Recent Non-Compete Court Decisions

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Jan 25, 2008

There have been a number of contempo court decisions addressing the enforceability of non-compete provisions. We are providing a summary of those decisions below. We thought you would observe them of interest.

I. Benchmark Medical Holdings, Inc. five. Wisconsin Prosthetics & Orthotics, Inc., Entreatment No. 2007AP805 (11/21/07).

In this thing, Wisconsin Prosthetics & Orthotics, Inc. (WPO) sought to enforce a non-compete provision in an employment agreement confronting Perry Alger, a former employee. WPO produces and services prosthetics and orthotics. Information technology 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 Oct of 1999, WPO hired Alger to work as its only orthotist in its Menasha part. As a condition of his employment with WPO, Alger signed a "not-competition and non-disclosure understanding." The non-compete provision had a xx-5 (25) mile geographical restriction. The non-compete provision stated in part:

Employee shall not, within the geographical limitations set forth to a higher place (i.e., within twenty-five (25) miles of the Visitor location where the Employee worked) and for a period of one (ane) twelvemonth, go employed in whatever business organisation or undertaking which competes in any manner with that of the Company, nor will, during that menstruum, return any services to any person, firm or corporation whatever information concerning the business, products, prices, customers, customer lists, or diplomacy of the Company except when and every bit requested to practise in and about the operation of his duties nether his employment. (Emphasis added.)

In June of 2006, Alger resigned from his employment with WPO and began working every bit an orthotist with Great Lakes Orthotics and Prosthetics located 15 miles from WPO's Menasha office. WPO initiated a court action to enforce the not-compete and non-disclosure understanding.

The Court commenced its analysis of the provision by noting that Wisconsin's restrictive covenant statute, Department 103.465, expresses a strong public policy against the enforcement of unreasonable restraints on employees. The Courtroom noted that restrictive covenants, such as noncompete provisions: are prima facie doubtable; that they must withstand shut scrutiny to laissez passer legal muster as being reasonable; that they will non 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 Courtroom 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 concern or undertaking which competes in whatsoever manner with the Company . . ." The Court ruled that considering there was no limitation on the chapters in which Alger could be employed, he was restricted from whatever employment in a business organisation that competes with WPO fifty-fifty if the new position was 1 in which Alger would not use the physician and client contacts he had adult at WPO. In essence, the provision prohibited Alger from being employed in any capacity (e.g., janitor, auditor, receptionist, etc.) with any competitor. The Courtroom institute that this restriction was broader than necessary to protect WPO'due south legitimate business interests. Every bit such, the Courtroom ruled that the provision was void and, in accordance with the terms of Section 103.465, that the unabridged non-compete provision was void.

II. H&R Block Eastern Enterprises, Inc. v. Grand. Swenson,et. al., Example No. 2004CV818 (Ct. App. 12/twenty/07).

In this affair, 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 independent the following clauses:

Noncompetition Covenant. Associate covenants that for two (2) years following the voluntary or involuntary termination of Associate's employment (such catamenia to be extended past any menses(s) of violation), Associate shall non, directly or indirectly, provide whatever of the post-obit services to any of the Visitor's Clients: (ane) ready revenue enhancement returns, (two) file tax returns electronically, or (three) provide bookkeeping or any other alternative or boosted service that the Company provides within the Acquaintance's district of employment.

Nonsolicitation Covenant. Associate covenants that for ii (2) years following the voluntary or involuntary termination of Associate'due south employment (such menstruation to be extended by whatsoever period(south) of violation), Acquaintance shall not directly or indirectly solicit or divert the Visitor'southward Clients or otherwise interfere with the Visitor's continuing relationships with its clients. Company Clients are those defined in Section eleven. (Emphasis added.)

Swenson quit her employment at H&R Block and opened a new business in December of 2004, known equally "King Street Tax & Accounting" and began competing with H&R Block. She hired four other H&R Cake employees to piece of work with her.

H&R Block then filed an action alleging that the onetime employees breached the restrictive clauses in their contracts. Swenson argued that the restrictive covenants were unenforceable.

The Wisconsin Courtroom focused on whether the provision inside the noncompete provision which stated that the elapsing menstruation was extended by any menses of violation was enforceable. H&R Block argued that the extension provision was reasonable because its event was to restrain the former employees for a total of only ii years and, if 2 years was reasonable, then the extension for a violation to make up a full of 2 years was reasonable likewise.

The Court of Appeals found that the extension provision was unreasonable for two reasons. Start, the Courtroom stated that it did not understand how the provision could exist applied in the context of two restrictive clauses, such as presented, which dealt with providing services to Company clients and soliciting those clients. The Courtroom stated:

. . . What constitutes a "one-24-hour interval" violation? Is it any mean solar day in which there is any contact with a company client for whom ane of the listed services is beingness provided? Does the violation then extend until the service is completed for that customer? If there are contacts with different visitor clients on one twenty-four hour period for the purposes of providing the listed services, does that count as a one day violation, the aforementioned as if in that location were contact with merely i visitor customer in a day? These questions, unanswered by the contract terms, hateful 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 at that place may be legitimate disputes between a former employee at H&R Block over whether particular conduct violates the clauses. The Court stated:

. . . An employee volition not know until a dispute is resolved by a court whether the behave is or is non a violation. Only so volition the employee know there is an extension and how long it is. The consequence of the extension provision thus makes the duration of the restraint not a stock-still and definitive time period simply a fourth dimension flow 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 menses 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 residue of the terms of the clauses were enforceable.

Iii. Star Direct, Inc. v. Eugene Dal Pra, Conclusion No. 2006CV1268 (Ct. App. 12/half dozen/07):

The employer in this thing, Star Direct, was a distributor of approximately 30 dissimilar products to approximately 800 convenience stores, service stations, truck stops, travel centers, and other retail outlets throughout Wisconsin, Illinois, Minnesota, Northward 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 assembly, who called on customers and potential customers on a particular road.

In September of 2002, Star Direct purchased two routes from CB Distributors. CB Distributors entered into a covenant non to compete regarding the routes. Dal Pra was employed past CB Distributors as a sales associate at the fourth dimension for 1 of the routes. Star Straight hired him and assigned him to approximately the aforementioned road 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, later on termination of Employee'due south employment with the Employer, Employee shall non interfere with, or endeavor to entice away from Employer any person, business firm, corporation, partnership or entity of any kind whatever which is a client of Employer or CB Distributors, or which was a customer of Employer or CB Distributors within a catamenia 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 noesis as a upshot of his position with Employer; and Employee shall not approach whatsoever such customer or past customer for any such purpose or knowingly cooperate with the taking of any such activeness by any other person, firm, corporation or entity of any kind.

Additionally, for a menstruation of xx-four (24) months afterward termination of Employee'due south employment with Employer, Employee shall non, directly or indirectly, whether as an private for his own business relationship or for or with any person, business firm, corporation, partnership, joint-venture, association or other entity any, become engaged in whatsoever business which is substantially similar to or in contest with the business of the Employer, within a fifty (50) mile radius of Rockford, Illinois.

[The Courtroom of Appeals referred to the corroborate italicized portion of the noncompete every bit the customer clause and the 2d paragraph every bit the "business clause."]

Dal Pra quit his employment with Star Direct in August of 2006. He then began his ain concern distributing full general merchandise under the proper noun of Distributing Plus. In his new concern, Dal Pra called upon the same customers he chosen on in the last twelvemonth of his employment with Star Direct and sold some of the same products as Star Straight 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 Courtroom started its assay by noting that the business clause prohibited Dal Pra, for 24 months and within a 50 mile radius of Rockford, Illinois, from condign "engaged in any business which is substantially like to or in competition with the business of the Employer." The Courtroom found that the business organization clause was overly broad because it prohibited Dal Pra from distributing products to customers that Star Direct did not distribute and that were non substantially like to the products or product categories that Star Direct did distribute. The Court stated:

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

The Court so turned to the issue of whether the business clause, which was institute to be unenforceable, could be severed from the client 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 take been reasonable and enforceable by itself.

What Do the Above Case Rulings Mean for Wisconsin Employers?

In recent years, at that place have been more than than the usual number of restrictive covenants that have been challenged in courtroom. Employees are signing restrictive covenants only, when deemed for their purpose to do so, they freely walk abroad from them.

The higher up cases demonstrate that the courts volition give shut 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 affair of police force.

In low-cal of the contempo cases and the ascent number of challenges to restrictive covenants, employers should review the restrictive covenants that they accept in identify, including those in employment agreements, to decide 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 "essentially similar" to the employer's business should be carefully reviewed. The same is true in regard to whatsoever provisions which, as written, prohibit an employee from property any position with a competitor.
If you lot have questions regarding the in a higher place, please contact any of the attorneys in the Employment, Benefits & Labor Relations Do Group of Ruder Ware.

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