Beware of Overreaching Contracts That Can Be Ineffective in Protecting Your Business

January 20, 2017

In a recent case, the Wisconsin Court of Appeals addressed the enforceability of an agreement between an employer and a former employee that barred the employee from soliciting the employer’s current workers. The court of appeals found that the covenant was too broad to be enforceable. Accordingly, although parts of the covenant were reasonable, it was struck down in its entirety, and a verdict for substantial damages in favor of the employer was reversed.

Background Manitowoc Company has two divisions: food service equipment and cranes. John Lanning began working for Manitowoc in 1985, and successfully worked as an engineer in the crane division for 25 years. He was respected, knowledgeable, and considered a “big fish” within Manitowoc. In 2010, he left the company to work for SANY America, a direct competitor of Manitowoc’s crane division.

In 2008, Lanning signed an agreement addressing confidential information, intellectual property, and solicitation of Manitowoc employees. The nonsolicitation provision stated:

I agree that during my employment by Manitowoc and for a period of two years from the date my employment by Manitowoc ends, . . . I will not (either directly or indirectly) 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.

The agreement included a broad definition of “solicit, induce, or encourage.” Under the agreement, Lanning was prohibited from “initiating communication” with Manitowoc employees “relating to possible employment”; “offering bonuses” or other compensation to Manitowoc employees to terminate their employment; “referring” Manitowoc employees to personnel or agents of competitors, suppliers, or customers; and “referring” personnel or agents of competitors, suppliers, or customers to Manitowoc employees.

Manitowoc filed suit against Lanning, alleging he violated the nonsolicitation provision by recruiting several of its employees for SANY. Specifically, Manitowoc accused Lanning of communicating with at least nine employees about leaving the company for SANY. The alleged violations included e-mails, casual conversations, lunches, and a tour of a plant in China. Lanning was also accused of telling multiple Manitowoc employees that their skills were needed at SANY and identifying the employees as job candidates to SANY.

While the specifics were disputed, the parties agreed that Lanning solicited Manitowoc employees. Consequently, Manitowoc was awarded $97,844.78 in damages, $1 million in attorneys’ fees, and $37,246.82 in costs.

Lanning appeals

On appeal, the trial court’s verdict was overturned. The court of appeals made two findings. First, it confirmed that Wis. Stat. § 103.465, which governs restrictive covenants in employment contracts, applies to nonsolicitation agreements. Second, it found that the nonsolicitation agreement in Lanning’s contract was not enforceable. Section 103.465 governs the enforceability of covenants not to compete, stating:

A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.

Wisconsin courts have found that a “covenant not to compete” encompasses any covenant between an employer and an employee that “seeks to restrain competition” or operates as a “trade restraint.” Thus, the enforceability question turned on whether Lanning’s nonsolicitation agreement sought to restrain competition or operate as a trade restraint.

The court held that Lanning’s nonsolicitation agreement was a restraint of trade subject to Wisconsin statutes. The court reasoned that prohibiting Lanning from poaching employees restrained the free movement of workers between companies. By walling off talented employees from future employment, the nonsolicitation agreement circumscribed Lanning and his new employer’s ability to compete with Manitowoc. The limitation was a distortion of ordinary competition in the free market. Competitors routinely recruit each other’s employees. Thus, the nonsolicitation agreement was a restraint of trade subject to Wisconsin statutes.

Next, the court found that the nonsolicitation agreement violated Wis. Stat. § 103.465. The court began its analysis by explaining key concepts that guide the inquiry. First, the reasonable application of an otherwise overly broad covenant does not save the covenant in whole or in part. Whether the covenant is enforceable is an all-or-nothing proposition. Second, the enforceability of the covenant is determined by the plain language of the covenant, not the particular facts or circumstances of the case. Thus, enforceability turns on the plain language of the covenant, even if the former employee’s actions are egregious or restricted by a narrowly written covenant.

With those principles in mind, the court found that the nonsolicitation agreement was unenforceable because it was overly broad. The court observed that the nonsolicitation agreement covered a plethora of activity, including directly or indirectly soliciting, inducing, or encouraging any Manitowoc employee to work for a competitor, supplier, or customer or even simply terminate his employment. That language included not only high-profile crane division employees but also workers with little competitive value. For example, entry-level workers, workers in the food-service division, and parttime janitorial workers all fell under the nonsolicitation agreement. Moreover, the agreement seemingly barred Lanning from serving as a job reference or even encouraging a friend to retire. In the end, the nonsolicitation agreement went well beyond protecting Manitowoc from Lanning using his specialized knowledge and relationships to poach key employees from the crane division. Manitowoc Co. v. Lanning, 2016 WI App 72, ___ Wis. 2d ___, 885 N.W.2d 798.

Bottom line

This case provides an excellent example of the pitfalls that must be avoided during the drafting process. When drafting a contract, attorneys often try to write the contract to address all possible situations and deliberately use broad language to eliminate ambiguities and future disputes. By contrast, covenants not to compete must be drafted narrowly to burden employees as little as possible and protect the employer’s legitimate competitive interests. A poorly drafted covenant will be deemed unenforceable and allow former employees to engage in what is otherwise legitimately prohibited behavior. Take care to avoid Manitowoc’s painful outcome. The line between an aggressive covenant and an unenforceable covenant is vanishing.

This article, slightly modified to note recent updates, was featured in the December 2016 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

For more information about "Beware of Overreaching Contracts That Can Be Ineffective in Protecting Your Business," contact Jeremy R. Lange at jlange@axley.com or 608.283.6728.