Every few years the Wisconsin Supreme Court gives us a significant change or new addition to the law on restrictive covenants in our great state. True to form, the Court published Runzheimer International, Ltd. v. David Friedlen, et al., which should give employers good cause to reexamine their restrictive covenants with employees.
Let’s start with the basics. A restrictive covenant, for purposes of this discussion, is an agreement between an employer and an employee for the individual to not do something after the employment relationship ends. In Wisconsin, they are governed by statute, Wis. Stat. § 103.465. Typically, these agreements come in the form of noncompetition or nonsolicitation terms. With a noncompetition agreement, the employee agrees not to work for certain competitive businesses within a certain area and for a certain amount of time after the employment relationship ends. A nonsolicitation agreement usually requires that the employee agree not to try to convince other employees to leave employment for a competitor for a certain amount of time after the employment relationship ends.
Restrictive covenants are contracts and subject to the legal requirements of contracts. One of those requirements is that a contract must be supported by consideration to be enforceable. Very basically summarized, this means that the employee has to receive something or the employer has to experience something to its detriment for the promise of the employee. Prior to Runzheimer, consideration could take the form of things like money, such as a bonus, or the promise of new employment. However, the prevailing understanding in Wisconsin was that continued employment, where an employee was asked to sign a restrictive covenant agreement after commencing employment, could not suffice as consideration to make those terms enforceable.
Runzheimer changes this principle and holds that the condition of continued employment can serve as adequate consideration. In this case, David Friedlen worked for Runzheimer International, Ltd. for fifteen years when the company asked all employees to sign a restrictive covenant agreement. Friedlen was given a choice to either sign the agreement or be fired. Friedlen did not receive anything else. Friedlen signed the covenant and worked for two more years before he was fired. After that employment relationship ended, Friedlen tried to work at a competitor of Runzheimer’s, Corporate Reimbursement Services. Runzheimer then brought suit against Friedlen and CRS to enforce the agreement.
The Wisconsin Supreme Court found that Runzheimer’s restrictive covenants with Friedlen were enforceable. On the specific issue before the Court, it found that Runzheimer’s promise not to terminate Friedlen if he signed the agreement was the necessary legal consideration to make it an enforceable restrictive covenant. The Court did not take the path of requiring a certain period of continued employment to follow to make the agreement enforceable. Rather, the Court’s analysis focused on Runzheimer’s promise not to terminate Friedlen at the time if he signed the agreement. This promise to forebear its right to terminate an at-will employee was the necessary consideration to support the restrictive covenants.
Four takeaways from Runzheimer:
- The promise not to fire an employee should be clear. The Court distinguished Runzheimer from NBZ Inc. v. Pilarski, where there was no evidence that the employer explicitly conditioned continued employment on agreeing to the restrictive covenant. Therefore, an agreement is more likely to be enforceable where continued employment is made explicitly conditional on assent to the restrictive covenant terms.
- How long of a period of continued employment must follow assent to a restrictive covenant? Other states, such as Illinois, hold that two years of continued employment is required for there to be sufficient consideration. Essentially, the concurring opinion of Chief Justice Abrahamson seems to suggest that the appropriate analysis would look at the period of employment following assent to the restrictive covenant agreement. But the majority opinion takes a narrower view where a short period of continued employment can negate the agreement because it does not rely on continued employment as consideration – rather, it is the promise to forebear on its right to terminate. This issue will likely be an argument for future courts to clarify.
- Speaking of length of continued employment . . . employees still have an out. The Court specifically cited legal claims such as “fraudulent inducement or good faith and fair dealing” that might make a restrictive covenant unenforceable where it relies on the condition of continued employment as consideration. This is seemingly a more complicated means of addressing adequacy of consideration than other courts follow to set out how long the employment relationship must continue to be considered lawful consideration. Employees who are employed for a short period of time after agreeing to the terms of a restrictive covenant are likely to channel those facts through these claims identified by the Court.
- Whether an employee quits or is terminated may be significant to the issue of consideration. Throughout the opinion, the Court’s analysis focused on employer conduct in examining consideration. Whether an employee quits after a short period of continued employment may be significant to whether a restrictive covenant agreement is enforceable.