Wisconsin Further Confines Employers’ Use of Restrictive Covenants, including Non-Solicitation Agreements

Employers operating in Wisconsin are likely familiar with Wisconsin’s restrictive covenant statute which is quite…well…restrictive on employers.  While the statute has been in place for decades, a recent decision by the Wisconsin Supreme Court places even further limitations on the language and circumstances of these agreements.

Background

Under Wisconsin law, an agreement by an employee to “not compete with his or her employer” during or after employment is only enforceable “if the restrictions imposed are reasonably necessary for the protection of the employer or principal.”  And, any covenant that imposes an “unreasonable restraint” is void, even portions that would otherwise be legal.

For decades, a five-part test has been used by the Wisconsin courts to determine whether a restrictive covenant is reasonable.  To be reasonable, the restraint must:

  1. Be necessary for the protection of the employer;
  2. Provide a reasonable time limit;
  3. Provide a reasonable territorial limit;
  4. Not be harsh or oppressive as to the employee; and
  5. Not be contrary to public policy

Extension of the Law to Non-Solicitation Agreements

In Manitowoc Co. v Lanning,[1] the court reviewed not a noncompete agreement, but a non-solicitation agreement.  Lanning’s employment agreement contained the following:  “I agree that…for a period of two years from the date [of termination], I will not (either directly or indirectly) solicit, induce or encourage any employee(s) to terminate their employment…or to accept employment with any competitor, supplier or customer…”

In Lanning, the Wisconsin Supreme Court first reviewed whether Wisconsin’s restrictive covenant statute extends beyond non-compete agreements to non-solicitation agreements, or non-solicitation of employees.  Because the statute indicates that “any covenant” that imposes an unreasonable restraint is invalid, the Court reasoned for the first time that a non-solicitation agreement would be subject to the law.  The Court then applied the five-factor test outlined above and determined that the agreement was unreasonable and, as a result, wholly unenforceable.  In particular the Court found the use of the term “any and all employees” of the 13,000 member company overly broad. The $1 million award was vacated, which alleged Lanning had recruited 9 employees to his new employer.

What Should You Do in the Wake of Lanning?

  • If you operate in the state of Wisconsin and you utilize restrictive covenants, carefully review the language of your existing agreements. It is likely they will not comply with the narrow non-solicitation analysis the Court employed.
  • Updating agreements with current employees to be binding post Lanning is tricky: changes must be backed by consideration — each party must give something and get something.
  • Consider the interests your company must necessarily protect and ensure the restrictive language is tailored, specifically to the employee, to address those interests. Even agreements that contain limits on time and territory could be deemed unnecessary for the protection of the employer.  For example, Lanning’s agreement was found to be unreasonably restrictive because it prohibited him from recruiting any and all employees and was not limited to a specific group of employees.
  • Remember: you do not have to abandon valuable restrictive covenants and non-solicitation agreements altogether. Agreements personalized to your company’s needs, the employee, and the Wisconsin law can be valid and useful protections.

We stand ready to help you evaluate, update, and re-execute your restrictive covenants.  We can be reached at questions@foleylawpractice.com or 844-204-0505.

[1] 2018 WI 6

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