Last week, the Wisconsin Supreme Court again clarified the law in regards to restrictive covenants when it issued a decision in the case of The Manitowoc Company, Inc. v. John M. Lanning, 2018 WI 6, 2018 WL472928.
The Manitowoc Company, Inc. v. John M. Lanning
The Court decided that an employee non-solicitation provision was subject to the same exacting standards as apply to restrictions in agreements barring competition, solicitation of customers, and disclosure of confidential information. Such restrictions are subject to the provisions of Wis. Stat. §103.465 and must meet the following five requirements to be valid and enforceable:
- They must contain a reasonable time limit.
- They must contain a reasonable territorial limit.
- They must be reasonably necessary for protection of the employer’s interests.
- They must not be harsh or oppressive on the employee.
- They must not be contrary to public policy.
If a restriction fails to meet any of these requirements, the entire restriction is invalid and unenforceable.
In Lanning, the Court rejected Manitowoc Company’s position that less exacting standards were appropriate because the non-solicitation of employee provision did not restrict Lanning’s ability to obtain employment with a competitor or engage in business activities competitive with the employer.
Focusing on the effect of the agreement on employees and competition, the Court decided that a provision that restricted Lanning and his current employer, a direct competitor of Manitowoc Company, from freely competing for employee talent in the labor pool, constituted a restraint of trade and had to meet the five requirements set forth above to be enforceable. See Lanning, 2018 WI ¶¶9, 28-29.
Turning to the question of whether the non-solicitation of employee provision met the requirements of law, the Court held that the restriction was unenforceable because it was not “reasonably necessary for the protection of the employer.” Id. at ¶10. The Court was concerned with the sweeping breadth of the restriction, noting that the provision restricted Lanning’s conduct as to all of Manitowoc Company’s 13,000 employees worldwide, regardless of whether those employees worked in a different division or location and regardless of Lanning’s personal familiarity with or ability to influence a particular employee. See id. at ¶¶ 59, 61-63.
What This Means for Employers
The Lanning case highlights the need for employers to give serious thought to their particular business needs before putting a restrictive covenant agreement in place, and the need to revisit their existing restrictive covenants regularly to ensure that the restrictions continue to be closely aligned with what is necessary to protect the company’s interests.
One size does not fit all in this context. Drafting an agreement that provides sweeping, all-encompassing protection could end up backfiring, as you could be left with an invalid provision that provides no protection at all. “[I]f an agreement imposes an unreasonable restraint, it is illegal, void, and unenforceable even as to so much of the covenant as would be a reasonable restraint.” Id. at ¶54. It will be more difficult to challenge a narrowly crafted restriction and less likely that a court will invalidate it.
In light of the Supreme Court’s decision in the Lanning case, it is a good time for employers to review their restrictive covenant agreements to ensure that they are drafted to reflect the company’s business needs and the current and ever changing state of Wisconsin law. McCarty Law’s Employment and Labor Law attorneys stand ready to assist you with this review.
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