Employers beware. Many employers utilize non-solicitation of employee agreements as standard practice when hiring new employees. Such agreements typically prevent a former employee (in usually a high level or management position) from encouraging current employees to leave the employer to join him or her at their new company. Despite the practicality of these agreements, the Wisconsin Supreme Court has called into question the enforceability of non-solicitation of employee agreements, and employers who utilize these agreements would be wise to reevaluate them in light of the Court’s decision in Manitowoc Company, Inc. v. Lanning, 2018 WI 6 (Jan. 19, 2018).
Specifically, on January 19, 2018, the Wisconsin Supreme Court upheld the Court of Appeals in finding that an overbroad non-solicitation agreement is unenforceable as a matter of law under Section 103.465 of the Wisconsin Statutes. A prior Mallery & Zimmerman blog post discussed the potential impact of the Court of Appeals decision.
This case focused on a relatively standard employment agreement, wherein a senior level employee, Lanning, agreed to a non-solicitation of employees provision:
I agree that during my Employment by Manitowoc and for a period of two years from the date my Employment by Manitowoc ends for any reason, including termination by Manitowoc with or without cause, I will not (either directly or indirectly) 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.
Manitowoc Co., Inc., 2018 WI 6, ¶ 25.
In the lead opinion, Justice Abrahamson addressed two principal issues: (1) whether Wisconsin Statutes Section 103.465 governing “Restrictive covenants in employment contracts” even applied to the above agreement; and (2) if Section 103.465 does apply, whether the non-solicitation provision was unenforceable under that statute.
Does Wisconsin Statutes Section 103.465 apply?
In addressing the principle issue, the Court acknowledged that Section 103.465 does not explicitly mention agreements concerning the non-solicitation of employees. Instead, the statute states that:
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 after the termination of that employment or agency, 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 covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.
Wis. Stat. § 103.465.
Despite the absence of any reference to non-solicitation agreements, the Court focused on a prior line of Wisconsin cases that extended Section 103.465 beyond the realm of traditional non-compete agreements, such as situations involving restraints on competition, including non-solicitation of customer agreements, non-disclosure/confidentiality agreements between employers and employees, and no-hire provisions between two employers. Manitowoc Co., Inc., 2018 WI 6, ¶ 30. The Court explained that whether a particular agreement constitutes a restraint of trade is based not upon how the agreement is labeled, but upon the effect of the agreement on employees and competition. Id. at ¶ 29. In focusing on the effect of the non-solicitation agreement, the Court explained that the provision “prevents employees of Manitowoc Company from having complete information regarding employment opportunities elsewhere; limits a potentially valuable professional resource the former employee would otherwise have regarding resources in the labor market; and hinders the mobility of Manitowoc Company employees.” Id. at ¶ 33.
The Court reasoned that past cases have interpreted Section 103.465 as including more than the “textbook example” of an employee covenant not to compete with his or her employer, and that the provision in this case is covered by the statute because it restricts Lanning, and any employee of Manitowoc Company, from freely competing against Manitowoc Company in the labor market. Id. at ¶ 34.
Is the non-solicitation provision unenforceable?
After making this preliminary determination, the Court then analyzed the non-solicitation provision under the well-established prerequisites that must be met for a restraint on competition to be enforceable under Section 103.465. The Court held that the provision did not meet the first prerequisite that the provision “be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee.” Id. at ¶ 40.
The Court disagreed with the Manitowoc Company’s assertion that it has an interest in protecting itself from “the loss of the employee(s) it trained and invested time and capital in, and the institutional understanding, experience, and intellectual capital they possess.” Id. at ¶ 43. The Court instead focused on the extensive reach of the language of the non-solicitation provision, placing extensive emphasis on the fact that it created a sweeping prohibition that prevents Lanning from encouraging any Manitowoc Company employee, no matter the employee’s job or location, to terminate his or her employment with Manitowoc Company for any reason, or soliciting any Manitowoc Company employee to take any position with any competitor, supplier, or customer of Manitowoc Company. Id. at ¶ 56.
More specifically, the Court ultimately held that the non-solicitation of employees provision was overbroad on its face as it did not contain a specified territory or class of employees, and restricted Lanning’s conduct as to all employees of Manitowoc Company everywhere. Id. at ¶ 59. The Court took the same approach as the Court of Appeals in disregarding the fact that the Manitowoc Company was seeking to enforce the non-solicitation agreement in this case in a much narrower manner. Even though Lanning had actually hired away key employees to a direct competitor, the Court still held that Section 103.465 prohibited it from enforcing any overbroad restraint on employees. Id. at ¶ 61. Accordingly, the Court upheld the Court of Appeals and remanded the case to the Circuit Court with instructions to enter judgment in favor of Lanning.
Justice Rebecca G. Bradley authored a concurring opinion, which was joined by Justices Gableman and Kelly, where she agreed that Section 103.465 applied to the non-solicitation of employees provision and that it was unenforceable under the statute, but she based her conclusion on the statutory construction of Section 103.465 rather than focusing on Wisconsin case law, which she believes has improperly interpreted the statute expansively.
Chief Justice Roggensack wrote a dissenting opinion, which was joined by Justice Ziegler. In the dissent, she explained that she would have reversed the Court of Appeals because the lead opinion distorted the plain meaning of Section 103.465, changing it from a statute that balanced the rights of employees and their employers into a broad mandate that prevents employers from protecting their business from third-party raiding. She noted that the result of the lead opinion would be to actually reduce competition by allowing competitors to cherry-pick key employees.
Insight & Analysis
While the Court’s decision appears to squarely subject non-solicitation of employee agreements to review in light of Section 103.465, it does not mean that such agreements are never enforceable. The Court’s focus on the expansive reach of the particular provision indicates that a more narrowly tailored non-solicitation agreement would likely pass muster. More specifically, an agreement that prohibited a former employee from soliciting an identified group of key employees, or a certain class of employees, is more likely to be found to be necessary for the protection of the employer.
In sum, employers need to be particularly careful in drafting non-solicitation of employee agreements, ensuring that such restrictions are not written so broadly as to effectively cover every single employee in any circumstance. Employers should also consider reviewing and replacing existing agreements that their business relies upon, as such agreements would likely be unenforceable based upon this decision. Strategizing as to which employees or type of employee would be particularly valuable to a competitor can go a long way in creating protections for an employer in light of the holding in this case.
If you have any questions regarding this article, please contact an attorney at Mallery & Zimmerman.