Looking Into the Restrictive Covenant Crystal Ball: Wisconsin Supreme Court Oral Argument in The Manitowoc Co. Inc. v. Lanning
During presentations I lead on non-competition and non-solicitation agreements, I frequently point out that employers need to have these contracts reviewed regularly. I emphasize this suggestion because, almost as sure as Wisconsin will see snow this winter, there is a significant case that comes out every few years affecting whether these agreements are enforceable. For geeks like me those who closely follow restrictive covenant law, September 5, 2017, was a significant date as the Wisconsin Supreme Court heard oral argument in the case of The Manitowoc Co. v. Lanning. This case raised several questions about restrictive covenants that will very likely require employers to re-examine any agreements they have in place and give lawyers new guidelines in drafting future contracts.
Restrictive covenants are regulated by Wisconsin Statute § 103.465. Prior to the Lanning case, I think it is fair to say that most attorneys treated non-competition agreements (or agreements that restrict where an employee can work after the employment relationship ends) and non-solicitation agreements (or agreements that restrict who an employee can talk to after the employment relationship ends) as falling under the gamut of § 103.465. However, one of the issues raised by Lanning is whether a non-solicitation agreement is a restraint that falls under § 103.465.
Courts have interpreted § 103.465 to impose numerous requirements on restrictive covenants to be enforceable contracts. Most notably, courts require restrictive covenants to meet a five factor standard to be enforceable, which includes that any restrictive covenant 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.
The restrictive covenant at issue in Lanning was an employee non-solicitation provision that stated:
I agree that during my Employment by Manitowoc and for a period of two years from the date my Employment by Manitowoc ends … 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.
The Lanning case is going to be a significant decision no matter who comes out on top. The Wisconsin Supreme Court will likely answer multiple questions about restrictive covenant law that are pertinent to such agreements. Namely, are non-solicitation agreements subject to § 103.465? If so, how specific must the restrictions of a non-solicitation agreement be so that it is enforceable? Based on this week’s oral argument, here are three predictions on what we may expect from the Court’s decision.
Prediction Number 1: The Court will hold that non-solicitation agreements are restraints on trade and therefore subject to analysis under § 103.465.
Part of Manitowoc Co.’s argument was that a non-solicitation agreement is not an agreement that restrains where an individual can work so the highly critical analysis under § 103.465 should not apply. Several of the justices strongly questioned this argument. Most notably was Justice Gableman who did not seem to think that this position reflected the realities of the workplace. At one point, Justice Gableman said “How things work in the real world . . . is that the way most people get the jobs they want . . . [is] by hearing from their friends, hearing from people that they know, hearing from their mentors, hearing from their associates.” Justice Gableman’s voice may be considered especially important to this decision as he authored a recent significant opinion that had wide ranging affects on restrictive covenant law in Wisconsin, in Star Direct, Inc. v. Dal Pra. The justices who raised questions on this issue seemed to agree that an employee non-solicitation agreement impedes employee mobility and is thus subject to § 103.465.
Prediction Number 2: The Court will hold that the loss of an employee in and of itself is not a protectable interest for an employer seeking to enforce a non-compete agreement.
In the lower court’s opinion, it presented a hypothetical that was significant to the court of appeals concluding that the non-solicitation agreement was overbroad. The court of appeals faulted the non-solicitation agreement for not strictly protecting Manitowoc Co. from the loss of an individual to another employer that competes with Manitowoc Co. To illustrate this point, the court of appeals noted that under the terms of the non-solicitation agreement, Lanning would be prohibited from convincing another employee of Manitowoc Co. to retire so that he or she could spend more time with family.
The Court is likely going to need to clarify whether Manitowoc Co. had a protectable interest in the loss of an employee in and of itself for purposes of the five factor analysis under § 103.465. Perhaps surprisingly, Justice Ann Walsh Bradley, considered to be among the Court’s minority liberal wing, seemed to raise the strongest question from this hypothetical of whether it is possible for an employer to draft an enforceable agreement. However, Justice Rebecca Bradley, of the Court’s conservative bloc, seemed to find the court of appeals’ hypothetical to be persuasive and the lack of any strong challenge to it by another justice suggests to me that employers will need to identify a competitive purpose to prohibit the solicitation of employees.
Prediction Number 3: The Court will address whether the circumstances of a restrictive covenant breach affects whether the provision is enforceable in the first instance.
Surprisingly, this issue seemed to be a point on which multiple justices focused. That is, whether the Court could consider the facts and circumstances of the employee’s breach in determining whether the restrictive covenant is reasonable. Justice Gableman was especially critical of Lanning’s argument seeking to exclude the facts of the breach in determining whether the non-solicitation agreement was reasonable. Chief Justice Roggensack’s questions also seemed to suggest that she is willing to explore the circumstances at the time the parties agree to a restrictive covenant can be used to determine a reasonable interpretation of its boundaries. Coming down strongly on the side of Lanning, however, was Justice Kelly who reminded the Court that § 103.465 requires that a restrictive covenant is unenforceable “even as to any . . . performance that would be a reasonable restraint.” I anticipate that the Court will ultimately go back to the statutory language to conclude Manitowoc Co.’s non-solicitation agreement is overbroad but may leave some room to consider narrowly limited, case-specific circumstances at the time of executing one of these agreements to determine whether a restriction is reasonable.
Readers can view the Lanning oral argument here. The Wisconsin Supreme Court’s opinion in Lanning is sure to offer new insights into restrictive covenant law. Be sure to check back to not only see if any of my predictions were correct, but also to confirm whether you may need to update the restrictive covenants in your workplace.