In the spirit of Labor Day, I thought both employees and business owners in Wisconsin should know about a recent decision on restrictive covenants from the Wisconsin Court of Appeals. The case is important for you or your business because it affects whether certain employer-employee agreements are actually enforceable.
Many Wisconsin employer-employee relationships are governed by restrictive covenant agreements, which typically come in three forms:
- A non-competition agreement (an agreement not to start a competing business or work for a competitor),
- a non-solicitation agreement (an agreement not to hire, or help an employee poach the employer’s current employees or customers), or
- a confidentiality agreement (an agreement to maintain the secrecy of an employer’s confidential information). We wrote on Confidentiality Agreements earlier this summer.
In many other states, these types of agreements are deemed to be illegal and unenforceable. Wisconsin, however, has a different stance, and by statute, allows employers to restrict an employee from competing against its business and protect its own business provided the agreement is “reasonably necessary for the protection of the employer.” What does that mean? Well, Wisconsin Courts have the ultimate power in deciding what is “reasonable” under the law.
The Wisconsin Court of Appeals Ruling
Most recently, the Wisconsin Court of Appeals ruled on the reasonableness of a non-solicitation agreement, in the case of Manitowoc Company v. Lanning. Lanning, the employee, was an experienced, well-connected engineer for Manitowoc Company, a company that manufacturers construction cranes and food service equipment. After working for Manitowoc Company in its construction crane division for almost 35 years, Lanning left to work for a competitor in the area. During his time with Manitowoc, he and Manitowoc Company had executed a non-solicitation agreement stating that Lanning would not “solicit, induce, or encourage any employee to terminate their employment with Manitowoc” or to take a new job with a competitor, customer or supplier. Manitowoc believed that Lanning was breaching this agreement by allegedly poaching some of their employees through his new employer, so they sued Lanning to enforce the agreement.
The Court of Appeals ruled that the non-solicitation agreement was unenforceable because the agreement allowed Manitowoc to restrict not only its own interests in restricting competition, but also some of its non-competitive interests. The court found that the agreement applied to Lanning’s poaching of any employee of Manitowoc. This could have applied to a high level executive or key employee in the division Lanning worked (which alone, may have been an enforceable restriction) or even an entry level employee or maintenance worker for the Food Service Division, a division in which Lanning never worked. If enforceable, this would have allowed Manitowoc to restrict Lanning’s ability to encourage any employee to find new work even if the termination of that employee would have had little to no impact on Manitowoc’s ability to compete. The Court noted the agreement would have allowed Manitowoc to enforce the restriction on Lanning even if he encouraged a young family friend who worked for Manitowoc to quit his job to pursue graduate studies and take a job as a barista at Starbucks, and that that would be too broad.
Even though Manitowoc is entitled to prevent an employee from poaching employees that actually affected their competitive interests under Wis Stat. 103.465, if any potential application of the agreement is not reasonably necessary, the entire agreement is void. Essentially, if Manitowoc would have drafted their non-solicitation agreement more carefully to avoid this broad application, their agreement would have been enforceable against Lanning.
The Bottom Line
It’s important that these types of agreements are carefully drafted. As this case shows, even if the actions that a former employee are competitive, a poorly drafted provision will not effectively restrict competition of employees and risks making the entire agreement void. Identifying which employees will actually have an impact on an employer’s competitive interests and inserting language in the agreement that limits the restrictions to those individuals is absolutely essential to an effective and enforceable restrictive covenant.
Whether you are an employer or employee subject to a restrictive covenant agreement, or even an employer thinking about entering into these types of agreements with your employees, this case adds some additional complications to the law on restrictive covenants in Wisconsin. With an employee’s or business’ livelihood on the line with these types of agreements, it is well worth it to have your agreement reviewed or drafted by an attorney with experience in the area to ensure it is effective. One of our business attorneys at Schober Schober & Mitchell, S.C. would be happy to help.