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Noncompetes And At-Will Employment At Issue In Wis.

Law360 Brandon M. Krajewski

Like any contract, an enforceable restrictive covenant in an employment agreement must be supported by adequate consideration. Is continued employment of an existing at-will employee sufficient consideration to support a covenant not to compete? The issue is unresolved in Wisconsin, but not for long. In Runzheimer International Limited v. Friedlen, the Supreme Court of Wisconsin granted certification to resolve that exact question posed by the Wisconsin Court of Appeals: “Is consideration in addition to continued employment required to support a covenant not to compete entered into by an existing at-will employee?”[1]

Runzheimer involves an action by Runzheimer International to enforce a restrictive covenant agreement between Runzheimer and its former employee David Friedlen. In 2009, after Friedlen worked for Runzheimer as an at-will employee for nearly 20 years, Runzheimer required Friedlen to sign a noncompete agreement. The agreement provided no additional benefit beyond the opportunity to remain employed. He received no additional salary, nor did signing the agreement make him eligible for incentives that he had not been eligible for prior to signing the agreement. In addition, Friedlen testified that he felt “forced” to sign the agreement and understood that he would be fired if he refused to do so.

Two years after signing the agreement, Runzheimer fired Friedlen. Shortly thereafter, Friedlen accepted employment with a Runzheimer competitor, and Runzheimer sued both Friedlen and the competitor. The trial court determined that the restriction was unenforceable for lack of consideration and Runzheimer appealed.

The Wisconsin Court of Appeals determined that the law on adequate consideration necessary to support a restrictive covenant for existing at-will employees is unsettled in the state. In NBZ Inc. v. Pilarski, the appellate court held a noncompete agreement entered into by an existing at-will employee was unenforceable due to lack of consideration, but did not expressly answer the question of whether “continued employment alone will serve as consideration for a covenant not to compete” as a general matter.[2] Unlike in Runzheimer, the NBZ employee’s continued employment was not conditioned on her signing a noncompete agreement. Thus, the Runzheimer court stated that NBZ can be read as implying that if the employer had conditioned continued employment on the employee’s signing the agreement, there may have been sufficient consideration.[3]

Later, In Star Direct v. Dal Pra, the Supreme Court of Wisconsin cited NBZ in support of its statement that “employers may not compel their existing employees to sign restrictive covenants without additional consideration.”[4] Star Direct, however, did not concern a restrictive covenant entered into with an existing at-will employee. Rather, Star Direct considered whether a series of restrictive covenants, entered into at the inception of a new employment relationship, were reasonably necessary to protect the employer’s business. The employee seeking to invalidate the covenants noted that the employer had acted inconsistently by requiring restrictive covenants from new employees but not from existing employees, and claimed that this inconsistency was evidence that the covenants were unreasonable and unnecessary.

The Wisconsin Supreme Court disagreed, noting that it was reasonable for a business to treat new employees differently from current employees because “employers may not compel their existing employees to sign restrictive covenants without additional consideration.” The case contained no other analysis of NBZ and, therefore, it is unclear whether the Star Direct court cited NBZ to indicate additional consideration is required or that continued employment may, in certain circumstances, suffice as additional consideration.

Recognizing the apparent inconsistency between the conflicting comments made in the Star Direct and NBZ decisions, and that Star Direct’s statement citing NBZ was arguably dicta, the Wisconsin Court of Appeals in Runzheimer certified the issue to the Supreme Court of Wisconsin. Runzheimer’s initial brief is due on July 14, 2014, with a decision to issue no later than July 2015.

In jurisdictions outside Wisconsin there is no clear consensus on whether continued at-will employment is sufficient consideration for a new restrictive covenant. Courts in Washington, Minnesota and South Carolina have all held that an employer must provide additional consideration to support a new restrictive covenant with an existing at-will employee.[5] In Illinois, “There must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant. This rule applies even if the employee resigns on his own.”[6]

Not every jurisdiction requires consideration in addition to continued employment for a new restrictive covenant, however, so Wisconsin would not be an outlier if it moved away from the language in Star Direct suggesting such a requirement. Several jurisdictions have held that continued employment alone is sufficient to support a new restrictive covenant.[7]

A decision for either party will clarify the rights of employees and provide critical guidance to employers under Wisconsin law. Until then, Wisconsin employers should be cautious if looking to secure new restrictive covenants with existing at-will employees without additional consideration. And, they should be wary that consideration is merely a threshold issue before courts consider whether the restrictive covenant is reasonable and necessary for the protection of the employer’s legitimate business interests. Until there is clear guidance on the consideration issue, Wisconsin employers should follow these best practices to ensure their noncompete agreements are enforceable:

  • Restrictive covenants should be executed at the beginning of the employment relationship. Employers should clearly communicate — in writing — that employment is contingent on the employee signing the agreement.
  • Adopt a uniform policy of obtaining and enforcing restrictive covenants. Ad hoc or nonuniform policies may indicate that the covenant is not reasonably necessary to protect the employer’s business interests.
  • Employers looking to enter into restrictive covenants with existing at-will employees should provide the employee with additional consideration (e.g., additional compensation in the form of a one-time bonus or a raise in exchange for signing the agreement).
  • —By Brandon M. Krajewski, Quarles & Brady LLP

    Brandon Krajewski is an associate in Quarles & Brady's Milwaukee office.

    Krajewski would like to thank Mitchell Lindstrom for his invaluable contribution to this article. Mitchell Lindstrom is a law student at Marquette Law School and was a summer associate at the firm.

    The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

    [1] Runzheimer Intern. Ltd. v. Friedlen, No. 2013AP1392, 2014 WL 1465157 (Wis. Ct. App. Apr. 15, 2014), cert. granted, (Wis. June 12, 2014).

    [2] 185 Wis.2d 828, 837-39, 520 N.W.2d 93 (Ct. App. 1994).

    [3] Runzheimer, 2014 WL 1465157.

    [4] 2009 WI 76, ¶ 50, 319 Wis.2d 274, 767 N.W.2d 898.

    [5] See Labriola v. Pollard Grp. Inc., 100 P.3d 791, 794 (Wash. 2004); Freeman v. Duluth Clinic Inc., 334 N.W.2d 626 (Minn. 1983); Poole v. Incentives Unlimited Inc., 548 S.E.2d 207 (S.C. 2001).

    [6] Fifield v. Premier Dealer Servs. Inc., 2013 IL App (1st) 120327, 993 N.E.2d 938, 373 Ill. Dec. 379, appeal denied, 996 N.E.2d 12, 374 Ill. Dec. 565 (Ill. 2013).

    [7] See Lucht’s Concrete Plumbing Inc. v. Horner, 225 P.3d 1058 (Colo. 2011); Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903 (N.Y. App. Div. 1992).