United States: Wisconsin Supreme Court Holds That Employee Non-Solicitation Agreements Are Subject To A Strict Enforcement Standard

In Wisconsin, post-employment restrictive covenants are governed by Wis. Stat. § 103.465, requiring that any restrictive covenant be reasonable to be enforceable.1 Courts interpreting the statute have held that for a restrictive covenant to be enforceable it must: (1) be necessary for the protection of the employer; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy. If a restrictive covenant fails to satisfy even one of the five prerequisites, it is void and unenforceable.

To many employers, a post-employment restrictive covenant has meant a traditional non-competition or non-solicitation agreement—for example, a post-employment restrictive covenant prohibiting the former employee from competing with the employer or prohibiting the former employee from soliciting the employer's customers. On January 19, 2018, however, the Wisconsin Supreme Court held that a post-employment restriction limiting the former employee's ability to solicit his former coworkers is also governed by Wis. Stat § 103.465. Thus, for non-solicitation of employees ("NSE") provisions to be enforceable, they must pass scrutiny under the same reasonableness prerequisites as other post-employment restrictions that restrain competition.

In The Manitowoc Company, Inc. v. Lanning, a former chief engineer of The Manitowoc Company ("Manitowoc") accepted a position with a direct competitor. His employment contract with Manitowoc contained an NSE provision that prohibited him from directly or indirectly soliciting, inducing, or encouraging any Manitowoc employee to terminate his or her employment with Manitowoc or to accept employment with any competitor, supplier, or customer of Manitowoc. The NSE provision prohibited the chief engineer from soliciting any of Manitowoc's 13,000 world-wide employees regardless of the employee's position within the company or the employee's connection to the former chief engineer. After the chief engineer began working for a competitor, he allegedly enticed a number of Manitowoc employees to terminate their employment and to join him working for the competitor. When Manitowoc brought suit, the former chief engineer argued that the NSE provision is governed by Wis. Stat. § 103.465 and was unenforceable because it was overbroad and not necessary for Manitowoc's protection.

The Wisconsin Supreme Court held that although Wis. Stat. § 103.465 explicitly refers to a covenant "not to compete," the plain meaning of the statute is not limited to a covenant in which an employee agrees not to compete with a former employer. Rather, according to the court, the purpose of the statute is to require any restraint on trade, including NSE provisions, to be reasonable.

Having held that the statute does apply to NSE provisions, the court next examined whether the former employee's NSE provision was reasonable. The court focused on the first prerequisite—whether the NSE provision is necessary for Manitowoc's protection. Manitowoc argued it was necessary to protect itself from the loss of the employees it trained and invested time and capital in, and the institutional understanding, experience, and intellectual capital they possessed. The court held that under certain circumstances, such considerations may be valid protectable interests, but the former chief engineer's provision went further—it prohibited him from soliciting any employee, including low-level employees whom he did not even know. The court held that this rendered the NSE overbroad and not necessary for Manitowoc's protection, and therefore was void and unenforceable.

As a result of the Wisconsin Supreme Court's decision in Lanning, NSE provisions should now be added to the list of restrictive covenants that courts have found are subject to Wis. Stat. § 103.465. This list includes, for example, traditional non-compete agreements, customer non-solicitation restrictions, confidentiality/non-disclosure agreements, and no-hire provisions between two employers. In light of the Lanning decision, Wisconsin employers should review, and revise if appropriate, any NSE provisions (and other restrictive covenants) in their employment-related contracts to tailor them to a legally-protectable interest and otherwise maximize their enforceability in Wisconsin.

Footnotes

1 The text of Wis. Stat. § 103.465 provides:

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.

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