|
Published: May 1, 2008
Author: Daniel McAlvanah
The Wisconsin Supreme Court has granted a petition for review of the case of Star Direct, Inc. v. Dal Pra. The Supreme Court has an opportunity to clarify two important issues relating to the enforceability of restrictive covenants which contain provisions held to be in violation of Wisconsin Statute section 103.465. The resolution of these issues will impact the lower courts' future treatment of restrictive covenants.
Facts
In September of 2002, Star Distributing, a distributor of convenience store products, hired Eugene Dal Pra as a sales associate. At the time of hire, Dal Pra signed an employment agreement that contained two specific non-compete provisions, identified as the "business clause" and the "customer clause."
Under the "customer clause," Dal Pra was restricted from soliciting business from Star customers during a period of two years following the termination of his employment. The "business clause" restricted Dal Pra from becoming engaged "in any business which is substantially similar to or in competition with" Star, within a 50-mile radius of Rockford, Illinois. Like the customer clause, the business clause applied for a two-year period following Dal Pra's termination of employment.
In August of 2006, Dal Pra voluntarily terminated his employment with Star. Dal Pra then began his own business distributing many of the same products as he did while employed by Star, and to many of Star's customers. Star then filed suit, alleging that Star violated the non-compete agreement. In response, Dal Pra moved for dismissal on the grounds that the non-compete agreement was invalid under section 103.465. After the circuit court granted summary judgment in Dal Pra's favor, Star appealed.
The Court of Appeals' Decision
The Court of Appeals' decision had two components. First, the court examined the enforceability of the business clause in light of section 103.465. Under case law interpreting section 103.465, a restrictive covenant must: (1) be necessary to protect the employer; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive to the employee; and (5) not be contrary to public policy.
In analyzing the business clause, the court held that the clause violated section 103.465 because Star had failed to show that it had a legitimate business interest in preventing Dal Pra from engaging in any business "substantially similar" to Star's business. Importantly, the court interpreted the clause "substantially similar" to mean that Dal Pra was not only restricted from selling the exact same line of products that Star sold, but any products that could theoretically be sold by a distributor engaged in the same line of business as Star. Star failed to show that it had a legitimate business interest in restraining Dal Pra from selling products that Star didn't even sell. For this reason, the court held that the business clause was unenforceable. The court did not make an independent inquiry into the enforceability of the customer clause.
The second - and arguably more important - issue addressed by the court was whether the customer clause and the business clause were divisible. In other words, could the court chose to treat the two clauses as two separate restrictive covenants, notwithstanding the fact that they were both incorporated into a single overarching employment agreement? The answer to this question gave rise to an even more intriguing question: If the court were to hold that the customer clause and the business clause were divisible, could the court still enforce the customer clause despite the fact that it had already invalidated the business clause?
The Test for Divisibility: Sufficient Intertwinement
To answer the first of these questions, the court looked to precedent. Under a 1984 decision in Streiff v. American Family Mutual Insurance Company, the Wisconsin Supreme Court held that when separate restrictive covenants within a single contract are sufficiently "intertwined," the covenants constitute a single indivisible covenant. Further, according to the Streiff decision, if the separate covenants are indivisible, if one covenant is invalid, all of the component covenants are invalid.
The use of the intertwinement test has become something of a challenge. Streiff defines intertwinement in at least two different ways. Under one version, indivisibility exists if the separate provisions of a non-compete agreement are "distinct, mutually exclusive, independent provisions that come into play in totally different fact situations." In another version of the test, indivisibility exists if the provisions "restrict several similar types of activities and establish several time and geographical restraints."
The court of appeals adopted the second approach, much as it did in a 2001 case called Mutual Service Casualty Insurance Company v. Brass. In Brass, the court considered the enforceability of three restrictive covenants in an insurance agent's employment contract. The first clause provided that the insurance company's obligation to provide termination compensation was subject to the condition that the employee not induce policyholders to cancel insurance contracts they had with the company. The second clause provided that, for a period of one year after termination, the employee would not induce any policyholder credited to the employee's account on the termination date to cancel any policy or solicit such a policyholder to purchase insurance coverage from a competitor. The third clause provided that, for three years following termination, the employee would not in any way be connected with the insurance business of a specific competitor. Against this background, the court in Brass concluded that the three clauses, when considered together, constituted an indivisible covenant because they restricted several similar types of activities and established several time and geographical restraints.
Analogizing to Brass, the court of appeals held that the customer clause and the business clause constituted a single indivisible covenant. Despite the authoritative tone of the court of appeals' opinion, the decision lays bare the problems with an indivisibility test that asks whether the provisions at issue "restrict several similar types of activities and establish several time and geographical restraints."
What is also evident is that the analytical framework applied in Brass and Streiff yields more confusion than clarity. For example, if provisions that restrict several similar types of activities and establish several time and geographical restraints are indivisible, does it logically follow that provisions that restrict a multitude of dissimilar activities and establish a limited number of time and geographical practices are divisible? Moreover, what matters more in the analysis: activity restraints or temporal and geographical restraints? By accepting review, the Wisconsin Supreme Court has an opportunity to clarify these issues.
Are Divisible Covenants Still Enforceable?
The Supreme Court's decision may also help answer an even more tantalizing question. Under Streiff, it is clear that if the restrictive covenants within an employment agreement are indivisible, the fact that a single restrictive covenant is unenforceable renders all of the covenants unenforceable. But what about a situation in which a court concludes that the restrictive covenants within an employment agreement are divisible? If the covenants are divisible, and a court concludes that only one of the covenants is unenforceable under section 103.465, do the remainder of the covenants survive? Despite the oft-repeated mantras that restrictive covenants are suspect and must be construed in favor of the employee, there is at least a chance that the Supreme Court will answer this final question in the affirmative. If this were to occur, the result could benefit employers in future litigation.
Bottom Line
Regardless of how the Supreme Court chooses to resolve this case, employers should still adhere to basic principles of good drafting when creating restrictive covenants. Moreover, given the risk that a court could conclude that the various restrictive covenants in an employment agreement are divisible, the safest course is to draft all of the provisions in such a way as to ensure that they survive scrutiny under section 103.465. Consult legal counsel for guidance to make sure that your restrictive covenants are enforceable.
Daniel P. McAlvanah is an attorney at Axley Brynelson, LLP. He can be reached at 608.260.2489 or dmcalvanah@axley.com.
This article was featured in the May 2008 issue of the Wisconsin Employment Law Letter, which is edited by Axley Brynelson Attorney Saul C. Glazer and published by M. Lee Smith Publishers LLC. Reproduced here with the permission of M. Lee Smith Publishers, LLC.
Axley Brynelson is pleased to provide articles, legal alerts, podcasts and videos for informational purposes, but we are not giving legal advice or creating an attorney/client relationship by providing this information. The law constantly changes, and our publications may not be currently updated. Before relying on any legal information of a general nature, please consult legal counsel as to your particular situation. While our attorneys welcome your comments and questions, keep in mind that any information you provide us, unless you are now a client, will not be confidential.
|
