Enforcing Non-Compete Agreements Just Got A Little Bit EasierJuly 24, 2009
As most business leaders and human resource professionals know, securing an enforceable covenant not to compete can be a significant challenge in Wisconsin. A decision by the Wisconsin Supreme Court issued on July 14, 2009, however, is a ray of sunshine for employers in an otherwise cloudy legal landscape. Indeed, the practical result of the Court's decision in Star Direct, Inc. v. Dal Pra, 2009 WI 76, clarifies the law and places employers in a better position for drafting and enforcing post-employment restrictive covenant agreements.
The facts of the Star Direct case reflect a common circumstance for Wisconsin employers. Star Direct distributes merchandise, such as batteries, cigarettes, lighters and toys, to convenience stores. Its principal sales strategy employs the use of route salespersons, who are charged with developing long-term business and personal relationships Star Direct's customers.
Mr. Dal Pra worked for a competitor of Star Direct. After Star Direct acquired the competitor, it sought to retain Mr. Dal Pra and offered him a "very good" compensation package, which included a $30,000 bonus following 30 months of service. But, nothing is free. Star Direct conditioned its bonus offer on Mr. Dal Pra's signing a non-competition agreement. The agreement contained three post-employment restrictions which ran for a period of 24 months following the end of Mr. Dal Pra's employment: (1) prohibited Mr. Dal Pra from stealing those current or former customers of Star Direct with whom Mr. Dal Pra dealt on behalf of Star Direct; (2) prohibited Mr. Dal Pra from "becoming engaged" by a competitor or an organization substantially similar to Star Direct within a 50-mile radius of Rockford, Illinois; and (3) prohibited Mr. Dal Pra from disclosing certain confidential and proprietary information of Star Direct.
Mr. Dal Pra worked for Star Direct for approximately four years and received his bonus of $30,000. He then quit his employment, started his own distribution company and engaged in activities which violated the non-compete agreement. Unsurprisingly, Star Direct was not charmed by Mr. Dal Pra's behavior; it filed suit to enforce the non-compete agreement and recover damages. The trial court and the Court of Appeals ruled that the non-competition agreement was unenforceable. In overruling the lower courts, the Supreme Court made several decisions which will help Wisconsin employers in creating and enforcing restrictive covenant agreements. A brief description of those decisions follows:
1. Although Wisconsin courts must interpret restrictive covenant agreements in favor of the employee, courts must still interpret such agreements "reasonably" by "giving the words their plain meaning."
It is well established under Wisconsin law that restrictive covenants are to be construed in favor of the employee. Courts have often relied on this employee-friendly rule of construction to invalidate non-compete agreements. However, in Star Direct, the Wisconsin Supreme Court clarified that interpreting restrictive covenants in favor of the employee does not mandate unreasonable interpretations in order to rule in the employee's favor. Rather, courts must interpret restrictive covenants "reasonably" by giving the words their plain meaning.
2. An employer can take reasonable steps to shield its recent former customers from unfair competition from former employees.
Prior to Star Direct, there was some debate regarding whether an employer had a protectable interest in shielding former customers from unfair competition from former employees. Significantly, in Star Direct, the Court sided with the employer and definitively ruled that employers do indeed have a legitimate, protectable interest in former customers. In reaching this decision, the Court reasoned that employees obtain significant knowledge about the employer and former customers during the course of their employment. An employee's use of such information, if not prohibited, would afford him an unfair advantage over the employer and other competitors. The Court further emphasized that employers do have a legitimate interest in winning back the business of "recent" past customers.
3. Businesses can shield customers from the competitive activities of former employees, even if the former employee has not dealt with the customer in the recent past.
The former employee in Star Direct argued that the restrictive covenant at issue was unreasonable and unenforceable because it prohibited him from soliciting customers that he had not recently serviced. The Court rejected the plaintiff's argument, holding that employers do have a protectable interest in shielding current customers from the competitive activities of former employees, even if the employee has not had recent contact with the customer. The Court explained that the lack of recent contact does not change the fact that confidential customer information obtained by the employee may pose a real competitive danger to the employer.
4. A business' failure to have the same or similar restrictive covenant agreements with all similarly situated employees does not render the agreements unenforceable.
One factor that courts consider in evaluating the enforceability of non-compete agreements is whether the agreement is necessary for the protection of the employer's interests. The plaintiff in Star Direct argued that the fact that the company had not obtained restrictive covenants from all route salespersons demonstrated that such covenants were not necessary for its protection.
In rejecting the plaintiff's argument, the Court suggested that the appropriate inquiry is not whether all similarly situated employees are subject to restrictive covenants, but rather whether the employer's actions demonstrate that it obtained the agreement because it "legitimately fears" post-termination competition. Thus, a business' failure to obtain similar restrictive covenants from all similarly situated employees does not necessarily render an agreement unenforceable if the employer can otherwise demonstrate that its justifications were credible and for the protection of its legitimate business interests.
5. The existence of an unenforceable post-employment restrictive covenant does not render other, separate restrictive covenants contained in the same agreement as unenforceable as long as the separate provisions may be understood and independently enforced.
When a non-compete agreement contains multiple restrictive covenants, as was the case in Star Direct, employees often argue that the existence of an unenforceable covenant renders separate covenants unenforceable. The Star Direct court provided clear guidance on this issue, holding that one unenforceable covenant does not necessarily mean that other restrictive covenants are also unenforceable. The "foundational inquiry" is whether, if the unenforceable provision is stricken, can the other provisions be understood and independently enforced. In concluding that two of the three restrictive covenants contained in Dal Pra's non-compete agreement were divisible, and therefore enforceable, the Star Direct court placed special emphasis on the fact that the covenants were contained in separate paragraphs, and did not contain any cross-references.
The Star Direct case represents a significant clarification of Wisconsin law as it pertains to post-employment restrictive covenant agreements. In the big picture, the decision represents a directive to lower courts that they should interpret non-competition agreements in a way that is designed to incorporate the intent of the parties, rather than accepting unreasonable interpretations of the agreements as a means to find them unenforceable. In litigation concerning non-competition agreements, the Star Direct case will prove to be a powerful tool to employers. More specifically, the Court's decision affirms the enforceability of certain types of post-employment restrictions favored by employers. As a result, businesses should immediately review their current non-competition agreements. In particular, employers should focus their review on whether their current agreements lump a number of distinct post-employment restrictions into a single paragraph in an agreement. In light of the Star Direct case, it is clearly advantageous to place separate and distinct post-employment restrictions in separate clauses of the agreement. Likewise, for employers with a need to restrict competition from former sales employees, the Star Direct decision allows employers to shield some former customers from a competing ex-employee.
As most business leaders know, sales programs are often enhanced by building successful personal relationships in the midst of highly competitive environments. Employers can go a long way to protecting those relationships from its former sales employees by drafting and implementing reasonable and well-drafted restrictive covenant agreements. The Star Direct case makes this task a bit easier for businesses to achieve that goal.