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.

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.

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.

top secretA long awaited Federal Law on trade secret misappropriation was signed into effect last month. The new law, titled the Federal Defend Trade Secrets Act, or “DTSA”, creates a Federal cause of action for businesses who own trade secrets against individuals who have misappropriated the business’ confidential information. The law creates a uniform definition of
trade secret; a definition that currently differs from state to state, and that has made litigation difficult for businesses with multi-state presences.

Many businesses’ livelihoods depend upon protection of trade secrets. Trade secrets include secret formulas, designs, ideas, and other forms of intellectual property that are the basis for the business’ competitive advantage in their particular market.  While other type of intellectual property like trademarks, patents, or copyrights require publicizing the particular information to mark it as the business’ own property, publicity of a trade secret risks hindering the business’ competitive advantage, giving the business incentive to keep that trade secret, a secret! A couple famous examples of trade secrets that are currently utilized by American companies are Coca-Cola’s formula for Coke, and Google’s search algorithm.

Of course, without protection of trade secret laws, businesses’ risk their trade secrets falling into the wrong hands. Necessarily, employees, independent contractors, and other individuals often become aware of trade secrets when becoming involved with a particular business. Because these individuals could exploit those trade secrets for their own gain, many states, including Wisconsin, have devised their own trade secret misappropriation laws to give businesses a right to recover damages from a person who gained access to the trade secret and then exploited it for his or her own benefit. However, with the increased nationalization (and indeed globalization) of the modern marketplace,  businesses should welcome a uniform definition of trade secret and a uniform forum in Federal Court for litigating trade-secret misappropriation. These changes in the DTSA ease the procedural and financial burdens that accompany state court trade secret litigation.

What this means for your business

One particularly important section in the DTSA is one affecting confidentiality agreements in business contracts, whether they be between the business and its employees, or between the business and independent contractors. The section requires that, as of May 16, 2016, in order for a business to have the full protection of the DTSA, any agreement regarding trade secrets must provide a specific notice to individuals signing those agreements of their rights and protections as whistleblowers in particular types of trade secret cases.

This recent development in trade secret law demonstrates the importance of keeping your business apprised and compliant with the latest changes to the legal landscape. Whether your business’ confidentiality agreements need review, updating, or need to be drafted in the first place, or if you have a former employee or contractor who you believe misappropriated your trade secrets, contact one of our business attorneys at Schober Schober & Mitchell, S.C. to discuss how we can help.

The Wisconsin Senate recently passed a bill that would yet again fundamentally change the current state of Labor & Employment law in Wisconsin. The bill still requires Assembly approval and the Governor’s signature.

Senate Bill 69 repeals current Wisconsin Statute section 103.465, which governs the enforceability of non-compete agreements in employment contracts. The bill would replace the current statute with a less restrictive and more comprehensive mandatory statutory scheme that Wisconsin courts would be required to follow when determining whether a non-compete is enforceable contractual provision. Currently, under § 103.465, non-compete agreements are more likely than not to be ruled unenforceable because the statute only allows enforcement “if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” This statutory reasonableness standard has allowed for significant judicial law making, making enforcement of non-compete agreements less likely. If the bill becomes law, it would make it much more difficult for courts to strike down non-compete clauses in employment contracts, and make enforceability much more likely.

Notable provisions in the bill include:

  • allowing an employer’s offer continued employment to an at-will employee that is conditioned upon the employee’s acceptance of a contractual non-compete provision to constitute valid consideration for an enforceable contract (which statutorily enacts the recent Wisconsin Supreme Court holding in Runzheimer International, Ltd. v. Friedlen, 2015 WI 45.);
  • requiring “blue-penciling,” a practice recently rejected by the Wisconsin Supreme Court in Star Direct, Inc. v. Dal Pra, 2009 WI 76, in which a court is limited to “crossing-out” only the unreasonable portion of the non-compete agreement, whereas the current law under Star Direct allows courts to eliminate all non-compete provisions (even reasonable ones) where only one individual non-compete is found to be unreasonable;
  • creating a rebuttable evidentiary presumption that a provision that only restrains competition for 6 months or less is presumed to be reasonable; while providing that a provision restraining competition for more than 2 years is presumably unreasonable, but still allowing the employer to prove that the provision is reasonable through clear and convincing evidence;
  • expanding the scope of legitimate business interests protected by the statute to include an employer’s prospective clients, rather than just existing ones;
  • requiring a court to jump through some hoops in order to strike down the provision on public policy grounds by requiring that the court explicitly set out the public policy ground it rests its decision on as well as requiring the court to state why the public policy for non-enforcement substantially outweighs the recognized legitimate business interest of the employer;
  • prohibiting a court from using a terminated employee’s individual economic hardship (from being prohibited from competing against their former employer) as a basis for non-enforcement, unless that person can show there are exceptional circumstances for non-enforcement;
  • requiring that if a terminated employee is found to have violated an enforceable non-compete agreement, that any contractually determined attorney fee shifting must be enforced, or in the absence of that, allowing the court to give the cost and attorney fee to the winning party;
  • disallowing the narrow construction of contract interpretation against the employer, and requiring interpretation of the contract in the favor of providing reasonable protection of the legitimate business interest of the employer; and
  • providing that for employers who have secured an injunction against their former employee, they would not be required to post a bond in order to gain injunctive relief, however, the court could require the employer to provide the former employee security for any damages they might incur due to the injunction.

A link to the bill can be found here.

This is a significant and comprehensive change in the current state of employment law in Wisconsin. The bill ties the hands of the judiciary in striking down non-competes, and gives employers much more power over their employees after termination.

It remains to be seen whether the Governor will sign this bill, but those businesses currently with non-compete agreements should know that these changes will only affect those contracts signed after the bill becomes law while current agreements would still be subject to the judicial discretion allowed by the current § 103.465. Schober Schober & Mitchell S.C. will be keeping a careful eye out for if and when this bill becomes law. Please contact us with any questions regarding the potential change in non-compete law; our business law attorneys will be happy to help.

This post is the combined efforts of Jeremy Klang and Thomas Schober.

 

Noncompetes are generally thought of as unique agreements given the varying way states view the restrictive covenants imposed on employees by such agreements. The U.S. Supreme Court recently clarified that that Federal Arbitration Act, 9 U. S. C. §1 et seq., requires arbitration, not litigation, as the proper dispute resolution method for determining enforceability of noncompetes if the applicable noncompete agreement contains an enforceable arbitration clause. In, NITRO-LIFT TECHNOLOGIES, L. L. C. v. EDDIE LEE HOWARD, the Supreme Court vacated the Oklahoma Supreme Court’s decision that the state court was the proper forum for deciding whether the particular noncompete was enforceable under state law.

The general rule in Wisconsin is: (a)  Courts will literally interpret unambiguous contracts; and (b) extrinsic evidence will be used to interpret ambiguous contracts. A recent appellate court decision applied this general rule with respect to noncompete agreements holding that the trial court’s finding that the noncompete was ambiguous was, without additional findings, not enough to find the agreement unenforceable. See

http://www.wisbar.org/res/capp/2011/2010ap000801.htm

             In these tough times, lots of businesses have been closing. In fact, for the fist time in our many years of practice, we’re hearing clients tell us that there is not enough business for both them and their direct competition – that if things continue as they are, they will both go out of business. In fact, they’ve become somewhat friends talking about it. Then the idea comes to one of them: could I pay my competition something to get them to shut down? The answer generally lies in the federal antitrust

Continue Reading Can I Pay My Competition to Shut Down? (Co-authored with Todd Goodwin)

 

For over 50 years, Wisconsin has been deciding cases related to covenants not to compete in working relationships under Wisconsin Stat. § 103.465. On July 14, 2009, in an opinion authored by Justice Michael J. Gableman, Wisconsin’s Supreme Court changed the way that statute will work, much to the benefit of employers. Here’s what they did.

Continue Reading Wisconsin Makes Covenants More Employer Friendly