Wisconsin Court Rejects Common Employee Nonsolicitation Provision

On January 19, 2018, the Wisconsin Supreme Court issued a significant decision affecting Wisconsin employers that require employees to sign nonsolicitation agreements as a condition of employment. A court majority declined to enforce a nonsolicitation agreement because it didn’t comply with state law governing employee restrictive covenants.

The decision is significant because the language at issue is common to many agreements in the state, and it may embolden employees to breach existing agreements. In light of the decision, employers should have legal counsel review and, if necessary, update their employee restrictive covenants.

Facts

The Manitowoc Company is a manufacturer with two divisions—a food-service equipment division and a construction crane division. John Lanning joined the business in 1985 as a chief engineer in its crane division. He worked for the company for more than 25 years. According to the court, he was “successful, knowledgeable, and well-connected” within the company.

In 2008, Lanning signed an employment agreement that included a nonsolicitation provision. The provision stated in part:

I agree that during my Employment by Manitowoc and for a period of two years from the date my Employment by Manitowoc ends for any reason, including termination by Manitowoc with or without cause, 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. As used herein, the term “solicit, induce or encourage” includes, but is not limited to, any of the following: (a) initiating communications with an employee of Manitowoc relating to possible employment; (b) offering bonuses or additional compensation to encourage employees of Manitowoc to terminate their employment therewith and accept employment with a competitor, supplier or customer of Manitowoc; (c) referring employees of Manitowoc to personnel or agents employed or engaged by competitors, suppliers or customers of Manitowoc; or (d) referring personnel or agents employed or engaged by competitors, suppliers or customers of Manitowoc to employees of Manitowoc.

According to the court, the provision prevented Lanning from soliciting 13,000 Manitowoc employees, regardless of their position, physical location, or connection to him.

Lanning terminated his employment, effective January 6, 2010. Two days later, he became the director of engineering for SANY America, a direct competitor of Manitowoc’s crane division.

Manitowoc claimed that Lanning violated the nonsolicitation provision. Specifically, the company claimed that he communicated with at least nine Manitowoc employees about potential opportunities at SANY, took one Manitowoc employee to lunch in connection with SANY recruitment efforts, took another Manitowoc employee on a tour of a SANY crane manufacturing plant in China, and participated in one Manitowoc employee’s job interview with SANY.

Manitowoc sued Lanning for breach of his employment agreement. The trial court found in the company’s favor and awarded $97,844.78 in damages, $1 million in attorneys’ fees, and $37,246.82 in costs. Lanning appealed, and the court of appeals reversed the trial court’s ruling. It concluded that the nonsolicitation provision was an unreasonable restraint of trade in violation of Wisconsin law. A majority of the state’s highest court affirmed the decision.

Wisconsin Law on Employee Restrictive Covenants

Every state has its own rules for the enforceability of employee restrictive covenants. In Wisconsin, restrictive covenants are governed by section 103.465 of the statutes, which states:

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 subsection, 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.

The law reflects Wisconsin’s strong public policy in favor of worker mobility and against unreasonable restraints on trade. When courts review employee restrictive covenants, they interpret them with the following “canons of construction”:

• Restrictive covenants are prima facie suspect (or suspect at first look).
• They should be closely scrutinized for reasonableness.
• They won’t be construed to extend beyond the scope their language requires.
• They will be construed in the employee’s favor.

As the statute states, a covenant that fails to comply is considered “illegal, void, and unenforceable.”

When an employer seeks to enforce an employee restrictive covenant under Wisconsin law, it must show that the covenant is (1) reasonably necessary for its protection, (2) reasonable in duration, (3) reasonable in territorial scope, (4) not harsh or oppressive to the employee, and (5) not contrary to public policy.

In Lanning’s case, the court first considered whether the statute applied to the nonsolicitation provision. A majority of the court stated that it would be an exercise in semantics to overlook the statute merely because an agreement isn’t labeled a “covenant not to compete.” It noted that the law’s explicit purpose is to invalidate covenants that impose unreasonable restraints on employees regardless of the restrictions’ label. It concluded that the nonsolicitation provision restricted Lanning’s ability to engage in the ordinary competition attendant to a free market, specifically restricting him from freely competing for the best talent in the labor pool. It also limited other employees’ ability to work with him in the future and prevented them from having complete information about job opportunities elsewhere.

Next, the court decided whether the nonsolicitation provision was enforceable under Wisconsin law. The majority decided that the agreement didn’t meet the requirement that a covenant be “reasonably necessary for the protection of the employer.” It noted that the legislature made a policy choice to place the burden of drafting a reasonable restrictive covenant on the employer, which often wields greater bargaining power and is generally in a better position to show that a restraint is no broader than necessary to protect its business.

Manitowoc argued that it had an interest in protecting itself from the loss of employees it trained and invested time and capital in, along with the institutional understanding, experience, and intellectual capital they possess. The court disagreed. It was especially troubled by the application of the covenant to “any” employee in a case in which the company employs 13,000 employees worldwide. The majority noted that the nonsolicitation provision contained no limitation based on the nature of an employee’s position within the company or on Lanning’s personal familiarity with or influence over the employee. It also noted there was no limit based on the geographical location in which an employee works.

According to the majority, the company’s argument “flouts the generally recognized principle that the law ‘does not protect against the raiding of a competitor’s employees.’” Past cases and literature explain that ordinarily, an employer’s protectable interest is limited to retaining top-level employees, employees who have special skills or knowledge important to its business, or employees who have skills that are difficult to replace. The majority decided that the company’s nonsolicitation provision went beyond that. The plain language of the provision created a sweeping prohibition that prevented Lanning from encouraging any Manitowoc employee, no matter the job or location, to terminate employment with the company for any reason or soliciting any employee to take any position with any competitor, supplier, or customer. Manitowoc Company, Inc. v. Lanning, 2018 WI 6.

Bottom Line

This decision will make it more difficult to protect yourself from unfair competition and may embolden employees to breach otherwise enforceable restrictive covenants. The kind of language in Manitowoc’s nonsolicitation provision is commonly found in agreements throughout Wisconsin. Accordingly, you should have such provisions reviewed and updated if necessary.