Wisconsin Court of Appeals Rules on Repayment Provision in Agreement with Employees

February 5, 2010

In an opinion dated January 10, 2010 the Wisconsin Court of Appeals upheld a contract between an employer and its former employees. The contract required the former employees to repay education expenses and included noncompetition, nonsolicitation, and confidentiality provisions.

The employer sought to recover from the former employees the money it expended for an educational program for the former employees. The contract provided that the employees would be required to repay the employer’s education expenses in the event the employees failed to complete the required education program, failed to maintain passing grades, or left the employer’s employment within four years of completion of the education program.

The employees challenged the enforceability of the repayment provisions on the theory that the contracts contained noncompetition provisions that were invalid (a fact conceded by the employer) and which, the former employees argued, doomed the repayment provisions as well.

It appeared that the employees attempted to invoke the reasoning from Mutual Service Cas. Ins. Co. v. Brass, 2001 WI App 92 which interpreted the decision in Streiff v. American Family Mut. Ins. Co., 348 N.W.2d 505 to require that in an employment agreement with multiple restrictive covenants which govern similar types of activities if one such restrictive covenant is found to be invalid they will all be found to be intertwined and indivisible and therefore all will be invalid.

This reasoning was recently overruled in Star Direct, Inc. v. Dal Pra, 2009 WI 76 which clarified the meaning of Streiff and the treatment of multiple restrictions on competition in employment agreements where one or more is found to be invalid. The Star Direct court held that:

The foundational inquiry for determining whether a covenant is divisible is whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced…In the context of multiple non-compete provisions in a contract, indivisibility will usually be seen by an intertwining, or inextricable link, between the various provisions via a textual reference such that one provision cannot be read or interpreted without reference to the other…Overlap, even substantial overlap, between clauses is not necessarily determinative. Employers may have several protectable interests that apply in similar, though not exactly the same, situations and it makes sense to set these out in separate post-termination restrictive covenants.

This meant that the employees were essentially left with attempting to insert the Brass decision’s reasoning into their case using Streiff. From its analysis however the Court of Appeals viewed the Streiff and Star Direct cases’ statements on the issue of the divisibility of provisions in an employment contract as being consistent with one another.

The Court of Appeals concluded that the repayment provision and the noncompetition provisions were divisible under either the Streiff or Star Direct analyses and therefore the repayment provisions were enforceable against the former employees. It is not clear however that even if the Brass reasoning were still valid that the invalidity of noncompetition provisions should require that largely unrelated repayment provisions in the same contract be rendered unenforceable.

[1] Frank D. Gillitzer Elec. Co., Ltd. v. Andersen, 2010 WL 173895.

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For more information about "Wisconsin Court of Appeals Rules on Repayment Provision in Agreement with Employees," contact Edward J. Lawton at elawton@axley.com or 262.409.2278.