Co. Concurrence

    Justice Rebecca G. Bradley, joined by Justice Michael Gableman and Justice Daniel Kelly, wrote a notable concurrence, agreeing that Wis. Stat. section 103.465 governs Lanning’s nonsolicitation of employees provision and that the covenant is unenforceable. The concurrence, however, criticized the lead opinion for neglecting to undertake a textual analysis of section 103.465 and grounding an interpretation of section 103.465 in case law that strays “far from the text [of the statute] in advancing policy choices that should be made legislatively, not judicially.”18 In addition, Justice Rebecca G. Bradley cautioned that not every nonsolicitation of employees covenant is subject to Wis. Stat. section 103.465.

    The concurrence then went on to take issue, in no uncertain terms, with the 2002 Wisconsin Supreme Court precedent of Heyde Cos.19 Heyde is cited in the lead opinion and, as discussed above, holds that an agreement between two employers to abstain from soliciting each other’s employees, without the employees’ knowledge or consent, is unenforceable as a matter of law.

    In Justice Rebecca G. Bradley’s view, Heyde “should be overruled as unsound in principle because its analysis is patently wrong.”20 She explained that the plain language of Wisconsin’s restrictive covenant statute only applies to covenants between employers and employees, not between two employers. Thus, according to Justice Rebecca G. Bradley, the court disregarded the statute’s plain language and instead extended its application based solely on the “purpose” of the statute.

    This is notable because Wisconsin is in the minority of states to extend its restrictive covenant statute to covenants between two employers. For example, Illinois courts have expressly rejected the reasoning in Heyde and have found “no hire” clauses between companies to be reasonable, even when the affected employees lack knowledge of the restriction.21 Justice Rebecca G. Bradley’s comments in Lanning signal her disagreement with the Wisconsin approach and that she might be amenable to revisiting that approach, should the opportunity to do so arise.

    Key Takeaways from Manitowoc Co.

    Wisconsin courts continue to maintain very high standards of reasonableness with respect to the scope and duration of restrictive covenants. Accordingly, it is imperative that employers thoughtfully draft covenants with reasonable restrictions in employment and independent contractor agreements consistent with the new Lanning decision.

    To increase the likelihood that an employee nonsolicitation restriction will be enforced, the provision should be carefully tailored to the employee who is being restricted. Considerations that should be incorporated into the restriction include the restricted employee’s position, his or her level of influence over other employees, and the competitive threat he or she poses to the company. Ultimately, employers must draft the restriction to serve a “legitimate and unique competitive interest.”

    Legal counsel is well advised to review an employer’s existing employee nonsolicitation language. As the court had never previously held the statute applied to such provisions, many employers incorporated employee nonsolicitation restrictions that broadly restricted employees from soliciting any employee, no matter the employee’s job or location, to terminate his or her employment with the company for any reason. After Lanning, such a broad restriction is no longer enforceable.

    Employers considering updating their restrictive covenant agreements with current employees should keep in mind that changes to existing agreements must be supported by consideration. Accordingly, employers must provide consideration for the changes, which can include, but are not limited to, a change in the employment relationship, a monetary benefit, and so on.

    As made clear in the court’s recent decision in Runzheimer International Ltd., continued at-will employment also constitutes lawful consideration to support an otherwise reasonably drafted restrictive covenant agreement. Thus, if an employee is told he or she will be terminated unless he or she signs a noncompetition agreement, and the employer actually will terminate the employee if he or she does not sign the agreement, valid consideration exists for the restrictive covenant agreement if the employee executes the agreement.22

    As a final matter, additional issues will likely be raised in Wisconsin circuit courts in the years to come, particularly given the differing views expressed by the divided supreme court in Lanning, both as to the scope of Wis. Stat. section 103.465 and the approach taken when interpreting the statute. What this means for Wisconsin employers and legal counsel advising clients with employees in Wisconsin is that a tailored restrictive covenant is more likely to remain enforceable long term.

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    What’s your favorite part of Wisconsin?

    Erin (Maggie) CookThe University of Wisconsin-Madison is my favorite part of Wisconsin. I am a Wisconsin girl through and through. I grew up in Hudson and now reside in Milwaukee, but some of my fondest memories are from my time on campus. From my undergrad days in Witte B and meeting my husband in the U.W. Marching Band to catching my cane at Homecoming and now boating on Lake Mendota with family, Madison will always hold a special place in my heart. On Wisconsin!

    Erin (Maggie) Cook, Godfrey & Kahn S.C., Milwaukee.

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    Rebeca LópezMy father grew up in a small farming town in Mexico and, from the age of 9, had to walk miles through the mountains to get to Guadalajara to study. He walked that path three times a year until he was 18. I’ve long wanted to walk that path with him and see the sacrifice he made to obtain his education.

    Rebeca López, Godfrey & Kahn S.C., Milwaukee.

    What legal memory will still bring a smile to your face 20 years from now?

    Maria KreiterSeeing the feet of my partner Howard Pollack raise off the ground when our significantly taller client enveloped him in the largest of bear hugs after we won a jury trial (which was my first jury trial). The case had been pending for nearly six years at the time of the trial, and the win marked a new and happy chapter for our client. The thought of our client’s unrestrained joy at that moment often reminds me that it is great to be a lawyer, and makes me smile.

    com mkreiter gklaw Maria Kreiter, Godfrey & Kahn S.C., Milwaukee.

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    Endnotes

    1 Manitowoc Co. v. Lanning, 2018 WI 6, 379 Wis. 2d 189, 906 N.W.2d 130.

    2 Lakeside Oil Co. v. Slutsky, 8 Wis. 2d 157, 98 N.W.2d 415 (1959).

    3 Id. at 162-63.

    4 Fields Found. Ltd. v. Christensen, 103 Wis. 2d 465, 471, 309 N.W.2d 125 (Ct. App. 1981).

    5 Gary Van Zeeland Talent Inc. v. Sandas, 84 Wis. 2d 202, 267 N.W.2d 242 (1978).

    6 Heyde Cos. v. Dove Healthcare LLC, 2002 WI 131, 258 Wis. 2d 28, 654 N.W.2d 830.

    7 Star Direct Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898.

    8 Lanning, 2018 WI 6, ¶ 25, 379 Wis. 2d 189.

    9 Star Direct, 2009 WI 76, 319 Wis. 2d 274.

    10 Gary Van Zeeland, 84 Wis. 2d 202.

    11 Heyde Cos., 2002 WI 131, 258 Wis. 2d 28.

    12 Lanning, 2018 WI 6, ¶ 9, 379 Wis. 2d 189.

    13 Lakeside Oil, 8 Wis. 2d 157.

    14 Lanning, 2018 WI 6, ¶ 59, 379 Wis. 2d 189.

    15 Id. ¶ 56.

    16 Id. ¶ 59.

    17 Id. ¶¶ 50, 61.

    18 Id. ¶ 65 (R.G. Bradley, J., concurring).

    19 Heyde Cos., 2002 WI 131, 258 Wis. 2d 28.

    20 Lanning, 2018 WI 6, ¶ 65, 379 Wis. 2d 189 (R.G. Bradley, J., concurring).

    21 See H & M Commercial Driver Leasing Inc. v. Fox Valley Containers, Inc., 805 N.E.2d 1177, 1183 (Ill. 2004).

    22 Runzheimer Int’l Ltd. v. Friedlen, 2015 WI 45, 362 Wis. 2d 100, 862 N.W.2d 879.




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