Wisconsin Court Applies Rule of Reason Enforcing Non-Solicitation Provision in Stock-Option Agreement

July 26, 2010

Wisconsin courts have long recognized the importance of protecting parties’ freedom to contract. This freedom, however, is not without limits. Wisconsin courts view restrictive covenants, such as non-compete, confidentiality and non-solicitation provisions, with a high degree of skepticism. To the favor of the employees, Wisconsin courts utilize four principles to analyze such restrictive covenants:

  1. They are presumptively invalid
  2. They must be able to withstand close scrutiny to pass legal muster as being reasonable
  3. They will not be interpreted to extend further than the language of the contract absolutely requires
  4. They are to be interpreted in the light most favorable to the employee [1]

In Wisconsin, Wis. Stat. § 103.465 governs restrictive covenants in employment contracts. Under Wis. Stat. § 103.465, a restrictive covenant is enforceable only when it:

  1. Is necessary to protect the employer
  2. Provides a reasonable time limit
  3. Provides a reasonable territorial limit
  4. Is not harsh or oppressive to the employee
  5. Is not contrary to public policy

Furthermore, should any part of such covenant fail to satisfy the five elements above and be deemed void, illegal and unenforceable, the entire covenant becomes void, illegal and unenforceable regardless of the reasonableness of the remaining provisions.

Wisconsin courts, however, do not apply Wis. Stat. § 103.465 in all agreements. They instead scrutinize restrictive covenants under such section in two particular instances: when the restrictive covenant is signed at the beginning of employment as part of the initial employment arrangement, and when the restrictive covenant is contained in a document other than the employment agreement but the employer holds superior bargaining leverage over the employee. [2] In short, the rigorous conditions of Wis. Stat. § 103.465 apply only when the covenant is a condition of employment or because the employer possesses an unfair bargaining advantage. [3]

Restrictive covenants that fall outside the scope of Wis. Stat. § 103.465 are subject to a considerably lower standard: a “rule of reason” inquiry. Specifically, the “rule of reason” requires the restrictive covenant to be reasonably necessary for the protection of the employer, not oppressive and harsh on the employee, nor injurious to the interests of the general public. [4]

On July 13, 2010 the Wisconsin Court of Appeals issued its decision in Selmer Co. v. Rinn, which has been recommended for publication. There, Timothy Rinn was employed as the vice president of sales and marketing for The Selmer Company. [5] Selmer offered Rinn stock options and the stock option agreement contained a non-solicitation provision and a confidentiality provision. [6] Rinn was under no obligation to purchase stock, as his refusal would not have affected his employment in any way, yet he chose to accept the offer. [7] Seven years later, Rinn chose to leave Selmer and join another employer in the same line of work as Selmer. [8] In his new position Rinn repeatedly contacted and solicited customers of Selmer, thereby violating the terms of the restrictive covenant. [9]

Rinn argued that the restrictive covenant in the stock option agreement was an overbroad and unenforceable restraint of trade under Wis. Stat. § 103.465. [10] While recognizing that Rinn was an employee at the time the covenant was signed, the court found that the covenant could be separated from the employment relationship because the agreement was not a condition for continued employment nor did the employer possess an unfair bargaining advantage. [11] Consequently, the court did not apply Wis. Stat. § 103.465, but instead applied the less stringent “rule of reason” analysis and found, under this less stringent analysis, that the covenant was reasonable and enforceable. [12]

Accordingly, despite Wisconsin’s clear disfavor for overbroad non-compete agreements, Wis. Stat. § 103.465 is not applicable to all restrictive covenants. As held in Selmer Co. v. Rinn, if the terms of an employee’s continued employment are not tied to the non-compete agreement and the employee has equal bargaining position with the employer, the courts will apply the “rule of reason” analysis to the provisions. [13] Such provisions may be enforceable even if they would have otherwise failed under the more stringent statutory analysis of Wis. Stat. § 103.465.

[1] Heyde Cos., Inc. v. Dove Healthcare, LLC, 2002 WI 131, ¶ 16, 258 Wis. 2d 28, 654 N.W.2d 830 (citations omitted).
[2] Selmer Co. v. Rinn, et al., 2009AP1353 ¶¶ 17-19.
[3] Id. ¶ 24.
[4] Id. ¶ 24.
[5] Id. ¶ 24.
[6] Id. ¶ 4.
[7] Id.
[8] Id. ¶ 5.
[9] Id. ¶ 6.
[10] Id. ¶ 1.
[11] Id. ¶ 21.
[12] Id. ¶ 27.
[13] Id. ¶ 23.