Breaking news: Continued employment is lawful consideration in Wisconsin
This morning the Wisconsin Supreme Court ruled that continued at-will employment constitutes lawful consideration to support an otherwise reasonably drafted restrictive covenant agreement signed by a current employee. No additional monetary payments or other consideration is necessary. As employers in Wisconsin are aware, this is an issue that previously was wrought with uncertainty. A copy of the Court’s decision is available here.
This case was successfully argued by Godfrey & Kahn, S.C. and represents a big win for employers.
In the underlying case, Runzheimer International v. Friedlen, the Circuit Court held that an employer’s offer of continued employment to support a noncompete agreement with an employee was “illusory” and thus invalidated the agreement. Recognizing that this issue has not been squarely addressed in Wisconsin and citing potentially conflicting case law, the Court of Appeals certified the case to the Supreme Court on the narrow issue of whether “consideration in addition to continued employment [is] required to support a covenant not to compete entered into by an existing at-will employee.”
Currently the states are split as to whether continued employment alone will support a restrictive covenant. The Court pointed out that the states that do not find continued employment to form sufficient consideration are in the “distinct minority.” In siding with the majority, the Court held that an employer’s promise to continue to employ an at-will employee is lawful consideration in Wisconsin. In reaching its decision, the Court emphasized that:
(1) An employer’s promise of continued at-will employment will create lawful consideration only when employer is truly exercising forbearance with respect to its right to terminate employment. In other words, employers must be prepared to then and there terminate a current employee who refuses to sign a restrictive covenant agreement; and
(2) Employers may not misrepresent their intention to continue to employ the employee. An agreement signed by an employee who is terminated by the employer shortly thereafter could constitute a breach and make the agreement unenforceable. The Court emphasized that employees are protected by traditional contract formation principals such as fraudulent inducement and the covenant of good faith and fair dealing.
In making these points, the Court clarified and explained past precedent. The Court stated that it was of no consequence that the duration of the continued employment was not specified in the agreement. The Court emphasized that with respect to contract formation, the consideration analysis is limited to the existence of “lawful consideration,” not its adequacy. On these and other points, the Court provided additional analysis and guidance that is helpful to employers and is covered in our client alert found here.
While this is not a green light to require all current employees to sign a noncompete, employers now have certainty that, in particular circumstances, otherwise reasonably drafted restrictive covenant agreements signed by current employees will not be invalidated solely on the basis of consideration.