Broad Non-Solicitation of Employees Provision Ruled Unenforceable by Wisconsin Supreme Court
Labor & Employment Alert 01/31/18 John R. Remington, Averi A. Niemuth
Most employers and human resources professionals are familiar with non-competition and non-solicitation provisions. A related, but less scrutinized provision in employment contracts is a non-solicitation of employee (NSE) provision, which bars a departing employee from recruiting former co-workers to join a competitor. As a matter of first impression, on January 19, 2018, the Wisconsin Supreme Court addressed the enforceability of NSE provisions in Manitowoc Company, Inc. v. Lanning, No. 2015AP1530, 2018 WL 472928.
Case Overview: The case involved John Lanning, who worked as an engineer in the Manitowoc Company’s crane division for 25 years. During his employment, Lanning signed an employment agreement that prohibited him from “directly or indirectly soliciting, inducing, or encouraging any employee of Manitowoc Company to terminate his or her employment with Manitowoc Company or to accept employment with a competitor, supplier, or customer of Manitowoc Company.” Upon leaving Manitowoc, Lanning worked for a direct competitor, SANY America, and communicated with at least nine Manitowoc employees regarding potential employment at SANY. The critical issue was whether Manitowoc could enforce the NSE provision and recover damages in light of Lanning’s breach.
The trial court awarded Manitowoc $97,844.78 in damages and $1 million in attorneys’ fees. The Court of Appeals reversed, determining that the NSE provision was overbroad and unenforceable. Ultimately, the Wisconsin Supreme Court agreed with the Court of Appeals and ruled in favor of Lanning.
The Wisconsin Supreme Court determined, for the first time, that Wisconsin statute § 103.465, which addresses restrictive covenants and invalidates “covenants that impose unreasonable restraints on employees,” applied to NSE provisions. In other words, these provisions will be subject to the same rules of interpretation as other covenants. Second, the Court ruled that this particular NSE provision was unenforceable and overbroad on its face because it was not “reasonably necessary for the protection of the employer.” The Court emphasized that the words “any employee” in the NSE provision covered every one of Manitowoc’s “13,000 world-wide employees” without any limitation regarding the employee’s position, geographic location, specialized knowledge or skills, or relationship or familiarity with Lanning. It quoted the Court of Appeals’ summary of the provision, “Manitowoc has drafted a provision that requires it to prove that it has a protectable interest in preventing Lanning from encouraging any employee to leave Manitowoc for any reason, or to take any job with any competitor, supplier, or customer.” Such a sweeping provision is overbroad and unenforceable under the statute.
Impact on Employers: Employers are urged to revisit their NSE provisions to ensure that they contain narrowly tailored language to meet the employer’s specific business needs and pass muster under this recent decision. In general, NSE provisions should be narrowly tailored to apply to only those co-workers with whom the employee has had direct contact, and consideration should be given as to the category of employees to whom it would apply, i.e., employees who would be difficult to replace or could cause the company competitive harm. NSE provisions should also include time and geographical limitations similar to other non-compete and non-solicit agreements.
Future Changes: Although a majority of the Court agreed with the points of law set forth above, the Court disagreed sharply about the scope of Wisconsin Statute § 103.465, setting the stage for future litigation about what kinds of agreements are governed by the statute. Although practitioners may struggle to make sense of the competing interpretations and predict the direction of this area of law, the safest course for employers is to carefully tailor these agreements to address that employer’s competitive interests.
For more information, please contact John Remington at (414) 277-3087/[email protected], or your Quarles & Brady attorney.