What is a Non-Compete Agreement?
Non-Compete Agreement: is a contract between two parties, where one party agrees not to compete with the other for a period of time.
Wisconsin Supreme Court 2015 Decision
On April 30, 2015, the Wisconsin Supreme Court made a landmark decision concerning how existing at-will employees may be compensated for entering non-compete agreements with their employers. The case contemplated the existence of consideration when current employees enter non-compete agreements in exchange for the company’s promise to temporarily waive its right to terminate the employee.
The majority opinion, handed down by Justice Prosser, declared that an employer’s promise of continued employment
in exchange for non-compete agreements constitutes valid consideration to make the agreements enforceable. Prior to this groundbreaking case, a company’ s offer of continued employment as consideration for an employee entering into a restrictive covenant was insufficient.
Runzheimer International, Ltd v. Friedlen
Runzheimer International, Ltd. v. Friedlen involved a Wisconsin corporation, Runzheimer International, and its longtime at-will employee, David Friedlen. Friedlen worked at Runzheimer for 15 years as a business development consultant.
In 2009 Friedlin was approached by the company and was asked to enter into a restrictive covenant. Friedlen was given the ultimatum to sign the non-compete or else be terminated; however, in exchange for signing the agreement, Runzheimer promised him continued employment. Friedlen signed the covenant and 29 months later his position at Runzheimer was terminated.
After a short search, Friedlen found work with a Runzheimer competitor, violating his non-compete agreement. Runzheimer sued for breach of contract and the issue made it all the way to the Wisconsin Supreme Court.
The Supreme Court held that an employer’s forbearance in exercising its right to terminate an at-will employee is enough consideration for an at-will employee to become bound by an otherwise valid restrictive covenant. The Court did, however, caution employers executing these agreements, using promises of continued employment as consideration, that employees are still protected by good faith and fair dealing requirements.
Essentially, while the Court was unwilling to set a standard amount of time an employer must honor its promise of continued employment, any amount of time that suggests the continued employment was only an “illusory promise” may be deemed invalid under other contract law principles, such as good faith and fair dealing.
Further, the Court stated, “… the promise’s duration goes to the adequacy of consideration, not the existence of lawful consideration.” Thus a promise’s short duration could render the consideration inadequate which would also invalidate the agreement.
How it May Affect Wisconsin Businesses:
The majority opinion confirms that one way an employer may respond to changing economic times is to reduce the risk that former employees will leave and subsequently join a competitor company by requiring employees to accept non-compete covenants. The Court’s decision in Runzheimer makes that insulation process a little bit easier, and does so with little or no impact on a company’s bottom line. With a new twist on an old tool, the Court provides Wisconsin businesses with greater flexibility regarding the kind of compensation that is required in exchange for non-compete agreements.
Now companies may offer temporary promises of continued employment in exchange for these covenants, rather than having to reach into their checkbooks to compensate the employee financially. This new method of compensation allows companies to protect themselves from the threat of former employees joining the other team in a way that is financially feasible, and also helps relieve some of the stresses associated with an ever-changing economy.