Recent Non-Compete Court Decisions

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January 25, 2008

There have been a number of recent court decisions addressing the enforceability of non-compete provisions. We are providing a summary of those decisions below. We thought you would find them of interest.
 
I. Benchmark Medical Holdings, Inc. v. Wisconsin Prosthetics & Orthotics, Inc., Appeal No. 2007AP805 (11/21/07).
 
In this matter, Wisconsin Prosthetics & Orthotics, Inc. (WPO) sought to enforce a non-compete provision in an employment agreement against Perry Alger, a former employee. WPO produces and services prosthetics and orthotics. It has offices in Green Bay, Sheboygan, and Menasha. Orthotics are body braces prescribed by a physician. An orthotist is a technician who fabricates and fits patients with the braces.
 
In October of 1999, WPO hired Alger to work as its only orthotist in its Menasha office. As a condition of his employment with WPO, Alger signed a “non-competition and non-disclosure agreement.” The non-compete provision had a twenty-five (25) mile geographical restriction. The non-compete provision stated in part:
 

Employee shall not, within the geographical limitations set forth above (i.e., within twenty-five (25) miles of the Company location where the Employee worked) and for a period of one (1) year, become employed in any business or undertaking which competes in any manner with that of the Company, nor will, during that period, render any services to any person, firm or corporation any information concerning the business, products, prices, customers, customer lists, or affairs of the Company except when and as requested to do in and about the performance of his duties under his employment. (Emphasis added.)

 
In June of 2006, Alger resigned from his employment with WPO and began working as an orthotist with Great Lakes Orthotics and Prosthetics located 15 miles from WPO’s Menasha office. WPO initiated a court action to enforce the non-compete and non-disclosure agreement.
 
The Court commenced its analysis of the provision by noting that Wisconsin’s restrictive covenant statute, Section 103.465, expresses a strong public policy against the enforcement of unreasonable restraints on employees. The Court noted that restrictive covenants, such as noncompete provisions: are prima facie suspect; that they must withstand close scrutiny to pass legal muster as being reasonable; that they will not be construed to extend beyond their proper import or further than the language of the contract absolutely requires; and they are to be construed in favor of the employee.
 
In regard to Alger s non-compete provision, the Court noted that he was prohibited, for one year and within a 25 mile radius of location where he had worked, from becoming “employed in any business or undertaking which competes in any manner with the Company . . .” The Court ruled that because there was no limitation on the capacity in which Alger could be employed, he was restricted from any employment in a business that competes with WPO even if the new position was one in which Alger would not utilize the physician and client contacts he had developed at WPO. In essence, the provision prohibited Alger from being employed in any capacity (e.g., janitor, accountant, receptionist, etc.) with any competitor. The Court found that this restriction was broader than necessary to protect WPO’s legitimate business interests. As such, the Court ruled that the provision was void and, in accord with the terms of Section 103.465, that the entire non-compete provision was void.
 
II. H&R Block Eastern Enterprises, Inc. v. M. Swenson,et. al., Case No. 2004CV818 (Ct. App. 12/20/07).
 
In this matter, Mary Swenson and others were employed by H&R Block as tax preparers in La Crosse, Wisconsin. Swenson and others agreed to an employment contract which contained the following clauses:
 

Noncompetition Covenant. Associate covenants that for two (2) years following the voluntary or involuntary termination of Associate’s employment (such period to be extended by any period(s) of violation), Associate shall not, directly or indirectly, provide any of the following services to any of the Company’s Clients: (1) prepare tax returns, (2) file tax returns electronically, or (3) provide bookkeeping or any other alternative or additional service that the Company provides within the Associate’s district of employment.
 
Nonsolicitation Covenant. Associate covenants that for two (2) years following the voluntary or involuntary termination of Associate’s employment (such period to be extended by any period(s) of violation), Associate shall not directly or indirectly solicit or divert the Company’s Clients or otherwise interfere with the Company’s continuing relationships with its clients. Company Clients are those defined in Section 11. (Emphasis added.)

 
Swenson quit her employment at H&R Block and opened a new business in December of 2004, known as “King Street Tax & Bookkeeping” and began competing with H&R Block. She hired four other H&R Block employees to work with her.
 
H&R Block then filed an action alleging that the former employees breached the restrictive clauses in their contracts. Swenson argued that the restrictive covenants were unenforceable.
 
The Wisconsin Court focused on whether the provision within the noncompete provision which stated that the duration period was extended by any period of violation was enforceable. H&R Block argued that the extension provision was reasonable because its effect was to restrain the former employees for a total of only two years and, if two years was reasonable, then the extension for a violation to make up a total of two years was reasonable as well.
 
The Court of Appeals found that the extension provision was unreasonable for two reasons. First, the Court stated that it did not understand how the provision could be applied in the context of two restrictive clauses, such as presented, which dealt with providing services to Company clients and soliciting those clients. The Court stated:
 

. . . What constitutes a “one-day” violation? Is it any day in which there is any contact with a company client for whom one of the listed services is being provided? Does the violation then extend until the service is completed for that client? If there are contacts with different company clients on one day for the purposes of providing the listed services, does that count as a one day violation, the same as if there were contact with only one company client in a day? These questions, unanswered by the contract terms, mean that a former employee cannot tell from the terms of his or her contract how long the extension will be for particular conduct in violation of the clauses.

 
Second, the Court found that there may be legitimate disputes between a former employee at H&R Block over whether particular conduct violates the clauses. The Court stated:
 

. . . An employee will not know until a dispute is resolved by a court whether the conduct is or is not a violation. Only then will the employee know there is an extension and how long it is. The effect of the extension provision thus makes the duration of the restraint not a fixed and definitive time period but a time period that is contingent upon outcomes the employee cannot predict.
 

In sum, the Court concluded the extension provision in both the noncompetition and the nonsolicitation clauses was unreasonable and rendered the two year time period in each clause unreasonable. Because the extension provision in each clause was unreasonable, the Court found that each clause was void and unenforceable even if the remainder of the terms of the clauses were enforceable.
 
III. Star Direct, Inc. v. Eugene Dal Pra, Decision No. 2006CV1268 (Ct. App. 12/6/07):
 
The employer in this matter, Star Direct, was a distributor of approximately 30 different products to approximately 800 convenience stores, service stations, truck stops, travel centers, and other retail outlets throughout Wisconsin, Illinois, Minnesota, North Dakota, and the Upper Peninsula of Michigan. The products included dietary products, toys, figurines, cigarette papers, lighters, and cameras. Star Direct served its customers by employing sales associates, who called on customers and potential customers on a particular route.
 
In September of 2002, Star Direct purchased two routes from CB Distributors. CB Distributors entered into a covenant not to compete regarding the routes. Dal Pra was employed by CB Distributors as a sales associate at the time for one of the routes. Star Direct hired him and assigned him to approximately the same route that he had with CB Distributors. Dal Pra signed an employment agreement that contained a noncompete provision which stated in part:
 

. . . Further, for twenty-four (24) months, after termination of Employee’s employment with the Employer, Employee shall not interfere with, or endeavor to entice away from Employer any person, firm, corporation, partnership or entity of any kind whatsoever which is a customer of Employer or CB Distributors, or which was a customer of Employer or CB Distributors within a period of time of one year prior to the termination of Employee’s employment with Employer, for which Employee performed services or otherwise dealt with on behalf of Employer or CB Distributors or relative to which Employee obtained special knowledge as a result of his position with Employer; and Employee shall not approach any such customer or past customer for any such purpose or knowingly cooperate with the taking of any such action by any other person, firm, corporation or entity of any kind.

 

Additionally, for a period of twenty-four (24) months after termination of Employee’s employment with Employer, Employee shall not, directly or indirectly, whether as an individual for his own account or for or with any person, firm, corporation, partnership, joint-venture, association or other entity whatsoever, become engaged in any business which is substantially similar to or in competition with the business of the Employer, within a fifty (50) mile radius of Rockford, Illinois.
 
[The Court of Appeals referred to the approve italicized portion of the noncompete as the customer clause and the second paragraph as the “business clause.”]

 
Dal Pra quit his employment with Star Direct in August of 2006. He then began his own business distributing general merchandise under the name of Distributing Plus. In his new business, Dal Pra called upon the same customers he called on in the last year of his employment with Star Direct and sold some of the same products as Star Direct sold to them. Star Direct then sued Dal Pra alleging that he had breached the customer clause and business clause of his restrictive covenant.
 
The Court started its analysis by noting that the business clause prohibited Dal Pra, for 24 months and within a 50 mile radius of Rockford, Illinois, from becoming “engaged in any business which is substantially similar to or in competition with the business of the Employer.” The Court found that the business clause was overly broad because it prohibited Dal Pra from distributing products to customers that Star Direct did not distribute and that were not substantially similar to the products or product categories that Star Direct did distribute. The Court stated:
 

We conclude this employment agreement plainly prohibits Dal Pra, for 24 months from termination within a 50-miles radius of Rockford, from engaging in a business that is “substantially similar” to that of the Employer’s business, that business being “the distribution of products to convenient stores, services stations, truck stops, and travel centers.” This restriction plainly prohibits, for that time period and within that area, Dal Pra from distributing to those categories of customers many products that Star does not distribute and that are not substantially similar to the products or product categories that Star does distribute. Star does not contend that this restriction is reasonably necessary to protect its business interest. Accordingly, based on the undisputed facts, we conclude that the business clause is overbroad in scope and therefore invalid and unenforceable.

 
The Court then turned to the issue of whether the business clause, which was found to be unenforceable, could be severed from the customer clause, and the customer clause then enforced. The Court found that the business clause and customer clause were indivisible and, therefore, the customer clause was invalid and unenforceable as well. As such, the Court did not examine the customer clause to determine whether it would have been reasonable and enforceable by itself.
 
What Do the Above Case Rulings Mean for Wisconsin Employers?
 
In recent years, there have been more than the usual number of restrictive covenants that have been challenged in court. Employees are signing restrictive covenants but, when deemed for their purpose to do so, they freely walk away from them.
 
The above cases demonstrate that the courts will give close scrutiny to noncompete, nonsolicitation, and nondisclosure provisions. The courts view them as suspect. If the provisions are not very carefully crafted, the courts will find them unenforceable and void as a matter of law.
 
In light of the recent cases and the rising number of challenges to restrictive covenants, employers should review the restrictive covenants that they have in place, including those in employment agreements, to determine whether revisions are necessary to update them and render them more likely to be found enforceable. For example, any restrictions which address businesses which are “substantially similar” to the employer’s business should be carefully reviewed. The same is true in regard to any provisions which, as written, prohibit an employee from holding any position with a competitor.
If you have questions regarding the above, please contact any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware.

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