Restrictive Covenants Revisited

August 19, 2016

Over the course of my career, I have written numerous articles dealing with restrictive covenants and agreements between employers and employees. These articles have been prompted by a series of court decisions over the last 30 or so years, that have addressed specific aspects of restrictions in the employment relationship. My impression of the historical litigation is that the early court decisions tended to favor employees seeking to avoid the restrictions; and that an employer had a heavy burden to establish the enforceability of such restrictions. However, this seemed to have changed in 2009 when the Wisconsin Supreme Court rendered its decision in Star Direct, Inc. v. Dal Pra 2009 WI 79. That decision has been viewed as a victory for employers, making it much easier to enforce restrictive covenants.

Recently, the Wisconsin Court of Appeals rendered a decision which I found extremely interesting, and caused me to wonder if it is the beginning of a new trend in appellate court decisions. In The Manitowoc Company Inc. v. Lanning 2015 AP 1530,  an employee had signed a restrictive covenant with his employer, which provided that, for the two-year period of time following termination of employment, the employee would not, 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.”  (I have seen this same clause in numerous agreements between insurance agencies and producers.) The employee in question left employment and began working for a competitor. The facts suggested that this employee then attempted to induce several other Manitowoc employees to leave their employment and work for the same competitor. Needless to say, a lawsuit ensued. The case was tried in the circuit court; and the employee and sustained a worst-case scenario result. The trial court found that the no-solicitation-of-employees clause was enforceable under Wisconsin law; and awarded to Manitowoc $97,000 plus in damages, $37,000 plus in cost, and $1 million in attorneys’ fees. What a result! The employee appealed.

On appeal, there were a number of legal issues presented. The first was whether or not the Wisconsin statute, section 103.465 which governs the enforceability of covenants not to compete, applied to a no-solicitation of employees clause. Manitowoc had made the argument that a no-solicitation-of-employees clause does not restrict competition, but only serves to protect the employer from unfair competition. The appellate court dismissed this argument by noting that: “It is no leap of logic to conclude that a provision aimed at restricting a former employee from “systematically poaching” the valuable and talented employees of his former employer is a restraint of trade.” Id at 17. In short, the particular clause did not allow for the ordinary sort of competition attendant to a free market, which includes recruiting employees from competitors. Accordingly, the statute was applicable to the clause in question.

Having found the statute applicable, the next issue was whether or not the clause violated the statute. Manitowoc was obviously concerned about the overbreadth of the language of the clause. For example, the clause on its face applied to “… any employee(s)…” of Manitowoc. The defendant-employee had been attempting to solicit skilled employees to join the competitor. However, the language of the clause applied to “any” employee; and the Court indicated that in applying the plain language of the agreement, it could apply to a janitor. If so applied, it is apparent that Manitowoc had no legitimate employer interest to be protected. Manitowoc argued that, in determining enforceability under the statute, restrictive covenants should not be deemed enforceable “… simply because hypothetical applications may be overbroad.” Rather, courts must make this determination based upon what actually happened in each particular case. In response to this argument, the court indicated that case law demonstrates that courts look not at the particular facts or circumstances of the case, but to the plain language of the agreement itself. The court reviewed a series of Court of Appeals decisions and Wisconsin Supreme Court decisions, where the reviewing court did in fact look at hypotheticals. The Court of Appeals declined to change this approach in its analysis; and concluded that the no solicitation of employees clause, was simply overbroad in its application to “any” employee. In addition, the court noted that the clause in question also applied to the situation where the inducement was to work for a customer of Manitowoc. In that regard, the customer of Manitowoc could very well be engaged in a business that was not in competition with Manitowoc at all. Manitowoc was engaged in a business having two divisions: a food service equipment division and a crane division. If the defendant employee had induced a Manitowoc employee to work for a restaurant that had purchased food service equipment from Manitowoc, the clause would have prohibited such conduct. A restaurant and Manitowoc are not direct competitors. Again, this illustrates the overbreadth the clause in question. Accordingly, the court determined that the subject clause was simply not enforceable under the statute.

I suggest you stay tuned to see what transpires. According to the appellate court decision, Manitowoc has spent over $1 million in attorneys’ fees litigating the issues present in the lawsuit. This suggests to me that it will pursue an appeal before the Wisconsin Supreme Court. Whether or not the supreme court will take this case for review, is unknown. Given the current composition of the supreme court and the internal turmoil that appears to continue, I have no idea as to the likelihood of the court entertaining such an appeal.