Considering Consideration: Wisconsin Supreme Court Changes Non-Compete Law

April 30, 2015

We previously wrote about a new bill that has been introduced in the Wisconsin Legislature that would make significant changes to the enforceability of non-compete agreements in this state. A recent decision by the Wisconsin Supreme Court has already made a notable change to existing law and introduced a new uncertainty into this area. In Runzheimer Int’l, Ltd. v. Friedlen, 2015 WI 45, the court held that an employer can lawfully require an existing at-will employee to sign a non-compete agreement as a condition of further employment without providing any other benefit to the employee. However, it also suggested that an employer who does so may be unable to terminate the employee for a period of time if the employer wishes to enforce the non-compete agreement.

Before examining this decision, a little background is in order. Basic contract law requires that an agreement must be supported by “consideration” in order to be enforceable—that is, each party must agree to provide some benefit to the other or give up some legal right. In the employment context, an employee agrees to provide his or her time and skill to the employer in exchange for payment of money. While some form of consideration is required for an agreement to be binding, courts generally do not scrutinize the amount of consideration for any transaction—even a small amount will be sufficient, as long as each side contributes something. In the context of non-compete agreements, one recurring issue is under what circumstances an employer can force an at-will employee to sign a non-compete agreement. In an at-will employment relationship, either the employer or employee can terminate the relationship at any time for any reason (subject to discrimination laws).

In NBZ, Inc. v. Pilarski, 185 Wis. 2d 827, 837, 520 N.W.2d 93 (Ct. App. 1994), the Wisconsin Court of Appeals held that a non-compete agreement between an employer and an existing at-will employee is unenforceable due to lack of consideration if the employer does not require an employee to sign the agreement as a condition of future employment or provide any other benefit to the employee. There, a beauty salon attempted to enforce a non-compete agreement against a hair stylist who left to work for a competitor a year after she was hired. The hair stylist signed the non-compete shortly after she was hired, but the beauty salon did not threaten to fire her or promise her future employment if she signed the agreement. The court of appeals concluded that the agreement was not enforceable because the hair salon did not promise to do anything in exchange for the agreement.

Most attorneys read NBZ as requiring an employer to provide some form of affirmative benefit to an existing at-will employee if the employer wanted to enforce a non-compete agreement. This view was supported by a later decision by the Wisconsin Supreme Court in Star Direct, Inc. v. Dal Pra, 2009 WI 76, ¶ 50, 319 Wis. 2d 274, 767 N.W.2d 898, which held “employers may not compel their existing employees to sign restrictive covenants without additional consideration.”

However, the Wisconsin Supreme Court rejected this interpretation of these cases in Runzheimer. In this case, the plaintiff (Runzheimer) sued a former employee (Friedlen) for violating a non-compete agreement after Friedlen was fired and began working for a competitor. Friedlen had worked for Runzheimer for 15 years as a business development consultant when Runzheimer required him to sign the non-compete agreement. Runzheimer gave Friedlen two weeks to consider the agreement, but told him he would be fired if he did not sign it. Friedlen signed the agreement, but was terminated over a year later.

Friedlen argued that the non-compete agreement was invalid because Runzheimer had not provided him with any additional benefit when he signed the agreement. Runzheimer argued that it had, in fact, given Friedlen a benefit—it decided to keep employing him and did not exercise its right to fire him. The circuit court agreed with Friedlen and concluded that Runzheimer’s promise not to fire Friedlen was “illusory” because Friedlen was an at-will employee and could be terminated at any time. Runzheimer appealed and the court of appeals certified the case to the Wisconsin Supreme Court.

The Wisconsin Supreme Court reversed the circuit court and held: “an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” However, the court tempered its ruling by stating that “[a]lthough, theoretically, an employer could terminate an employee’s employment shortly after having the employee sign a restrictive covenant, the employee would then be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing, so that the restrictive covenant could not be enforced.”

The court’s decision is based largely on a theoretical discussion of basic contract law principles. The bottom line was that because Friedlen was an at-will employee, he could be fired at any time for any reason. Runzheimer told Friedlen he would be fired if he did not sign the non-compete agreement and then did not exercise its legal right to fire him after he signed. According to the Wisconsin Supreme Court, this “forbearance”—Runzheimer not firing Friedlen “at that time for that reason”—was “lawful consideration,” and the agreement could be enforced.

The court’s decision is problematic, however, because under this analysis, Runzheimer legally could have fired Friedlen two days after he signed the agreement. That is, according to the court, Runzheimer’s “promise” was simply to not fire Friedlen at the time he signed the non-compete. Runzheimer did not affirmatively promise to continue employing Friedlen for any period of time after he signed the agreement. However, according to the Wisconsin Supreme Court, if Runzheimer had fired Friedlen shortly after he signed the non-compete, Friedlen could have sued Runzheimer for “fraudulently inducing” him to sign the non-compete, violating its “duty of good faith and fair dealing,” and voided the non-compete agreement.

Chief Justice Abrahamson concurred in the result, but argued that the majority opinion was flawed in that, if Friedlen had been fired shortly after signing the agreement, it was unlikely Friedlen could succeed on any claim for “fraudulent inducement” or violating the “duty of good faith and fair dealing” because Runzheimer never affirmatively promised to do anything in the future, it simply promised not to fire him when he signed the agreement and fulfilled that promise. Chief Justice Abrahamson construed the majority opinion as in effect holding that Runzheimer implicitly promised to employ Friedlen for a “reasonable period of time” after he signed the agreement. The majority opinion, however, rejected this characterization of the decision.

Bottom Line

Under the decision in Runzheimer, employers can force existing at-will employees to sign non-compete agreements and need not offer them any benefit other than promising not to fire them at the time they sign the agreement. The difference between Runzheimer and NBZ was that the employer in NBZ did not threaten to fire its employee if she did not sign the agreement, whereas the employer in Runzheimer made it clear Friedlen would be fired if he did not sign. However, the decision in Runzheimer creates uncertainty as to how long an employer must continue to employ an at-will employee after he or she signs a non-compete agreement. While the majority decision suggests an employee may have some legal recourse if he or she is fired shortly after signing, the concurring opinion accurately points out the difficulties an employee will face with any such claim. Thus, an employer that requires an existing at-will employee to sign a non-compete agreement in order to avoid being terminated may become embroiled in litigation if it fires the employee shortly after the agreement is signed.

To avoid uncertainty and potential future litigation, employers that require existing at-will employees to sign non-competes should consult with an attorney to structure the non-compete agreement, and communications to the employee, in a fashion that reduces the likelihood of future litigation.