Wisconsin Supreme Court Hears Case Dealing with Non-Compete Agreements

On Wednesday, October 1, the Supreme Court of Wisconsin heard oral argument in a case that involves an important issue to Wisconsin employers who hire employees on an at-will basis and seek to protect themselves with non-competition, confidentiality, and non-solicitation agreements (hereinafter, “Non-Competes” or “Agreements”).

The opinion of a Milwaukee County Circuit Court that is under review invalidated a Wisconsin employer’s Non-Competes with its at-will employees in Wisconsin. The Milwaukee Circuit Court held if an employer seeks to update its Non-Competes with existing at-will employees, it cannot simply make the signing of such agreements a condition of the at-will employees’ continued employment.

Facts

In 2008, Runzheimer Int’l, Ltd. (“Runzheimer”) updated its current Non-Competes to better protect its proprietary information and business model. Each employee presented with the updated Non-Compete was an at-will employee, and was informed that he or she could not continue to work at Runzheimer (and be exposed to Runzheimer’s proprietary information) unless he or she executed the updated Non-Compete. Any employee that executed the updated Non-Compete would receive continued employment and would be allowed to participate in the following years’ employee bonus incentive plan.

David Friedlen, an existing at-will employee at Runzheimer, elected to keep his job and execute the updated Non-Compete. Friedlen not only kept his job for over two years thereafter, but was allowed into the bonus incentive program and earned over $20,000 under it the year after he executed the Agreement. After his employment was terminated, he went to work for a Runzheimer competitor in Massachusetts in violation of the Agreement, and asserted it was unenforceable because he did not receive sufficient consideration for it.

Friedlen argued that because he was an at-will employee, he could have been terminated at any time after he signed the Agreement and, if he had been terminated shortly thereafter, he would not receive “continued” employment or the benefits of the incentive plan paid out the next year.

Trial Court Decision

The Milwaukee County Circuit Court agreed with Friedlen and invalidated Runzheimer’s Non-Competes. It held that because at-will employees could be terminated at any time, offering them continued employment as consideration is illusory. It also held the incentive plan was illusory, because any consideration that was tied to the continued employment would also disappear if the employee was terminated. Thus, although the Wisconsin Supreme Court has held since 1933 that at-will employment is sufficient consideration to support Non-Competes, even though it can be terminated at any time, this circuit court created an exception for existing at-will employees.
After reviewing the case, the Court of Appeals certified the issue to the Supreme Court for resolution.

Supreme Court Oral Argument

While it is almost impossible to discern how the Supreme Court will decide a case based solely on oral argument, it can provide clues as to how the individual Justices view the case.

Based on the line of questioning, it appears that the decision may come down to the typical judicial conservative and liberal blocs on the Court. For example, two the conservative Justices, Michael Gableman and Annette Zielger, did not appear to accept the arguments for counsel representing the employee based on their questions and direct statements.

Meanwhile, Chief Justice Shirley Abrahamson’s line of questioning suggested that she was sympathetic to the employee’s situation and would require some form of consideration beyond promised continued employment when requiring an existing employee to sign a restrictive covenant, or non-compete.

WCJC and WMC File Amicus Curiae Brief

The Wisconsin Civil Justice Council and Wisconsin Manufacturers & Commerce filed an amicus curiae brief in the case arguing that if the Milwaukee County Circuit Court’s ruling is not overturned, it will have a broad and detrimental impact on Wisconsin employers’ ability to protect their proprietary processes and information. WCJC and WMC also assert that Wisconsin courts frequently alter the law of Non-Competes, rendering previously-enforceable agreements unenforceable and necessitating that employers update them. Employers generally do so by requiring existing, at-will employees to sign them as a condition of further employment. Under the existing Milwaukee County Circuit Court ruling, employers will be required to offer consideration such as upfront cash payments to their entire at-will workforce if they want to do nothing more than alter their Non-Competes to account for changes in their business or comply with existing law.

The case is Runzheimer Int’l, Ltd. v. Friedlen, 2013AP1392. A decision by the Supreme Court is expected before the end of its term in July 2015.

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