Is Continued Employment Consideration? Wisconsin Supreme Court Will Resolve the Issue Soon.
Commercial Litigation Law Update 06/23/14
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. Last week, in Runzheimer International, Limited v. Friedlen the Supreme Court of Wisconsin granted certification to resolve the 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?” Runzheimer Intern. Ltd. v. Friedlen, No. 2013AP1392, 2014 WL 1465157 (Wis. Ct. App. Apr. 15, 2014), cert. granted, (Wis. June 12, 2014).
Runzheimer involves an action by Runzheimer International to enforce a restrictive covenant agreement between Runzheimer and former employee David Friedlen. Id. In 2009, after Friedlen worked for Runzheimer as an at-will employee for nearly twenty years, Runzheimer required Friedlen to sign a restrictive covenant agreement. Id. The agreement provided no additional benefit beyond the opportunity to remain employed. Id. 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. Id. 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. Id.
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. Id.
The 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. Id. In NBZ, Inc. v. Pilarski, the Wisconsin 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. 185 Wis.2d 828, 837-39, 520 N.W.2d 93 (Ct. App. 1994). Unlike in Runzheimer, the 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. Runzheimer, 2014 WL 1465157.
In Star Direct v. Dal Pra, the Supreme Court of Wisconsin cited NBZ in stating that “employers may not compel their existing employees to sign restrictive covenants without additional consideration.” 2009 WI 76, ¶ 50, 319 Wis.2d 274, 767 N.W.2d 898. Star Direct, however, did not concern a restrictive covenant entered into with an existing at-will employee and, accordingly, the Court of Appeals implied that this language may be dicta. Star Direct considered whether a series of restrictive covenants, entered into at the inception of a new employment relationship, was 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.” See id. 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, the 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. A decision for either party will clarify the rights of employees and provide critical guidance to employers. Until then, employers looking to enter into restrictive covenants with existing at-will employees should consider providing the employee with additional consideration, which may include additional compensation or one-time bonus, in exchange for signing the agreement.
Brandon Krajewski is an attorney at Quarles & Brady LLP. He practices in the firm’s Commercial Litigation Group and is a member of its Trade Secrets and Unfair Competition Subgroup. Mr. Krajewski can be contacted at (414) 277-5783 or [email protected].
Mr. Krajewski would like to thank Mitchell Lindstrom for his invaluable contribution to this update. Mitchell Lindstrom is a law student at Marquette Law School and current Summer Associate with Quarles & Brady LLP.