Wisconsin Supreme Court Affirms Need for Carefully Drafted Non-Compete Agreements
Under Wisconsin law, non-compete, non-disclosure and non-solicitation agreements between employers and employees are enforceable, but only if the agreements are narrowly tailored to protect the employer from unfair competition. A recent decision by the Wisconsin Supreme Court reiterates how important it is to make sure such agreements are meticulously drafted.
In Manitowoc Co., Inc. v. Lanning, the Supreme Court declared that a two-year non-solicitation agreement, barring a former employee (John Lanning) from soliciting other employees to leave Manitowoc Co. to join a competitor, customer or supplier, was overly broad, and therefore unenforceable. As a result, Manitowoc Co. was left with no recourse for Lanning’s admitted violations of the agreement.
In 2008, Lanning signed a non-solicitation agreement with Manitowoc Co., prohibiting Lanning from soliciting Manitowoc Co. employees to leave the company, or accept employment with any competitor, supplier or customer of Manitowoc Co. In 2010, Lanning left Manitowoc Co. to work for a competitor. Over the next two years, Lanning communicated with at least nine Manitowoc Co. employees about possible employment with the competitor. Lanning’s solicitation efforts were significant, including taking one employee to lunch, giving another a tour of the competitor’s plant in China, and interviewing a third employee for a job with the competitor.
In 2011, Manitowoc Co. sued Lanning in Wisconsin state court to pursue Lanning’s breach of his non-solicitation agreement with Manitowoc Co. After a trial to the court, Manitowoc Co. prevailed, and in 2014 the Court awarded Manitowoc Co. $97,844.78 in damages, $37,246.82 in costs, and $1 million in attorneys’ fees (meaning Manitowoc Co. had spent at least $1 million in attorneys’ fees prosecuting the case through trial).
On appeal, the Court of Appeals reversed the judgment of the trial court, and, in a 5-2 decision issued early this year, the Supreme Court affirmed the Court of Appeals. As a result, the judgment in favor of Manitowoc Co. was vacated, and Manitowoc Co. walked away empty-handed.
The Supreme Court first explained that non-solicitation agreements like the employee non-solicitation covenant here fall under Wis. Stat. § 103.465, the statute governing non-compete agreements between employers and employees (no court had previously held that an employee non-solicitation agreement like this fell under Wisconsin’s statute, although many attorneys, this author included, believed that was the case). Because the agreement falls under the statute, for it to be enforceable under Wisconsin law, the agreement must be necessary to safeguard a protectable interest of the employer, reasonable in time and territorial scope, not harsh or oppressive, and not contrary to public policy. The Supreme Court held that the agreement did not meet these standards.
Manitowoc Co. argued that it had a protectable interest in preventing an employee like Lanning, who allegedly had full awareness of the talent and skill-set of the company’s employee base, from poaching the best employees and raiding the company. Yet, the Court noted, Manitowoc Co. employs 13,000 people all over the world, and the agreement prohibited Lanning from soliciting any of those employees. The Court found that there was no evidence or reason to believe that Lanning was personally familiar with or had special inside knowledge concerning all of those employees, especially considering that Lanning worked in only one of two divisions of the company, and had little interaction with the other division. It was thus not necessary, the Court held, for Manitowoc Co. to protect itself against Lanning’s solicitation of any and all of Manitowoc Co.’s 13,000 employees, and therefore the agreement is overbroad and unenforceable. As a result, Lanning is free to violate the agreement with impunity, and Manitowoc Co. cannot stop him.
It was a “double-whammy” for Manitowoc Co., to both suffer through Lanning’s solicitation of its employees, and then spend seven years and more than a million dollars suing Lanning, winning at trial, and having its victory reversed on appeal. The painful lesson here is that non-compete, non-disclosure and non-solicitation agreements must be drafted with extreme caution by skilled counsel. If there is any misstep, such agreements become worthless in the exact circumstances where they are most needed – that is, when a former employee flagrantly disregards his or her non-compete agreements, severely damaging the employer.
The good news is that the Supreme Court in 2015 held that an employer need not provide an employee with additional compensation in exchange for signing a restrictive covenant, even if the covenant is signed many years after the start of employment. This means that employers are free to revise their non-compete agreements at any time. In hindsight, Manitowoc Co. no-doubt wishes that, rather than spending $1 million and seven years fighting a losing battle after Lanning had left, it had spent a small fraction of that money making sure the agreement was sound while Lanning was still with the company. That is the common-sense upshot for this case, and all Wisconsin companies should take heed.
If you have any questions about non-compete, non-disclosure or non-solicitation agreements, or would like a review of the agreements you have in place, please contact Kohner, Mann & Kailas, S.C. Attorney Ryan M. Billings at (414) 962-5110 or rbillings@kmksc.com.