Employers invest substantial sums in hiring, training, and retaining employees. Therefore, it is not uncommon for employers to try to protect their investment through the use of employment agreements that include a prohibition against the post-termination solicitation of other employees. In a recent decision, the Wisconsin Court of Appeals addressed the issue of whether such a non-solicitation of employees provision (“NSE”) must meet the same requirements as a traditional non-compete agreement.
John Lanning, an engineer, over 25-year employee, and “big fish” within the crane division of The Manitowoc Company, Inc. (“Manitowoc”), entered into an agreement with Manitowoc containing the following NSE, which applied during the two years following the end of Lanning’s employment:
I will not… 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.
After leaving Manitowoc for a direct competitor, Lanning communicated with at least nine Manitowoc employees regarding opportunities with his new company. He engaged in casual conversations and emails, took one person to lunch in a recruitment effort, took another individual on a Chinese plant tour, identified several Manitowoc employees to his new employer’s recruiter, and participated in an interview of a Manitowoc employee. Manitowoc subsequently sued Lanning for breaching the NSE and was awarded over $1.1 million in damages, attorneys’ fees, and costs. Not surprisingly, Lanning appealed and challenged the enforceability of the NSE.
In a decision released earlier this month, the Wisconsin Court of Appeals reversed the circuit court’s determination that the NSE was enforceable. In doing so, the Court of Appeals found that a NSE must comply with the State’s restrictive covenant law. In Wisconsin, noncompete provisions in employment contracts are governed by §103.465 of the Wisconsin Statutes:
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 thereafter, 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 such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint.
Thus, a noncompete agreement is lawful and enforceable under Wisconsin law if it is (i) sufficiently limited in scope, and (ii) reasonably necessary for the protection of the employer.
The Court of Appeals ruled that § 103.465 also applies to NSEs and that the NSE in Lanning’s agreement was neither sufficiently limited nor reasonably necessary for Manitowoc’s protection. First, Lanning was restrained from soliciting any Manitowoc employee, whether entry-level or highly skilled, or whether Lanning had worked with the person for years or had never even met the individual. Second, Lanning could not recruit a Manitowoc employee on behalf of a company that did not compete with Manitowoc. Starbucks, for example, was Manitowoc’s customer, and Lanning was prohibited from encouraging a former colleague to work as a barista. Because Lanning’s NSE barred him from inducing a Manitowoc employee to terminate his employment, Lanning likewise could not persuade a former co-worker to retire and spend more time with his family. Finally, the Court of Appeals concluded that under the circumstances, Lanning’s NSE was not justified by a protectable interest of Manitowoc.
The Manitowoc Company, Inc. v. Lanning decision should serve as a notice that employers must carefully and narrowly draft non-compete agreements such that each restriction can be tied to the employer’s protection of a “legitimate and unique competitive interest.” Specifically, with respect to non-solicitation of employee provisions, employers should focus the prohibition on the solicitation of those employees whose departure and competition would threaten the employer and properly limit the scope of the restriction. If a NSE is not carefully drafted, it may not only be unenforceable, but could potentially void any other restrictive covenants in the agreement.
If you have any questions about how the information in this article may affect you or your business, please contact Peter Richter at prichter@stroudlaw.com or Doug Scriver at dscriver@stroudlaw.com or (608) 257-2281 or your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.
