News and Recent Decisions

How does a business stop a former employee from poaching the business’ employees after the employee has left employment of the business? Generally, to achieve this goal, employers have entered 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 which imposes significant limitations on employers with respect to non-solicitation provisions in employment contracts pursuant to Wisconsin Statute section 103.465.

Case Background

            I wrote about this case when the Wisconsin Court of Appeals issued its opinion in 2016, but to refresh my regular readers’ memories, here’s a brief summary of the facts of the case:

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 over 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 “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) for a period of two years after the termination of his employment with Manitowoc.

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 Wisconsin Statute 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, as explained in my previous post, the Court of Appeals reversed, stating that the non-solicitation provision was unreasonably overbroad and violated section 103.465.

 

The Wisconsin 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 Wis. Stat. section 103.465. The Court supported this holding by asserting that common law states that no business has a legally protectable interest in preventing the poaching of ALL of its employees from a stranger, and therefore, the provision attempting to do that is illegal under the statute. 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.

Key Takeaways

What does this mean for Wisconsin employers?

  1. The Court for the first time expressly acknowledged what most 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.
  2. 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.
  3. 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.

Final Thoughts

I think this decision creates potentially unintended consequences for small businesses in Wisconsin. A majority of businesses in Wisconsin, and most of our firm’s clients, are small to medium sized businesses. 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 now deters them from attempting to assure themselves that reasonable protection in non-solicitation agreements with employees. I am hopeful that the Court has the opportunity soon to clarify this holding as applied to small businesses to avoid these consequences.

There are many open questions still outstanding in this area, and it is inevitable that we’ll get the answers to these questions as they work their way through the courts. In the meantime, businesses will want to ensure they are protecting themselves against potential poaching of their employees to the maximum extent legally permissible. The business attorneys at Schober Schober & Mitchell, S.C. are experienced in drafting employee restrictive covenant agreements and pay close attention to the often-changing landscape of employment restrictive covenant law.

If you or your business need a review of your current employee restrictive covenant agreements or are looking into establishing these agreements in your business, we would be happy to help. Contact me at jmk@schoberlaw.com or visit our website at www.schoberlaw.com if you have any questions.

This article was originally posted on the “State Bar of Wisconsin’s Business Law Section Blog,” and was written by Attorney James Phillips.

 

The passage of the Tax Cuts and Jobs Act brings significant changes to the structure, financing, and agreements in mergers and acquisitions transactions. James Phillips details the more noteworthy provisions that apply in 2018 and beyond.

At the end of 2017, President Trump signed into law the Tax Cuts and Job Act (Act), with many provisions effective for tax years beginning after Dec. 31, 2017.

The Act contains a number of changes that may affect the structure, financing, and agreements related to mergers and acquisitions (M&A) transactions.

Here is a summary of the more significant provisions:

Tax Rate and Certain Deduction Changes

  • Corporate Rates. The Act changes the federal income tax rate applicable to C corporations to a flat rate of 21 percent (down from a maximum of 35 percent).
  • Individual Rates. The Act changes the maximum individual income tax rate on ordinary income from 39.6 percent to 37 percent. The maximum income tax rate on long-term capital gain and qualified dividends remains unchanged at 20 percent and the net investment income tax rate remains unchanged at 3.8 percent. The Section 1202 exclusion of 100 percent of the gain on the sale of qualified small business stock (among other requirements, C corporation stock) held for more than five years remains unchanged.
  • Individual Deductions. Itemized deductions for state and local taxes for individuals are now limited to $10,000 in combined income and property taxes for tax years 2018 through 2025, provided that the deduction for state and local taxes incurred in carrying on a trade or business or for the production of income is retained (such as business taxes imposed on pass-through entities and taxes on Schedules C and E).
  • Pass-through Business Rate. The Act provides for a deduction of up to 20 percent of “qualified business income” earned through partnerships, S corporations and sole proprietorships (including single member LLCs). There are a number of special rules and limitations. This deduction is not available for capital gains, dividends and interest (other than interest allocable to a trade or business). Owners of certain service businesses are subject to phase out rules, and the deduction can be limited to a percentage of wages and depreciable property. This deduction can result in an effective marginal income tax rate of 29.6 percent on qualifying income (plus the 3.8 percent net investment income tax [NII] if applicable).
  • Choice of Entity. The new, lower corporate income tax rate will require more analysis of the preferable way to conduct business operations and structures transactions. The lower corporate rate permits businesses to grow their equity and pay down debt at a faster rate. In many circumstances the ability to avoid the higher shareholder rate applicable to a pass-through, the benefit of shareholders not being involved in corporate tax planning and compliance, the ability to capture net operating losses at the corporate level for carryforward, the potential for the 1202 capital gain exclusion upon a stock sale, the new foreign tax regime, the decrease in the value of a step up in asset basis upon a sale due to the lower corporate income tax rate, the deductibility of state taxes, and others, will make C corporations more desirable. On the other hand, if a business is likely to produce sizable cash distributions to the owners on a current basis, or a sale is likely to be structured for tax purposes as an asset sale (whether asset purchase, forward merger or sections 336 or 338 elections) in the not too distant future, pass-through structures may continue to be preferable, although potentially more costly in the short run.
  • Blocker Entities. The new lower corporate income tax rate may make blocker entities much more common in a variety of situations.
  • Valuation. The change in the income tax rates could result in a change in the value of a variety of assets, but how it will affect transactions is unclear. Some changes could increase value (larger after-tax cash flow due to lower rates) but some changes could decrease value (a reduction in value of tax assets). For example, the value of a step up in basis upon a transaction structured as an asset purchase for tax purposes is worth less with lower income tax rates.

Interest Deduction Limitations

In general, net business interest expense deductions will be limited to 30 percent of “adjusted taxable income,” plus business interest income. The annual tax increment (ATI) is initially related to earnings before interest, taxes, depreciation, and amortization (EBIDTA), but after 2022 will more closely relate to earnings before interest and taxes (EBIT). The amount of interest not allowed as a deduction for a year is treated as paid in the succeeding year, subject to that year’s limitation.

  • Exceptions. The interest expense limitation does not apply in certain cases, including taxpayers whose average annual gross receipts for the three-tax-year period ending with the prior tax period do not exceed $25 million, and electing real estate activities for which the taxpayer must then use a longer depreciation life.
  • Debt versus Equity. The lower corporate rate tax benefit of interest deductions, combined with the potential for deferral of interest deductions and the more favorable individual income tax rate for dividends, is designed to decrease the benefit of debt compared to equity, and in certain cases may lead to less leverage.

Corporate Alternative Minimum Tax and Net Operating Losses

The Act repeals the corporate alternative minimum tax (AMT), but puts in place new limitations on net operating losses (NOLs). The Act eliminates NOL carrybacks but allows indefinite carryforwards. NOL deductions can only offset up to 80 percent of taxable income. The inability to carry back a loss means NOLs arising from a transaction, such as extraordinary compensation payments or other transaction-related items, can no longer be carried back to produce a tax benefit for the seller. And the inability to carry back a loss of a target company to offset pre-closing tax liabilities may change the structure of tax indemnities.

Full Expensing of Certain Property

The Act provides for a deduction of the entire cost of certain property placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Thereafter, the percentage immediately deductible is phased down over five years. The Act applies to not only new tangible personal property, but also used property and computer software.

  • Thus, a purchaser in acquisition structured as an asset sale for tax purposes could purchase tangible personal property at its tax basis and immediate expense the cost rather than step into the shoes of the seller and inherit the depreciation deductions that would otherwise could have been spread over seven years.
  • While asset-treatment acquisitions will still most likely be driven by purchase prices in excess of tax basis giving rise to increased intangible amortization and fixed asset depreciation, the ability to accelerate the cost of used property due to 100 percent expensing will produce some new and interesting negotiations for sellers and purchasers. The interplay of the 100 percent expensing and NOL and interest limitations for the purchaser, and recapture and tax cost for the seller, will require careful modelling of transactions.

Sale of US Partnership Interest by Foreign Partner

A foreign person’s gain on sales after Nov. 27, 2017, of interests in a partnership engaged in a U.S. trade or business will be taxed as effectively connected income up to the extent a sale of assets would have been so treated, requiring the selling partner to pay U.S. tax on the sale.

Sales of such partnership interests after Dec. 31, 2017, will be subject to withholding unless the seller provides an affidavit stating that the seller is a U.S. citizen. If the purchaser fails to withhold, the partnership is required to withhold from the transferee’s distributions the amount the transferee should have withheld.

  • The IRS has delayed the effective date for the withholding for administrative reasons for publicly-traded partnerships. The IRS has requested comments on the rules to be issued under the withholding requirement to, among other things, determine how liabilities of the partnership affect the amount realized.
  • Much like Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) certificates in the case of the sale of U.S. real property or U.S. real property holding corporations, affidavits will likely become the norm in a sale of a partnership interest.

International Taxation

There are significant changes to the taxation of international activity that will require taking a new look at the structure of domestic and foreign operations.

In many cases taxes on international operations can be lower if the U.S. owner is a C corporation. M&A transactions often present an opportunity to reorganize international operations in a more tax efficient manner.

Note: The foregoing is a summary and is not tax advice directed at any particular situation. The specific statutory provisions and tax advisors should be consulted before taking any particular action.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.

 

James Phillips, University of Iowa College of Law 1979, is a shareholder with Godfrey and Kahn in Milwaukee where he practices in the areas of domestic and international tax structuring, planning and controversy matters, corporate and business law, acquisitions and venture capital.



We do a lot of non-profit work. Oftentimes, we are working with new startups that are driven by strong social motivation, but to form and survive need investment capital. This puts us at a crossroad: do we go non-profit and non-stock or conventional corporation? Now, Wisconsin, joining 33 other states, has another alternative: the Benefit Corporation.

Non-profit corporations must have certain characteristics in order to qualify as exempt entities under section 501(c) of the Internal Revenue Code. Charitable organizations qualify under 501(c)(3). Such qualification requires a charitable “purpose” and further requires that in no case may the corporation dissolve and distribute anything to its members or board, but instead, must go to another similarly organized entity. It also allow its donors to deduct contributions to the organization. Its income is not taxed.

If an entity is motivated to protect investor’s capital, make a return on such capital and distribute proceeds upon dissolution to its owners, then it is a “for profit” entity. As such, its income is taxed.

In the past, such entities could not “crossover.” They were one or the other. With the enactment of Chapter 204 of the Wisconsin Statures, on November 27, 2017, Wisconsin now allows corporations to be profit driven and to exist to promote one or more public purposes.

Why is this so important? Because, in the past, the directors of a non-profit had no owners to be responsible to. They promulgated the non-profit’s purpose, regardless of its impact upon the bottom line. Directors of profit corporations owed a fiduciary obligation to the owners to act in their best interests — which oftentimes meant they had to act primarily in consideration of what their actions would do to the bottom line. In addition, for-profit directors could consider three other factors in their decision making:

  • the effect upon employees
  • the impact upon customers
  • how their actions would be perceived by the communities within which they served

Under new Chapter 204, benefit corporation directors may now consider the following additional factors:

  • the effect upon subsidiaries and suppliers
  • any impact upon the local or global environment
  • the interests of customers as beneficiaries of the corporation’s benefit purposes
  • the short term and long term interests of the corporation
  • the ability and extent to which it may accomplish the corporation’s benefit purposes
  • other factors the directors or officers deem important

Note how the last item is a huge “catch all!”

So, what are these “public benefits” that the new benefit corporation must espouse? “A benefit corporation shall have a purpose of creating general public benefit.” Sec. 204.201(1) Wis. Stats. A “General public benefit” is “a material positive impact on society and the environment by the operation of a benefit corporation taken as a whole, through activities that promote some combination of specific public benefits.” Sec 204.120(5) Wis. Stats. Under that section’s subsection (7), “Specific public benefits” are:

  • (a) Providing low-income or under-served individuals or communities with beneficial products or services.
  • (b) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business.
  • (c) Preserving the environment.
  • (d) Improving human health.
  • (e) Promoting the arts, sciences, or advancement of knowledge.
  • (f) Increasing the flow of capital to entities with a public benefit purpose.
  • (g) The accomplishment of any other particular benefit for society or the environment.

The owners may sue directors who fail to consider the corporation’s benefit purposes. Directors are broadly protected if they do. Sec. 204.301(3) Wis. Stats. There shall be a designated “benefit director” who shall have the powers to carry out the statute’s intent. Sec. 204.302 Wis. Stats. The law promotes transparency, inasmuch as the corporation has to provide its shareholders an annual statement that includes:

  • objectives to promote public benefits, as set by the board
  • standards the board adopted to measure progress
  • factual information regarding the success of meeting objectives
  • an assessment regarding the success of meeting objectives

The articles or bylaws may extend such transparency by making such statement available to the public. Sec. 204.401 Wis. Stats.

While the concept of a benefit corporation is quite new, it may be the right form to do business for owners who are motivated to solve social or environmental issues. It assures such owners continued control in order to achieve such goals. Such goals may be used to promote the corporation and may be seen by others dealing with the corporation as a consideration when doing so. Employees may be drawn by such purpose; customers may choose to buy from such a company; communities may be proud to bring such operations into their midst; and owners may benefit by improving the world and making a profit at the same time!

If you, or any group you work with is interested in exploring this new form within which you may do business, please contact our business law experts at Schober Schober & Mitchell, S.C. at (262)785-1820.

Other reading:

For many business owners, retaining key employees is a paramount concern of running their business. Employers often have invested a significant amount of training, heavily rely upon their key employees for revenue and business operations, and, in many cases, the employee is a likely candidate to take over the business. Beyond these reasons, a business owner may also fear that a key employee will be poached by a competitor which would result not only in a loss of the investment, but also risk the business’ competitive advantage or risk losing customers to the employee.

One strategy to alleviate this fear is to have the employee sign a non-competition agreement. We’ve written on our blog about the importance of having a carefully drafted non-competition agreement in the past, but it’s worth a reminder that a poorly drafted non-competition agreements risks a court voiding the whole agreement even if only one contract term violates the law. This is the case because Wisconsin has a statute (Wis. Stat. sec. 103.465) that imposes certain restrictions on the enforceability of non-competition agreements between employees and employers. The statute puts heavy scrutiny on the terms and surrounding circumstances of a non-compete agreement, and typically favors the employee.

However, a recent Wisconsin Court of Appeals case, Karsten v. Terra Engineering  & Construction Company, reminds us that it is possible for non-competition agreements to be scrutinized outside of the context of the statute, under a less restrictive method called the “rule of reason”. Under the rule of reason, the terms of a non-competition agreement and the surrounding circumstances of its negotiation still must meet certain elements, but this method is much less restrictive and therefore, the agreement is more likely to be enforced by the courts. Notably, under the “rule of reason”, if the court thinks the non-compete’s terms are unreasonable, rather than voiding the whole agreement completely, the court can modify the scope of the contract to what it thinks is reasonable. This is a huge advantage compared to the penalty of voiding the entire contract under 103.465. The Karsten court ruled that the statute “does not apply” and that the rule of reason applies to a non-compete  “when the [non-competition agreement] is not a condition of employment and the employer does not possess an unfair bargaining advantage over the employee.”

With that in mind, what are some ways that these agreements can be drafted and/or negotiated in order to avoid being scrutinized under 103.465?

  • Don’t use employment as the consideration for the contract! Provide an adequate bonus or benefits such as deferred compensation plans or the purchase of life insurance, in exchange for their agreement to the non-compete. Many employers expressly state in the agreement that the consideration is the employer employing the employee in the first place, or if negotiating with a current employee, the continued employment of the employee (implying that they will not continue to be employed if they do not sign).
  • Don’t expressly state that you have the right to terminate the employment of the employee for breaching the covenant! Most employees are employees at will, so therefore could be terminated with or without cause (provided there aren’t any discriminatory reasons for your termination). Because of this, even if there’s a separate employment agreement, there’s really no reason to expressly tie breach of the non-compete to your right to terminate.
  • Play Fair! The courts require that there is not unfair bargaining advantage by the employer. Consider giving the employee the opportunity to ask questions, to negotiate the consideration they’re receiving, encourage them to speak to legal counsel, and don’t threaten any negative consequences regarding their employment for their failure to sign. Providing language in the agreement that acknowledges that the parties understand the terms and their legal effects may also be helpful in achieving this goal.

Non-compete law is constantly evolving in Wisconsin. The business attorneys at Schober Schober & Mitchell, S.C. keep a close eye on these changes to ensure our clients are always in the best position to mitigate risks in their business.

Questions? Contact me at jmk@schoberlaw.com.

The attorneys at Schober Schober & Mitchell, S.C. are excited about the recent news that a Commercial Court Docket (“CCD”) will be coming to circuit courts in the Fox Valley, as well as in Southeastern Wisconsin– right here in Waukesha County! On February 16, 2017, the Supreme Court of Wisconsin voted 5 to 2 to adopt a pilot program that creates a separate commercial court docket in these judicial districts. This specialized commercial court will be solely responsible for resolving disputes pertaining to businesses brought in these judicial districts.

Depending on the type of dispute brought in these circuit courts, a case may automatically qualify for placement in the CCD. Cases qualifying for the CCD  will begin being assigned in these courts starting July 1, 2017. Some examples of the types of cases that qualify are those involving internal governance issues, business torts and restrictions in trade, merger and acquisition issues, securities, intellectual property, and franchise issues. Initially, the judges assigned to the CCD will be chosen by the Supreme Court. The Court has said that it will likely choose those judges with business law backgrounds, at least for the initial rotation during the three years of the pilot program.

This is a welcome change to both the legal and business landscape here in Wisconsin, and will hopefully be here to stay. Twenty-Six other states in the U.S. have created some type of special commercial court docket in their states, and studies have shown that this has had a positive impact on communities as a whole within those states. Here are a few reasons why this addition should be celebrated by all Wisconsinites:

With at least the initial judges overseeing the CCDs having demonstrated business law backgrounds, parties will have greater confidence that resolutions of complex commercial disputes will  reflect an understanding of the realities of day to day business issues;

The CCD should attract more businesses—whether they be start-ups or established companies—to relocate and do more business in Wisconsin, because of increased confidence that disputes will be resolved more quickly, fairly, and at a lower cost. This creates jobs, greater tax revenue, and increased quality and quantity of services available to businesses and consumers alike;

Separating commercial issues from the civil docket should significantly speed up litigation time, giving businesses greater incentive to fully litigate complex issues. This creates consistency and reliability in the law for the entire business community, and also reduces costs for businesses that otherwise might be deterred from litigation for purely economic reasons; and

In states that have created commercial court dockets, there has been an increased level of capital investment by venture capital groups and angel investors into start-ups and other early-stage businesses—something Wisconsin desperately needs to help foster growth of the many entrepreneurs and startups seeking to grow in this state.

Have questions or comments about the new Commercial Court Docket and how it might impact you or your business? Contact one of the attorneys at Schober Schober & Mitchell, S.C.

Effective March 14, 2017, consumers will have what is being called by some, a “Right to Yelp”. The Consumer Review Fairness Act of 2016 (“CRFA”) was enacted in December 2016, and prohibits businesses from inserting provisions into customer contracts that prohibit the customer from giving a derogatory online review about the business.

These provisions have been termed anti-derogatory provisions, and are used to give a business a contractually based legal right  to remove a negative consumer review that the business believes could damage its reputation. Typically these contractual provisions are buried in form contracts (defined by the CRFA as contracts where the customer had no opportunity to meaningfully negotiate the terms). Examples of these types of agreements are the terms of use of almost every business’ website, or even your Apple service agreement. The CRFA now prohibits businesses from using anti-derogatory provisions, and provides for penalties for businesses that do so.

What This Means for You

From the consumer standpoint, the CRFA encourages an organic and free-flowing information marketplace in regards to customer reviews, and allows the public as a whole to have the most accurate picture of a business’ services. In the “Google” age, consumers have come to rely upon the accuracy of reviews on sites and mobile phone apps like Yelp, YP, Facebook, and the Better Business Bureau. Consumers use these sites to determine which professional service to use, what restaurant at which to eat, and which products to buy. The CRFA ensures that these review sites are able show the full picture to consumers.

On the other hand, the CRFA limits a business’ legal options in protecting their business’ reputation. Businesses can now only remove reviews that are slanderous, libelous, or defamatory, and, for the most part, must go to court to do so. With the law prohibiting businesses from creating a contractual right to remove negative reviews, the business is forced to prove in court that the statement was actually defamatory, a much taller task than a breach of contract action.

How to Manage Negative Reviews

In light of the fact that many sites like Yelp and BBB are already flagging businesses using these anti-derogatory review provisions in their contracts, many businesses may have stopped using these provisions already. However, the question still persists: how do you get rid of the negative reviews without resorting to litigation?

Here are a few suggestions:

Many sites have options for you as a business owner to claim your business on their site so you can publicly respond to reviewers. In the event of a negative review, you have the opportunity to respond, clarify the situation, as well as take an opportunity to publicly show your commitment to customer service. This then puts it on the reviewer to give you a reasonable response. Hopefully this interaction will either diffuse the situation, lead the reviewer to remove his/her post, or result in the reviewer responding inappropriately, thereby ruining his/her credibility. Make sure you’ve claimed your business on these sites so you can do this!

If the negative review lingers, how can you make that review an anomaly? First, learn from it, and strive to prevent whatever caused the negative review. This should lead to a higher rating over time. Second, encourage (and that doesn’t mean bribe) your customers to leave you a review at the end of your customer relationship so you can gain a higher rating. One interesting method I’ve seen for those businesses interacting with customers electronically, is that the businesses ask their customers about their experience through electronic communication. This gives them the option to answer whether their experience was positive and negative. If it was negative, the business links the customer to a private feedback page where they can make their comment to you privately. If they select positive, link them to a page asking them to review you on whatever review site you suggest. Though it doesn’t stop the negative reviewers from then taking their frustrations to Yelp, or the like, you may reduce the risk of a negative review by allowing an unsatisfied customer to blow off some steam.

If the comment is actually personally derogatory or defamatory, there are options on most sites that allow you to flag the comment to the site administrator to get the review removed.

The business attorneys at Schober Schober & Mitchell, S.C. stay updated on new legal issues affecting Wisconsin businesses. To ensure your business is complying with this new law, or for any questions you may have, email me at jmk@schoberlaw.com.

For those of you who follow professional football, you are no doubt aware that Tom Brady, the 4-time Super Bowl winning Quarterback for the New England Patriots, recently came back from a suspension for (allegedly) deflating footballs. But why would I bring this up on our firm’s business law blog? Beside the implications for your fantasy football team, the reason is because Brady’s suspension was in large part a result of something called an arbitration clause in his contract.

Brady is represented by the NFL Player’s Association (the “NFLPA”), a union that advocates on behalf of players (who are employees) through a collective bargaining agreement with the National Football League (the “NFL”). In negotiating some provisions of NFL player contracts, the NFL and NFLPA have agreed to submit all disputes between the players (the employees) and the NFL (the employer), to what is called arbitration. Arbitration is a common way for private parties to resolve any disputes instead of going to court, and the decision to arbitrate is typically agreed upon between the parties in whatever contract governs the parties’ relationship.

To many, arbitration is a preferable method of dispute resolution for a few reasons:

The parties can specifically choose arbitrators to resolve their dispute that are knowledgeable in the particular area of dispute, and avoid the risk of drawing a circuit court or federal court judge without the background in that area;

Arbitration is not necessarily subject to the stringent rules of evidence found in trial court; and

Except in limited circumstances, the decision of the arbitrators is final and binding upon the parties, meaning protracted litigation and appeals are unlikely.

In Tom Brady’s case, he tried arguing that one of those limited circumstances should overturn the arbitration decision against him. United States Courts and Wisconsin Courts have a strong policy of deferring to arbitration decisions and only overturning them in circumstances where it is clear that the decision was corrupted, there was some evident bias, where there is evidence and meaningful procedural misconduct, or where the arbitrator exceeded his or her power at some point in the arbitration.

Brady’s arbitration was unusual because the arbitrator was Roger Goodell, the Commissioner of the NFL. Brady’s argument was that Goodell acted with evident bias, that there was procedural misconduct, and that Goodell exceeded his power as an arbitrator. After having the arbitration decision overturned in circuit court in 2015, in summer 2016, the 2nd Circuit Court of Appeals (in New York) finally ruled against Brady, deciding that the actions of Goodell were not egregious enough to upset the policy of deferring to arbitration decisions. Ultimately, Brady accepted the suspension, foregoing an opportunity to take the case to the United States Supreme Court.

 

Ok, But What Does This Have to Do With Your Business?

            The Brady case is another illustration that contractually opting for arbitration is preferable for those who prioritize cost-effectiveness in dispute resolution. The law that defers to arbitration in the United States doesn’t just apply to high-profile athletes and employers bringing in billions of dollars in revenue like the Tom Brady and the NFL. Because of this, the likelihood of an arbitration decision being overturned is low for all parties who opt for it to resolve their disputes.

For all businesses, when entering into contracts with third parties like vendors, employees or customers, both parties have incentive to minimize the risks involved in your relationship, many of which are uncertain and unforeseeable. You can even agree how costs will be allocated based upon which party is successful. Where a dispute arises, opting for a cost-effective and time sensitive solution to limit the litigation through arbitration may be a preferred option over going to state or federal court.

Not every contract calls for an arbitration clause, however. Because of US Courts’ policy to not upset arbitration decisions, opting for arbitration to resolve your disputes also means that you will have to live with the consequences of the decisions, even when it goes against you. Accordingly, arbitration should be opted to only in strategic situations, and contracts containing such clauses should be drafted by an attorney who has knowledge of the risks prevalent in your particular industry as well as local contract law. If you have any questions about how you can manage your business’ risks through arbitration clauses, contact one of the business attorneys at Schober Schober & Mitchell, S.C. We would be happy to help.

Time is runningTime Clock out to plan for some big changes in overtime pay law. Last summer we wrote about a proposed “modernization” in the Department of Labor’s overtime pay rules. The rule has now gone through the required commentary period, and will now be effective December 1, 2016.

Currently, overtime law allows employers to be exempt from paying their salaried employees time and one-half for overtime worked if those employees are in “white-collar” positions and if the employee makes over a certain salary threshold. White-collar positions are defined as executive, administrative, or professional positions (and are defined more specifically by the Department of Labor). Right now, the salary threshold for the exemption is $23,660 per year or more. Starting December 1, 2016, however, the new salary threshold for the exemption will be $47,476 and above.

You may have heard the news that some states are suing to prevent the new rule from going into effect, and that the US House of Representatives just passed a bill to delay the effective date of the law for six months. But, if you were hoping that this would allow for a bit more time to plan for this new rule you are probably out of luck. Unless there is a stay on the new rule by the Supreme Court or if the president decides not to veto the Congress’ bill, both of which are unlikely, the new rule will take effect in just two months.

With that in mind, here are a few possible solutions to help ease the updated rule’s impact on your business:

  • Establish a policy (if you don’t already have one in place) requiring employees to track their time worked during the week and requiring approval before being allowed to work over forty hours in a week.
  • If you have employees who make more than the new salary threshold but don’t meet the “white-collar” position definitions, you could try transitioning the employee into a new role that makes them eligible for the exemption.
  • Lastly, if you have employees that are currently close to this new salary threshold and you know they often work more than 40 hours a week, depending on the situation, it may actually be more economical to give them a raise (or a bonus) to put them above the $47,476 threshold to be eligible for the exemption, and avoid paying 150% their salary for extra time worked.

This new rule change will have a large impact on many employers and employees across the country. With the effective date of December 1st quickly approaching, the business attorneys at Schober Schober & Mitchell S.C. will be happy to help you plan how to best comply with the new law.

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.

I’ve never really gotten on the Zombie movie and TV show bandwagon. I think it’s because they’re just so far-fetched, that it’s difficult for me to buy into the premise. When it comes to the reality of the Zombie Property Apocalypse though, it’s a completely different story. You may have read or heard about “Zombie Properties” in the news, but might not know exactly what the term really means.

Zombie Properties are partially a result of the subprime mortgage crisis that contributed to the housing bubble burst in the late 2000s, as many homeowners and lenders across the state of Wisconsin found themselves in court involved in foreclosure actions. In Wisconsin, a lender must foreclose on a property by bringing a law suit, where it must prove that the borrower defaulted on its mortgage obligations in order to get a judgment for foreclosure. Upon that judgment, the borrower has a specified period of time to redeem the property. Often, however, upon receipt of the foreclosure notice, borrowers just abandon their homes and don’t fight the foreclosure action in court, making it easy for a lender to obtain the foreclosure judgment. Seemingly, this would also make it easy for lenders to sell the property to get their money back from the loan it gave to the borrower. But, sometimes lenders won’t sell the property even if they have a foreclosure judgment. Upon a property being abandoned, properties  sometimes become subject to break-ins and other crime, making them unmarketable for sale, and often are of so little value that the lender has little incentive to incur the costs to sell. The lender will then just leave the property abandoned and dormant, putting the property in a limbo where it is neither dead nor alive; hence the term “zombie property.”

Zombie Properties have a negative effect on the marketability of sellers of other neighborhood homes and also decrease the availability of housing for buyers. In an effort to curb the problem in the state, Wisconsin enacted Act 376 earlier this year. The Act seeks to combat the Zombie Property problem in Wisconsin by making the time period for all foreclosures quicker and by deterring lenders from letting abandoned properties sit unsold for too long.

Shortened Redemption Periods

The first notable change under the new law is the reduction of redemption periods for owners of residential properties subject to foreclosure. In Wisconsin, when a lender wins a judgment of foreclosure against a borrower in default, the borrower has a chance to redeem the property by paying off the mortgage, executing a short sale, giving the lender a deed in lieu of foreclosure, or even filing for bankruptcy. Under the old law, if the lender opted to retain the ability to go after the borrower for any outstanding amount due on the mortgage, the borrower was given a year to redeem the property and to repay the deficiency. Also under the old law, if the lender opted to just have the ability to sell after the redemption period but waived its ability to go after the owner personally for the deficiency on the mortgage, the redemption period for the property was only 6 months. Under the new law, the redemption periods were reduced from 12 months to 6 and from 6 months to 3, for each respective situation. One caveat in the new law is that for this new 3 month redemption period, the owner of the property can extend the redemption period by a maximum of two months by showing that he or she has made a good faith effort to sell the property. The home owner can show a good faith effort by listing the property for sale with a real estate broker.  Though this reduction in redemption time affects all foreclosures on mortgages executed after April 27, 2016, the law reduces the likelihood of a home becoming a “Zombie Property” by reducing the amount of time that abandoned properties remain dormant.

 

Forced Sale of “Zombie Properties”

            The other notable change in the new Act is a rule that forces the hand of a lender to sell a property within a certain period of time if a court deems the property to be abandoned. Under the prior law, the Wisconsin Supreme Court had interpreted the statute as to require a lender to hold a sheriff’s sale of a property within a “reasonable” time after the expiration of the redemption period. In that ruling, the Wisconsin Supreme Court intended to curb the apparent Zombie Property Apocalypse by forcing lenders to sell abandoned properties after redemption periods expired. Despite the Court’s efforts to combat the problem, the Court’s ruling requiring a lender to sell an abandoned property within a “reasonable time period” was unclear.

The new law removes this lack of clarity by accomplishing two things: First, it requires that either the lender or the municipality where the property is located prove that the property is abandoned. Next, if a court rules that the property is abandoned, the lender must either sell the property or release the mortgage on the property within 12 months of the expiration of the property owner’s redemption period. If the lender does not do so after the expiration of the 12 month period, the municipality where the property is located or even the owner of the property can force the lender to sell the property at a sheriff’s sale. This change on forced sales of abandoned properties applies to foreclosure actions begun after April 27, 2016, without regard to whether the mortgage was executed prior to that date. By deterring lenders from sitting on abandoned properties for long periods of time, this change also reduces the likelihood that a property becomes a “Zombie Property.”

This new foreclosure process in Wisconsin is important to know for both lenders and all owners of real estate. For any questions on how this new law might affect you or your business, contact Schober Schober & Mitchell, S.C. at 262-569-8300 or email me at jmk@schoberlaw.com.