WI Supreme Court Concludes Non-Compete Statute Applies to Non-Solicitation of Employees Agreement

Published by Paul W. Schwarzenbart on

In Manitowoc Co. v. Lanning, 2018 WI 6, decided January 19, 2018, a 5-2 majority of the Wisconsin Supreme Court concluded that a non-solicitation of employees agreement (“NSE”) can be subject to scrutiny under Wis. Stat. § 103.465. Under the statute, enacted in 1957, any covenant by an employee “not to compete” with a former employer upon termination of employment is void in toto if the agreement imposes an unreasonable restraint in any respect. However, the divided opinions strongly suggest that the court is narrowing its view of the statute’s scope.

The lead opinion, authored by Justice Shirley Abrahamson and joined in by Justice Anne Walsh Bradley, trod a familiar path in non-compete cases. It frames two issues for review. One, was the NSE a “covenant … not to compete”? Two, if so, was any part of the NSE unreasonably broad, resulting in the entire covenant being void.

The lead opinion has little difficulty answering both questions in the affirmative. In doing so, it cites past precedents applying the statute to many restrictions other than an express agreement by an employee to refrain from future employment with a competitor. The lead opinion quotes Tatge v. Chambers & Owen, Inc., 219 Wis. 2d 99, 112, 579 N.W.2d 217 (1998), for the proposition that “it would be an exercise in semantics to overlook § 103.465 merely because [a provision] of the agreement is not labeled a ‘covenant not to compete,’” adding that the statute “has been applied to agreements viewed as restraints of trade.” 2018 WI 6, ¶ 5.

While the concurring opinion, authored by Justice Rebecca Grassl Bradley, and joined in by Justices Michael Gableman and Daniel Kelly, agreed that the NSE at issue in the case was subject to the statute, it strongly disagrees with the lead opinion’s analysis. The concurring opinion first criticizes the lead opinion for unduly relying on the court’s own case law interpreting the statute and failing to undertake a “textual analysis” of the statute. 2018 WI 6, ¶ 65.The concurring opinion states that in “abandoning this process, the lead opinion risks reading into Wis. Stat. § 103.465 imagined words derived from the court’s perception of the legislature's unspoken policies and purpose.” Id., ¶ 66.

What “imagined words”? Specifically, the concurring opinion focuses on the lead opinion’s reference to the NSE as a “restraint of trade” and its focus on the impact of the NSE on parties other than the employee and the employer. 2018 WI 6, ¶¶ 75, 76. This latter flaw, according to the concurring opinion, led the court to err in Heyde Cos., Inc. v. Dove Healthcare, LLC, 2002 WI 131, 258 Wis. 2d 28, 654 N.W.2d 830, by applying the statute to invalidate a “no hire” agreement between two employers, an agreement to which no employee was a party. The concurring opinion states flatly that Heyde “should be overruled as unsound in principle because its analysis is patently wrong,” and it then devotes significant analysis to explaining exactly why. Id., ¶¶ 78-81.

But despite its disagreement with the lead opinion’s view of the statute and its reliance on precedents applying the statute expansively, the concurring opinion reaches the same result in this case. It agrees the NSE was a “covenant … not to compete” because it restrained the employee, Lanning, from “engag[ing] in a particular form of competition,” i.e., “soliciting, inducing, or encouraging any Manitowoc employee from accepting employment with any Manitowoc competitor, thereby limiting Lanning in performing certain work—namely, recruitment for his new employer, a competitor of Manitowoc’s.” 2018 WI 6, ¶ 72. It rejects the analysis of the dissenting opinion, authored by Chief Justice Patience Roggensack and joined in by Justice Annette Kingsland Ziegler, as “internally contradictory,” in that it concluded the NSE was not a covenant not to compete under a strict reading of the statute, while at the same time stating that “the former employer will become a less effective competitor” due to the NSE not being enforceable.” Id., ¶ 74.

Once the lead and concurring opinions arrive at the conclusion that the NSE was subject to the statute, the outcome is clear. This NSE was afflicted by sins familiar to any attorney who has tried to enforce such agreements within the scope of the statute. It prohibited Lanning from soliciting “any” employee in any position with the company without regard to geographical location or personal familiarity with Lanning. 2018 WI 6, ¶¶ 46, 47, 56, 62. The lead opinion explicitly rejected Manitowoc’s argument that the statute should be applied on a “sliding scale” basis, with lesser scrutiny being given to an NSE because it was “less onerous” than a traditional not compete.” Id., ¶¶ 51-54. The concurring opinion made no reference to this argument, and presumably rejected it as contrary to its textual analysis of the statute.

So what can be drawn from this decision? Three thoughts:

First, an NSE can be treated as a non-compete subject to Wis. Stat. § 103.465, although the concurring opinion cautioned that “not every NSE provision necessarily falls under the purview of that statute.” 2018 WI 6, ¶ 65. The concurring opinion, however, makes no suggestions as to what circumstances might lead to the conclusion that a particular NSE is beyond the statute’s reach.

Second, given that the dissent joined with the concurrence in criticizing the lead opinion’s description of the statute as directed to “restraints of trade,” it appears there is a strong majority support on the court to overrule the Heyde Cos. case and it is likely only a matter of time before the court expressly does so.

Third, again, with the concurrence and the dissent in agreement that attention must focus on the text of the statute rather than expansive past precedents, it is reasonable to assume that, in future cases, employers will argue that Lanning favors a narrower, more textually focused application of the statute.

Filed Under: employment law

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