Court of Appeals Determines The Fate Of Overbroad Non-Solicitation Agreements

Last week, the District II Wisconsin Court of Appeals held that an agreement that restricts a former employee from encouraging other employees to leave their jobs, generally referred to as a “non-solicitation” agreement, was unenforceable.  The Manitowoc Company Inc. v. Lanning, 2015AP1530 (Aug. 17, 2016).  The decision calls into question what is a rather typical provision in such employer-employee agreements.

The provision at issue prohibited the employee from indirectly or directly soliciting, inducing, or encouraging any other employee to terminate their employment with Manitowoc or to accept employment with a Manitowoc competitor, supplier, or customer.  It applied during the employee’s employment with Manitowoc and for two years after separation.  When the employee quit his employment with Manitowoc, he was sued for violation of the non-solicitation provision as it was alleged he had recruited several employees to join him at his new employer, a direct competitor of Manitowoc.

Before the trial court, judgement was entered against the employee, Lanning, for approximately $100,000 in damages and $1 million in attorneys’ fees.  Unsurprisingly, Lanning appealed that decision to the Court of Appeals.  Lanning argued that the provision was unenforceable under Wisconsin Statutes Section 103.465 as it was not “reasonably necessary for the protection of the employer . . . .”

The Court of Appeals held that Section 103.465 did, indeed, apply to non-solicitation agreements, in addition to the traditional non-compete agreements.  The Court found that Section 103.465 applies to any agreement that attempts to restrict competition, not just non-compete agreements.  The Court concluded that the specific provision at issue was unenforceable because it sought to prohibit a wide breath of both competitive and noncompetitive activity.  After all, it applied to “any other employee,” regardless of the importance of the position to competition, and it sought to bar soliciting such an employee to work for a competitor, supplier or customer, regardless of whether the supplier or customer actually competed with the employer.

Interestingly, the Court found that it was irrelevant what happened in this particular case—the employee had indeed hired away key employees to a direct competitor.  Rather, the Court found that so long as any hypothetical circumstance would render the provision overbroad, it violated Section 103.465 and was unenforceable.

Generally speaking, it is true that an employer has a protectable business interest in retaining its workforce that it has spent time and money assembling and training.  Presumably, had the provision in the agreement solely restricted key employees from being solicited to work for a competitor of the employer, it may well have been enforceable.  The battleground over restrictive covenants has been for many years focused on non-competition provisions, and the law has primarily shifted over the years towards requiring employers to draft ever-narrower provisions regarding restrictions on competition.  This new decision is applying some of the same arguments about the breadth of non-competition provisions to non-solicitation provisions.

Of course, it is yet unknown whether this decision is an aberration or whether the pendulum is starting to swing back toward employees following the high-water mark for employers with the Wisconsin Supreme Court’s 2009 decision in Star Direct v. Dal Pra in which the Court upheld a non-competition provision that many thought would be struck down.  However, it certainly raises the question as to the specific parameters that a court will find enforceable for non-solicitation agreements.  For the time being, the best practice to ensure such agreements are enforceable is to draft such provisions so they prohibit solicitation only of employees that would be a substantial detriment to the employer, and a substantial benefit to the competitor.  Further, such provisions should only restrict solicitation to work for an actual competitor, not just a supplier or customer.  After all, the employer would have a difficult time demonstrating to a court that a provision that barred a janitor being solicited away to a customer was “reasonably necessary for the protection of the employer . . . .”

Moving forward, it will be interesting to see if this decision results in a new path for Wisconsin courts.  After all, it has been abundantly clear that, in Wisconsin, the law governing restrictive covenants is not static—it never was—and it continues to change and evolve.  What was enforceable in the past might not now be enforceable.  Several other states have basically outlawed most all restrictive post-employment covenants (e.g., California), and others are in the throes of trying to do so (e.g., Massachusetts).  Some allow modification to make an otherwise unenforceable covenant enforceable (e.g., Minnesota allows “blue-penciling”), while others do not.

Given the employer apparently spent upwards of $1 million in attorneys’ fees in the case (and that was just before the trial court), one would imagine they would seek review by the Wisconsin Supreme Court.  Hopefully, the case garners the attention of the Supreme Court and results in some clarification or guidance for employers.

If you have any questions about your agreements and whether they are likely to be enforceable, please contact Michael McDonagh at mmcdonagh@mzmilw.com.

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