Wisconsin Business and Commercial Litigation

Employers, take heart.  There’s a new case that give guidance on how to escape the glaring scrutiny cast on your non-competition/solicit agreements by Wis. Stat. s. 103.465.  In The Selmer Co. v. Rinn, the Wisconsin Court of Appeals upheld a Brown County trial court decision that concluded the non-compete at issue did not fall within the reach of the statute., but rather was to be examined under the “rule of reason.”  How was this possible?

The court began by citing Reiman Associates, Inc. v. R/A Advertising, Inc., 102 Wis. 2d 305, 306 N.W.2d 292 (Ct. App. 1981), for the proposition that not all non-compete agreements are governed by the statute.  Specifically, it drew parallels with the facts of the Rinn case:

Rinn was, of course, an employee at the time he contracted for the right to purchase corporate stock, and Selmer’s motivation for the offer–made explicit on the first page of the agreement–was to “promote [Selmer's] growth and development by providing increased incentives for key employees .” However, unlike typical restrictive covenants, upon which a prospective employee’s position may depend, there were no consequences attached to Rinn’s refusal to accept the agreement. The circuit court found Rinn was not pressured to sign the stock option agreement, nor was his employment conditioned upon his doing so. Indeed, the circuit court found Rinn’s refusal would not have affected his employment in any way.

Accordingly, Selmer held no bargaining advantage over Rinn. Rinn was free to walk away from the transaction; instead, he seized the opportunity to purchase an ownership interest in Selmer’s parent company. In exchange for Selmer’s promise to make discount stock available, Rinn forfeited his ability to tap Selmer customers for one year following his employment.⁽⁸⁾ Although Rinn has received the benefit of that bargain–he exercised the stock option and more than quadrupled his initial investment–he now seeks to evade the consequences of that choice by invoking WIS. STAT. § 103.465’s protections. This case falls closer to the bargained-for exchange in Reiman than it does to the employment cases cited above.

The court appeared most convinced by the idea that while there was an incentive provided to Rinn to sign the non-compete (discount stock prices), there were no consequences if he did not sign the agreement.  The court followed up with a common-law reasonableness analysis:

Having determined WIS. STAT. § 103.465 does not apply, we must determine whether the covenant not to compete satisfies the common law’s rule of reason. In determining reasonableness, we examine whether the covenant is:  “(1) reasonably necessary for the protection of the beneficiary;” (2) reasonable between the parties, “particularly as to the party restrained, considering time, space, purpose, and scope; and (3) not specially injurious to the public.” Reiman, 102 Wis. 2d at 309. Whether a covenant is reasonable is a matter of law to be determined from the writing. My Laundry Co. v. Schmeling, 129 Wis. 597, 613, 109 N.W. 540 (1906).

The elements are materially identical to the Wis. Stat. 103.465 analysis, but the scrutiny is much lower.  Consider this when the next non-compete discussion arises.

chains photo courtesy [sic]’s flickr gallery via this license

In Gillitzer v. Andersen, the court of appeals once again addressed the divisibility of various employment-related covenants.  Employees signed a contract agreeing that: 1)  if the employer paid for their electric apprenticeship training, and the employee left the company’s employ within four years, the employee would repay the training costs;  and 2) the employee would, for four years after leaving the company, not solicit present or past customers, employees, or disclose price or customer lists.  The employee defendants, of course, left before the four years was up and Gillitzer wanted its money back.

The employees claimed that the unreasonable non-compete provision, under Streiff v. American Family Mutual Insurance Co., 118 Wis. 2d 602, 348 N.W.2d 505 (1984), was indivisible from the admittedly reasonable repayment provision, and should therefore be struck down.  Gillitzer claimed that admittedly unreasonable non-compete provision, under Star Direct, Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898, was divisible from the reasonable and enforceable repayment provision.

The court ducked the decision, finding the provisions divisible under both cases:

Both cases describe the divisibility test in terms of whether the provisions must be read together to determine the meaning of either. See Streiff, 118 Wis. 2d at 612; Star Direct, 319 Wis. 2d 274, ¶78. Both acknowledge the fact-intensive nature of the divisibility analysis. See id. We do not decide, because it is not essential to our resolution of this appeal, whether the Star Direct test for divisibility is new and different from the test set forth in Streiff. We conclude that under the court’s language in either Streiff or Star Direct, the training reimbursement provision is divisible from the non-compete provision.

Whether viewed under the Streiff or Star Direct language, the training reimbursement provision here is clearly divisible from the non-compete clauses.

For those involved in drafting, enforcing, or challenging non-compete or comparable provisions, take note of the court’s comments about both Streiff and Star Direct.

Contract picture courtesy ol slambert flickr gallery under this creative commons license.

The Wisconsin Supreme Court recently (July 14, 2009) undertook to analyze non-compete and confidentiality agreements between an employee and employer.  In Star Direct v. Dal Pra, the court considered claims that Dal Pra violated various provisions of his agreement by, after voluntarily terminating his employment with Star Direct, starting his own competing business servicing Star Direct’s customers.

The Court addressed each of the three contract clauses at issue, beginning with the “customer clause,” and focusing on Star Direct’s interests in prohibiting competition:

The customer clause prohibits Dal Pra, for 24 months following termination, from interfering with or endeavoring to entice away a person or entity “which is a customer” or “which was a customer . . . within a period of time of one year prior to . . . termination.”  The clause further specifies that prohibited customers are those “for which Employee performed services or otherwise dealt with” or “obtained special knowledge” about in the course of employment.  The provision also prohibits Dal Pra from approaching “any such customer or past customer” for prohibited purposes or cooperating with others toward that end.

Addressing an issue not previously directly decided, the Court approved of the customer clause’s application to past customers of Star Direct.  In reaching its decision, the Court relied primarily on the idea that Dal Pra would have a significant advantage in competing for those past customers because of his special knowledge of Star Direct’s business and of the customers themselves.  Moreover, the Court pointed to the nature of the business itself as support for this decision and for its conclusion that Star Direct had an interest in protecting customers with whom Dal Pra had not recently contacted.

The court turned next to the “business clause:”

[F]or a period of twenty-four (24) months after termination of Employee’s employment with Employer, Employee shall not, directly or indirectly . . . become engaged in any business which is substantially similar to or in competition with the business of the Employer, within a fifty (50) mile radius of Rockford, Illinois.

The Court concluded that the business clause’s restriction on engaging in a “substantially similar” business was overbroad and not reasonably necessary to protect Star Direct:

The lack of any protectable interest means the business clause is unreasonable and unenforceable.

Finally, the Court turned to the “confidentiality clause:”

The confidentiality clause bars Dal Pra, for 24 months following his termination, from using or disclosing “any information or knowledge, known, disclosed or otherwise obtained by him during his employment by Employer or CB Distributors.” It then lists a variety of specific information that is to be deemed confidential and protected, including but not limited to knowledge “conceived, discovered or developed by Employee or CB Distributors,” “proprietary products or procedures,” trade secrets, customer lists, “marketing techniques which are not generally known in the business community, and which relate to the business of the Employer or CB Distributors or are in the nature of trade or business secrets,” mailing lists, and special pricing information.

Again, the court focused on whether the clause was necessary to protect Star Direct.  Because it concluded that the information protected was proprietary, it determined that the clause was reasonably necessary.  Finally, the court addressed divisibility of restrictive covenants in general, and particularly those above. 

If you haven’t read it, and you or your company uses restrictive covenants, click the link and get going.