Wisconsin Supreme Court Recognizes Continued Employment as Consideration for Noncompete
Blog Post
As we previously reported, the Wisconsin Supreme Court heard arguments last fall in Runzheimer International, Ltd. v. Friedlen, which certified the question of whether continued employment can support an enforceable non-compete agreement with an at-will employee. Non-compete law is somewhat idiosyncratic and unpredictable in Wisconsin, and the Court of Appeals noted that the continued employment question was unsettled under Wisconsin law.
In a recent decision in Runzheimer, the Wisconsin Supreme Court sided with a majority of states in holding that “an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” The Court rejected the argument that if continued employment is deemed lawful consideration, an employer can fire its employee immediately after the agreement is executed and enforce the non-compete against the employee. Interestingly, the Court reasoned that the employee would have resort to other contract principles in such a circumstance. It explained (emphasis added):
The Court also approvingly quoted Judge Richard Posner’s remark in Curtis 1000, Inc. v. Suess (a Seventh Circuit case considering the same question under Illinois law) that “[e]mployers pay a price if they get a reputation for tricky dealings with their employees." Accordingly, the Court upheld the enforceability of the noncompete agreement at issue, and remanded the case for further determination regarding the reasonableness of the covenant.
Runzheimer makes noncompete law in Wisconsin more clear and predictable, and enables an employer to protect its assets by conditioning continued employment on an employee’s willingness to enter into a noncompete agreement (provided the agreement is otherwise lawful). The decision also lays the groundwork for possible defenses for an employee discharged a short time after entering into a noncompete agreement.
In a recent decision in Runzheimer, the Wisconsin Supreme Court sided with a majority of states in holding that “an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” The Court rejected the argument that if continued employment is deemed lawful consideration, an employer can fire its employee immediately after the agreement is executed and enforce the non-compete against the employee. Interestingly, the Court reasoned that the employee would have resort to other contract principles in such a circumstance. It explained (emphasis added):
When an employer promises not to fire an existing at-will employee if the employee agrees to sign a restrictive covenant, the employer violates the spirit of the agreement when the employer fires the employee moments after the employee signs the covenant. . . . The modification in the employment relationship when an existing at-will employee signs a restrictive covenant is the restrictive covenant, not a new employment contract of reasonable duration; and it is the modification that would become unenforceable if the employer acts in bad faith. Although, theoretically, an employer could terminate an employee's employment shortly after having the employee sign a restrictive covenant, the employee would then be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing, so that the restrictive covenant could not be enforced.
The Court also approvingly quoted Judge Richard Posner’s remark in Curtis 1000, Inc. v. Suess (a Seventh Circuit case considering the same question under Illinois law) that “[e]mployers pay a price if they get a reputation for tricky dealings with their employees." Accordingly, the Court upheld the enforceability of the noncompete agreement at issue, and remanded the case for further determination regarding the reasonableness of the covenant.
Runzheimer makes noncompete law in Wisconsin more clear and predictable, and enables an employer to protect its assets by conditioning continued employment on an employee’s willingness to enter into a noncompete agreement (provided the agreement is otherwise lawful). The decision also lays the groundwork for possible defenses for an employee discharged a short time after entering into a noncompete agreement.