Wisconsin Supreme Court Alters Legal Landscape For Restrictive Covenants in Employment Contracts
Commercial Transactions Litigation Update 08/03/09 Nicole J. Druckrey, Jeffrey O. Davis
A recent decision out of the Wisconsin Supreme Court may dramatically change the way in which covenants not to compete in employment agreements will be treated by Wisconsin courts. A Wisconsin statute provides that the partial enforcement of a restrictive covenant is not permitted. Accordingly, Wisconsin courts have long applied a very strict "all or nothing" rule, finding that if any provision of a non-compete agreement was overly broad, the entire agreement would be tossed, even if it included other, less broad provisions. Recent decisions from intermediate and federal courts had taken this rule to an extreme. Now it appears the Supreme Court has reversed course and authorizes courts to partially enforce, at least in some circumstances, non-compete agreements that are found to be overly broad in some respect.
Facts of the Case and the Court's Ruling
The case is Star Direct v. Dal Pra, and it involved a fairly typical set of facts. Star Direct distributed sundries and novelty items to convenience stores and service stations. Like many businesses, its success hinged on the relationships its salespeople built with customers as well as client-specific information such as contact names and preferences, marketing strategies and pricing.
Eugene Dal Pra was a sales employee of Star Direct. He signed a non-compete agreement that barred him, for two years post-termination, from engaging in three activities: (1) soliciting customers or certain defined "past customers," (2) becoming engaged in a business "substantially similar to or in competition with" Star Direct's business or (3) using or disclosing confidential information. Dal Pra later quit and began competing with Star Direct, and Star Direct sued. The courts below dismissed the case, finding that the agreement failed in its entirety because the "substantially similar" language rendered the entire agreement overly broad.
The Supreme Court reversed. While the Court agreed that the "substantially similar" language was overly broad, it disagreed that this language should cause the entire agreement to fail. Rather, only the particular provision to which it applied was struck. Consequently, the other provisions - specifically, the non-solicitation and confidentiality provisions - were still enforceable.
Impact of the Court's Ruling on Employers
While many open questions remain, Star Direct likely represents the most significant Wisconsin non-compete ruling in decades and will undoubtedly change the way businesses, lawyers and courts view and apply non-competes and related provisions in employment agreements. Up to now, it was generally ill-advised for employers to include multiple restrictive covenants in employment agreements, since the invalidity of any single clause could drag down the entire agreement, and multiple clauses simply gave courts that much more "ammunition" to invalidate the contract as a whole. Star Direct may usher in an entirely different approach. Since unreasonable provisions of non-competes can be struck without affecting the remainder of the agreement, employers may wish to seek broad protection in certain provisions while still ensuring some protection in others. For example, an employer will now be able to consider using a "radius"-type geographic scope provision without fear that it would affect a less restrictive customer-based restriction in the same agreement.
The decision also puts more teeth in these agreements at the enforcement stage, as the decision will generally increase the odds of non-compete agreements being upheld in the event of a breach. Of course, great care must still be given in the drafting of these agreements. While the scope of the Star Direct ruling is not clear, at a minimum it remains certain that courts cannot simply re-write a covenant that is overly broad. And there will likely always be judicial hostility toward enforcing employee non-compete agreements - particularly those that are deemed to be overreaching.
If you have questions about this Wisconsin Supreme Court decision or non-compete matters in general, contact Jeff Davis at (414) 277-5317 / [email protected], Nicole Druckrey at (414) 277-5777 / [email protected] or your Quarles & Brady attorney.