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Wisconsin Supreme Court Hears Argument on Consideration for Noncompetes

Trade Secrets and Unfair Competition Law Update Brandon M. Krajewski

On October 1, 2014, the Wisconsin Supreme Court heard oral argument in Runzheimer International, Limited v. Friedlen, on the question of whether consideration in addition to continued employment is required to support a covenant not to compete entered into by an existing at-will employee. 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 Wisconsin. In NBZ, Inc. v. Pilarski, the Court of Appeals held that 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. Unlike in Runzheimer, the NBZ employee’s continued employment was not conditioned on her signing a noncompete agreement. Id. 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.

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.

On October 1, 2014, the Wisconsin Supreme Court heard oral argument on whether additional consideration is necessary to support a new noncompete agreement with an existing at-will employee or whether continued employment alone is adequate consideration. Chief Justice Abrahamson appeared to favor a rule that would require employers to offer at-will employees an employment contract for a specified term for a new noncompete to be enforceable. Justice Ziegler repeatedly questioned whether there was any legal distinction between a noncompete offered at the inception of the at-will employment relationship and one entered into during the course of an at-will employment relationship, given both parties’ nearly unfettered right to terminate the relationship—or not enter one—in either scenario. Justice Roggensack made it clear that she believed a noncompete entered into at the start of employment was categorically different than one entered into during the employment relationship. Finally, Justice Gableman queried whether any distinction between a noncompete entered into at the start of employment and one entered into during the relationship would require courts to examine the adequacy of consideration offered, something forbidden by black letter contract law.

A decision is expected to issue no later than July 2015.

Quarles & Brady LLP has an entire group of attorneys—the Trade Secrets and Unfair Competition Team—dedicated to helping clients with these issues. Their experience in this area of the law allows them to provide you with efficient and reliable advice. Quarles has assisted clients with these issues on both an hourly and flat fee basis. If you need assistance, please contact Nicole J. Druckrey at (414) 277-5777 or nicole.druckrey@quarles.com.