Wisconsin Supreme Court Concludes That Continued At-Will Employment Constitutes Lawful Consideration
Trade Secrets and Unfair Competition Law Update 04/30/15 Jeffrey O. Davis
On April 30, 2015, the Wisconsin Supreme Court issued its long-awaited decision in Runzheimer International, Ltd. v. Friedlen et al, concluding that continued at-will employment may constitute lawful consideration for a restrictive covenant.
In Runzheimer v. Friedlen, Runzheimer International, Ltd. ("Runzheimer") sued its former employee David Friedlen for breach of various restrictive covenants. In 2009, after Friedlen had worked for Runzheimer as an at-will employee for nearly twenty (20) years, Runzheimer required Friedlen to sign an agreement containing various restrictive covenants. The agreement provided no additional benefits beyond the opportunity to remain employed. Friedlen 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 later, Runzheimer fired Friedlen. Shortly thereafter, Friedlen accepted employment with a 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.
This was a case that had been certified for Supreme Court review by the Court of Appeals. The Court of Appeals had noted that the law on whether continued at-will employment constitutes consideration to support a restrictive covenant is unsettled. In NBZ, Inc. v. Pilarski, the Court of Appeals had held that a noncompete agreement entered into by an existing at-will employee was—under the particular facts of that case—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. 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 of the agreement, there may have been sufficient consideration.
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." 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 inconclusive on the subject, the Court of Appeals in Runzheimer certified the issue to the Supreme Court of Wisconsin. The Wisconsin Supreme Court has now resolved the issue, concluding that "an employer's forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for a restrictive covenant."1 Regarding Friedlen's concern that an employer could require an existing employee to sign a restrictive covenant and then terminate the employee the very next day, the Court noted that "the employee would  be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing, so that the restrictive covenant could not be enforced." The Court then remanded the case to address the issues of whether the restrictive covenants were reasonable.
How Does This Decision Impact You
Runzheimer gives Wisconsin employers considerable flexibility in implementing—or modifying—noncompetes with their existing employee base. Employers can now unquestionably require existing, at-will employees to execute restrictive covenants without having to supply them with other consideration such as a bonus, promotion, or raise. But employers must still think strategically about this issue. It is important to note that for employers who take the "continued employment as consideration" or "stick" approach, it is still necessary to show that signing a noncompete really is a condition of continued employment. Employers may need to be prepared to terminate employees who are asked and refuse to sign such an agreement, as failure to do so could call into question whether continued employment really was tied to the noncompete. Employers not wishing to go this route for all employees may want to at least consider a "carrot" approach and tie the noncompete to a bonus, stock incentive plan, promotion or raise, or even a required notice and advance severance package, rather than mere continued employment, notwithstanding Runzheimer.
Quarles & Brady LLP's Trade Secrets and Unfair Competition Team stands ready to assist you in matters involving unfair competition, including claims involving trade secret misappropriation, antitrust issues, noncompete breaches, false advertising, tortious interference with contracts and business relationships, business defamation, and breaches of the duty of loyalty. From advising you on preventive measures to litigating such matters, the attorneys on the Trade Secrets and Unfair Competition Team will use their extensive experience in this area to get the job done right. Contact your Quarles & Brady Attorney, Nicole J. Druckrey, Chair of the Trade Secrets and Unfair Competition Team, at 414-277-5777 / email@example.com, or Jeffrey O. Davis at (414) 277-5317 / firstname.lastname@example.org.
1 Chief Justice Shirley Abrahamson issued a concurring opinion. Though she did not agree with the majority's opinion that continued at-will employment constituted consideration, she concluded that because Friedlen's employment had continued for two (2) years after he executed the agreement, consideration was present.