Businesses have long sought to protect their customer relationships. Accordingly, companies may try to restrict the ability of their employees to compete for those customers after the employment relationship terminates. Post-employment restrictions are typically set out in a restrictive covenant agreement. In Wisconsin, such agreements 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.
Businesses may also try to protect their investment in the hiring, training, and retention of their workforce through the use of agreements that include a prohibition against the post-termination solicitation of other employees. In a decision issued earlier this month, the Wisconsin Supreme Court addressed the issue of whether § 103.465 should also apply to a non-solicitation of employees provision (“NSE”).
John Lanning (“Lanning”) was a long-term employee within the crane division of The Manitowoc Company, Inc. (“Manitowoc”). During his tenure, Lanning entered into an agreement with Manitowoc containing the following NSE:
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.
The NSE applied for two years after the termination of Lanning’s employment. Despite the NSE, once Lanning left Manitowoc for a direct competitor, he communicated with multiple Manitowoc employees regarding opportunities with his new employer. 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 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. The Wisconsin Court of Appeals agreed with Lanning and reversed the Circuit Court. Manitowoc then appealed to the Wisconsin Supreme Court.
In a decision released on January 19, the Wisconsin Supreme Court determined that the NSE Lanning entered into with Manitowoc was legally unenforceable. In doing so, a majority of the Court first determined that § 103.465 does apply to NSEs. Thus, like a traditional noncompete agreement, an NSE is lawful and enforceable under Wisconsin law only if it is (i) sufficiently limited in scope, and (ii) reasonably necessary for the protection of the employer.
Applying the statute to Lanning’s contract, the Court found that the NSE was neither sufficiently limited nor reasonably necessary for Manitowoc’s protection. According to a majority of the Justices, the NSE was overbroad because Lanning was restrained from soliciting any of Manitowoc’s 13,000 employees, whether entry-level or highly skilled, wherever located, and regardless of whether Lanning had worked with the person for years or had never even met the individual. The Court therefore 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 clear notice to employers that they must carefully and narrowly draft NSE provisions so that the restriction can be directly tied to the employer’s protection of a legitimate competitive interest and that the protection sought is not unreasonably burdensome on the employee. Employers should focus on the solicitation of employees whose departure and competition would threaten the employer and draft the NSE to ensure that the scope of the restriction is sufficiently limited. Like other restrictive covenants, an NSE provision will be carefully scrutinized by the Court and any problem will render the NSE completely unenforceable. As the Supreme Court noted, “[e]nforcing an overbroad restraint to the extent it can be reasonably enforced is exactly what § 103.465 was enacted to prevent.”
If you have any questions about how the information in this article may affect you or your business, please contact Peter Richter at email@example.com or Doug Scriver at firstname.lastname@example.org 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.