Recent Wisconsin Supreme Court Decision Hits Employment Agreements

The Wisconsin Supreme Court recently delivered another blow to employers seeking to protect their employees from being lured away by former employees.  In its February 26, 2018 decision, Manitowoc Co. v. Lanning, the Court held that Wis. Stat. § 103.465, Restrictive covenants in employment contracts (“Restrictive Covenants Statute”), applied to covenants prohibiting former employees from directly or indirectly soliciting, inducing, or encouraging a current employee to terminate the employee’s employment with the company or to accept employment with a competitor, supplier, or customer of the company.

The Restrictive Covenants Statute, which directly applies to typical non-compete agreements in employment agreements, contains language that prohibits “[a]ny covenant, described in this section, imposing an unreasonable restraint….”  In 1998, the Wisconsin Supreme Court reiterated a 1978 decision in holding that the Restrictive Covenants Statute does not solely apply to non-compete agreements, but applies equally to non-disclosure (confidentiality) provisions in employment agreements.  In reaching this conclusion, the Wisconsin Supreme Court held that non-disclosure provisions, like the one it was addressing, clearly sought to act as a restraint of competition.  The non-disclosure provision at issue prohibited the former employee from disclosing the company’s customer data, programs, and business practices.  As such, the Court held that such a restriction is only valid if it contains a limitation to a specified territory and time, and then is only enforceable to the extent the restrictions imposed are reasonably necessary for the former employer’s protection.

The Manitowoc Court stated that although the Restrictive Covenants Statute refers to covenants not to compete, the plain meaning of the statute is not limited solely to such covenants.  Instead, the Court held that the Restrictive Covenants Statute applies to agreements that are viewed as “restraints of trade.”  In holding that the non-solicitation of employees provision fell within the restrictions of the Restrictive Covenants Statute, the Court held that such a provision restricts the former employee’s ability to engage in the ordinary competition attendant to a free market – restricting the former employee from freely competing for the best talent in the market.

After holding that non-solicitation of employees provisions fall within the protections of the Restrictive Covenants Statute, the Court then addressed whether the provision before it was enforceable.  The Court held that the particular provision was invalid because it failed to meet any of the requirements that would have made it a reasonable restraint of trade.  For example, it did not contain a reasonable time limit or a reasonable territorial limit.  The Court specifically focused on the fact that the provision applied to “any” employee and was not limited to employees with whom the former employee was familiar or had influence over.

Although the Court held that the particular provision was unenforceable on its face, the Court stated that a non-solicitation of employees provision could be enforceable if it is reasonably necessary to protect the employer and is reasonable as to time, geography, and the type of conduct covered.  This holding not only expressly expands the reach of the Restrictive Covenants Statute, but should also serve as a clear signal to Wisconsin employers that any covenants contained in an employment agreement in Wisconsin have the potential of being swallowed up by the Restrictive Covenants Statute if a Court holds it is, in essence, a restraint of trade.  As such, employers in Wisconsin should have their employment agreements reviewed and evaluated to make certain that they are protected, and that their agreements are enforceable in light of the Wisconsin Supreme Court’s holding.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.