Employment Law Daily Even nonsolicitation pact was unenforceable restraint under Wisconsin law
Wednesday, January 24, 2018

Even nonsolicitation pact was unenforceable restraint under Wisconsin law

By E. Darius Sturmer, J.D.

The nonsolicitation clause within an employment agreement between crane manufacturer Manitowoc Company, Inc., and an engineering employee constituted an unreasonable restraint of trade upon the employee and was, therefore, unenforceable under Wis. Stat. § 103.465, a divided Wisconsin Supreme Court has ruled. In a 5-2 decision, the Court decided that Section 103.465, referring explicitly only to “covenants not to compete,” could also be applied to the nonsolicitation provision that barred the employee, for a period following his departure, from convincing other Manitowoc employees to leave and join him at a competing company. The provision restricting the employee restrained competition by limiting a competitor’s access to the labor pool, in the court’s view. Further, the court held that, because the nonsolicitation provision was not “reasonably necessary for the protection of the employer,” it could not satisfy Section 103.465’s prerequisites for enforceability. A Wisconsin appellate court’s reversal of a trial court’s $1.1 million judgment in favor of Manitowoc was affirmed, and the matter was remanded to the circuit court (Manitowoc Co., Inc. v. Lanning, January 19, 2018, Abrahamson, S.).

Applicability of Section 103.465. The plain meaning of Section 103.465 was not limited to a covenant in which in an employee explicitly agreed “not to compete” with a former employer, in the court’s view. Wisconsin courts have applied the statute far more broadly, to “traditional non-compete agreements, non-solicitation of customer agreements, and non-disclosure/confidentiality agreements between employers and employees as well as a no-hire provision between two employers,” the court observed. Thus, whether a particular agreement constituted a restraint of trade was based not upon how the agreement was labelled but upon the effect of the agreement on employees and competition, the court said.

In this instance, the provision prevented employees from Manitowoc from having complete information regarding employment opportunities elsewhere, the court remarked. It also “limit[ed] a potentially valuable professional resource [the departed employee] would otherwise have regarding resources in the labor market.” Although the law “encouraged the mobility of workers,” the court stated, the provision at issue “hinder[ed] the mobility of Manitowoc Company employees.” The effect was clear.

The precept of legislative acquiescence further reinforced the principle of stare decisis and supported its interpretation of the statute, the court said, noting that the Wisconsin legislature had passed up the opportunity on three separate occasions between 1995 and 2015 to amend the wording of the statute to counter the judiciary’s broad application of it.

Enforceability. Because Manitowoc failed to establish that it had a protectable interest justifying the sweeping restriction it imposed upon the employee’s activities, it could not satisfy all of the prerequisites that a restrictive covenant had to meet in order to be enforceable, the court concluded. The company claimed it had an interest in “protecting itself from ‘the loss of the employee(s) it trained and invested time and capital in, and the institutional understanding, experience, and intellectual capital they possess.’” However, the provision contained no limitations based upon the nature of the employee’s position, the employee’s personal familiarity with or influence over another particular employee, or the geographical location where he worked. “The argument that Manitowoc Company [had] a protectable interest in maintaining its entire workforce flout[ed] the generally recognized principle that the law ‘does not protect against the raiding of a competitor’s employees,’” the court stated. The company could have tailored the language of the agreement to its specific needs.

Manitowoc’s argument that a “sliding scale” approach should apply to gauge whether the nonsolicitation provision met Section 103.465’s prerequisites was without any basis in Wisconsin law, the court added.

Concurrence. A concurring opinion penned by Justice Rebecca Grassl Bradley and joined by two others disagreed with Justice Abrahamson’s basing of her interpretation of Section 103.465 in the lead opinion almost exclusively on arguably bad Wisconsin case law, and chided her opinion for “skip[ping] the critical first step of statutory analysis—examining the plain language of the text.” The case law interpreted and applied the statute expansively, “sometimes straying far from the text in advancing policy choices that should be made legislatively, not judicially,” the concurrence noted. In abandoning the process of textual analysis, the lead opinion risked reading into the statute “imagined words derived from the court’s perception of the legislature’s unspoken policies and purpose.”

Dissent. A dissenting opinion filed by two other justices contended that the nonsolicitation clause in the employee’s contract did not come within the plain meaning of Section 103.465 and was, therefore, enforceable. According to the dissenting justices, the lead opinion’s case law approach changed Section 103.465 “from a statute that balanced the rights of employees and their employers into a broad mandate that prevents employers from protecting their businesses from third-party raiding.” Declaring the nonsolicitation clause unenforceable permitted the former employee to assist his new company in “cherry picking Manitowoc Company, Inc.’s key employees and thereby reduce[d] the competition that Manitowoc would otherwise be able to exert against SANY, as both compete in the same marketplace,” the dissent said.

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