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Provisions of Non-Compete Law Apply to No-Solicitation of Employees Restraints

It is common, if not standard, for most non-compete agreements to contain a clause that prohibits the covered employee from soliciting current employees to terminate their employment in order to accept employment with a competitor. In essence, it prohibits the departing employee from raiding his/her former employer's valued employees. Until recently, the courts have never determined whether such constraints are subject to the requirements of Wis. Stat. § 103.465, which governs the enforceability of non-compete agreements. It now has, and they are.

In The Manitowoc Company v. John Lanning, 2015AP1530, decided on August 17, 2016, the Wisconsin Court of Appeals found that a non-solicitation of employees (NSE) clause is a restrictive covenant subject to and enforceable under Section 103.465. The disputed clause, contained in a confidentiality agreement signed by an executive, prohibited him from soliciting, inducing or encouraging any employees to terminate their employment with the company or to accept employment with a competitor, supplier or customer. Manitowoc claimed that after leaving the company to work for a direct competitor, the executive worked with his new employer to woo several key Manitowoc employees to leave their employment and come work for it. Manitowoc contended that the NSE was not subject to the requirements of Section 103.465, but if it was, it was reasonable and enforceable. The court disagreed.

Section 103.465 provides that non-compete agreements are lawful and enforceable "only if the restrictions imposed are reasonably necessary for the protection of the employer." Otherwise, they constitute an illegal restraint of trade. In order to be enforceable, the restrictive covenant must be necessary for the protection of the employer; provide reasonable time and territorial limits; not be harsh or oppressive to the employee; and, not be contrary to public policy.

The court found that the NSE was a restraint of trade subject to Section 103.465 because it limited competition in the market for employees, which included recruiting employees from competitors. It then found that the prohibition violated Section 103.465 because it was overbroad, and therefore unenforceable. The NSE restricted the solicitation of "any employee," which encompassed both high-level executives and entry level laborers, in any department throughout the company. It also covered a wide swath of potential employers - "competitors, customers, and suppliers," many with no competitive connection to the company - such as Starbucks, which was a customer. Given the sweeping scope of the restriction, the company could not prove why it was necessary to restrict the solicitation of employees from working for businesses that did not compete, or in positions that posed no competitive risk.

Drafting an enforceable non-compete agreement is a very tricky business, and the Manitowoc Company decision is just another example why. Non-compete agreements and their various components (confidentiality, competitive employment, no-solicitation) must be narrowly drafted to protect a legitimate business interest. If you have any questions about the court's decision or a non-compete agreement, contact WS Attorney Alan E. Seneczko at (262) 560-9696, or alseneczko@wesselssherman.com.

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