Under Unique Wisconsin Statute, Court Refuses to Enforce Covenant Against Poaching Employees
One of your “big fish” executives leaves employment with your company and goes to work for a competitor. Soon, other employees are leaving. Surely not by coincidence, they join your former big fish, working for your competitor.
But your company had locked up Mr. Big Fish with a three-pronged agreement, which included a non-solicitation of employees (“NSE”) provision. Surely you can put a stop to this outrage.
Maybe, maybenot. In Manitowoc Co. v. Lanning, No. 2015AP1530, 2016 WL 4370181 (Wis. Ct. App. Aug. 17, 2016), the Wisconsin Court of Appeals held that the NSE could not be enforced because it was overbroad and therefore unenforceable under Wis. Stat. § 103.465. This statute, unique to Wisconsin, was enacted in 1957 to overrule Wisconsin Supreme decisions embracing the “blue pencil” rule, which allowed courts to rewrite restrictive covenants to limit their scope. The statute changed the landscape by providing “that such restrictive covenant imposing an unreasonable restraint is void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint.” Lakeside Oil Co. v. Slutsky, 8 Wis. 2d 157, 162, 98 N.W.2d 415 (1959). In other words, under Wis. Stat. § 103.465, if any part of the restriction imposed by a restrictive covenant is unreasonable, the entire covenant fails.
In Star Direct, Inc. v. Dal Pra, 2009 WI 76, ¶ 78, 319 Wis. 2d 274, 767 N.W.2d 898, the Wisconsin Supreme Court read the statute as providing for an independent analysis of covenants that were divisible, that is, the contract contained different covenants supporting different interests that can be independently read and enforced. In doing so, the court acknowledged that different types of covenants restricting post-employment activities were subject to the statute. Lanning breaks new ground in one respect. It is the first reported appellate case in the Wisconsin state court system to apply the statute to an NSE where the employer contested its applicability.
The Lanning court broadly construed the scope of the statute, stating “the NSE provision does not allow for the ordinary sort of competition attendant to a free market, which includes recruiting employees from competitors,” so it must comply with the statute regardless how it is labeled. Lanning, ¶ 17. Having concluded that the statute applied, the court of appeals had little difficulty concluding the clause was overbroad and unenforceable, given that it applied to the solicitation of “any” employee, whether or not the employee solicited posed any realistic competitive threat. The court therefore set aside the trial court’s award of $97,844.78 in damages, $1 million in attorneys’ fees, and $37,246.82 in costs in favor of the Manitowoc Company, the former employer, and remanded the case with instructions to enter summary judgment for Lanning, the former employee.
Lanning serves as a reminder that in drafting employment agreements, the employer should assume that any restriction on an employee’s post-employment conduct will likely be scrutinized under Wis. Stat. § 103.465. Accordingly, such restrictions should be tailored to the least restrictive means necessary to protect legitimate business interests. Absent care in the drafting process, your employer clients risk spending a great deal of money in a futile effort to enforce covenants intended to protect their businesses.