Quirky Question #237, Badger your employees to sign new non-competes?

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Question:

We are a Wisconsin employer that has recently lost a number of employees to competing companies in our area. We’re worried our competitors are getting an unfair edge in the market, basically using employees we’ve spent time and resources training to compete against us. It doesn’t seem fair. Unfortunately, it didn’t occur to us to have our employees sign non-compete agreements back when we hired them. In light of all this, we wish to have our remaining employees sign non-compete agreements as a condition of their continued employment with us. If an employee refuses to sign, then we plan to terminate him/her. Assuming we craft a reasonable non-compete agreement, is there any problem with this course of action?

Answer:

Until the Wisconsin Supreme Court provides more guidance on this issue, you may take your proposed course of action, but your safest bet is to provide the employees some additional consideration for signing the agreements, more than just continued employment with your company.

Your question was recently asked in Runzheimer Intl LTD., v. Friedlen, a Wisconsin Court of Appeals decision that has been certified for review by the Wisconsin Supreme Court. In 2009, Runzheimer International required one of its employees, David Friedlen, to sign a non-compete agreement. This, in itself, is not particularly unusual. Employers often require employees to sign non-compete agreements, and, under Wisconsin law, non-compete agreements are valid so long as the restrictions are reasonably necessary for the protection of the employer.

What made this an interesting question under Wisconsin law was the fact that Friedlen had been employed by Runzheimer for nearly 20 years as an at-will employee. Signing the non-compete agreement was required as a condition of his continued employment with Runzheimer and no other consideration or benefit was provided other than the chance to continue working for Runzheimer as an at-will employee. In 2011, about two years after Friedlen had signed the non-compete agreement, Friedlen was terminated and began working for a competitor. Runzheimer then brought suit, seeking to enforce the non-compete agreement.

The trial court held continued at-will employment was illusory and did not constitute sufficient consideration for the agreement. On appeal, the Wisconsin Court of Appeals was asked to address whether continued at-will employment constitutes sufficient consideration to support a non-compete agreement signed after employment has already commenced.

Unfortunately, (and as recognized by the Wisconsin Court of Appeals), case law in Wisconsin is unclear and possibly contradictory. On one hand, one recent Wisconsin Supreme Court case, Star Direct, Inc. v. Del Pra, provides support that a non-compete entered into after employment has commenced requires additional consideration beyond merely continued at-will employment. Indeed, the Star Direct court specifically stated that “employers may not compel their existing employees to sign restrictive covenants without additional consideration.”

At first glance, Star Direct would seem to answer this question. However, for the above proposition, the Star Direct court cited NBZ, Inc. v. Pilarski, a Wisconsin Court of Appeals case which held a non-compete signed after employment commenced was not enforceable because no consideration was provided. But in NBZ, the Wisconsin Court of Appeals held the non-compete was unenforceable, not necessarily because continued at-will employment is insufficient consideration for a non-compete, but because the non-compete was not actually conditioned on continued employment. Indeed, in NBZ, the employer stated it did not know what would have happened to an employee who refused to sign the non-compete agreement. Thus, the NBZ court appeared to imply that a non-compete signed explicitly as a condition of continued at-will employment would be enforceable.

Because of the discrepancy in Wisconsin law, the Court of Appeals in Runzheimer decided not to address the question, instead certifying it to the Wisconsin Supreme Court. Until that Court decides the case, there is no clear rule in Wisconsin about whether continued at-will employment constitutes sufficient consideration for a non-compete agreement entered into after employment has commenced. Some jurisdictions, such as Ohio, have held that continued at-will employment alone is sufficient consideration. Other jurisdictions, such as Minnesota, require additional consideration beyond mere continued at-will employment for a non-compete agreement signed after employment has commenced. Still, other jurisdictions, such as Illinois, permit continued at-will employment to be sufficient consideration so long as the employee remains employed for a “substantial period” after signing the agreement.

In light of this, what can employers in Wisconsin do? Generally, the safest course of action is to either have employees sign a non-compete as a condition of employment before they begin employment, or to provide additional consideration if the non-compete is signed after employment begins. In providing additional consideration, employers should be careful to premise the signing of the non-compete on a benefit that is not generally available and that the employee would not have a right to without signing the non-compete. In short, providing additional consideration – for example, in the form of a bonus the employee would otherwise not be eligible to receive – is likely the safest course of action, at least until the question is definitively answered by the Wisconsin Supreme Court.

Topics:  Employer Liability Issues, Non-Compete Agreements, Restrictive Covenants

Published In: Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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