Wisconsin decision puts the states at odds over non-compete provisions in employment agreements.
Thanks to a recent Wisconsin Supreme Court decision, the law in Minnesota and its neighboring state now differs on the key, threshold issue of whether continuation of existing employment supports a non-compete agreement. Minnesota employers may want to rethink choice of law provisions in employment agreements if there is a legitimate issue about whether Minnesota or Wisconsin law applies.
When you think of Minnesota/Wisconsin border battles, you probably think of Vikings vs. Packers, Gophers vs. Badgers, or Twins vs. Brewers. Recent developments in Wisconsin employment law present a new battleground: the circumstances under which non-compete agreements are enforceable.
Minnesota courts have for many years held that the continuation of employment by itself does not provide consideration for a restrictive covenant. Unlike the promise of new employment to a job applicant, merely continuing a current employee’s employment does not support a covenant not to compete. The employer must offer something else of real value in exchange for the covenant. This black-letter law in Minnesota guides Minnesota employers when they seek to enter into enforceable post-employment restrictions with their employees.
A recent Wisconsin Supreme Court decision takes exactly the opposite view, explicitly rejects the Minnesota approach, and holds that the continuation of at-will employment is, in itself, lawful consideration for a non-compete agreement. Accordingly, employers operating under Wisconsin law may now enter into enforceable non-compete agreements with their existing employees, even without providing any payment, job advancement, training, or other benefit.
In addition to the Wisconsin Supreme Court decision, the Wisconsin Legislature has considered proposed legislation that would establish presumptions in favor of non-compete agreements, eliminate various defenses against enforcement, and otherwise make it easier for employers to obtain injunctive relief upon breach of a non-compete agreement. If enacted, these changes would dramatically alter the legal landscape for employers who have operations or employees in Wisconsin. Minnesota, generally considered a favorable venue for non-compete enforcement, and Wisconsin, historically seen as much more hostile to non-competes, would switch roles. Minnesota employers should be aware of these developments in our neighboring state and may want to reevaluate their strategies for non-compete enforcement.
The Runzheimer Decision
David Friedlen had worked for Runzheimer International for more than 15 years without signing any restrictive covenants. In 2009, as part of a corporate initiative, Runzheimer required all employees to sign an agreement containing provisions against the disclosure of confidential information, solicitation of customers, or provision of competing services after their employment with Runzheimer ended for any reason. Friedlen had two weeks to consider the agreement; Runzheimer told Friedlen that he would be fired if he did not sign. Friedlen eventually signed and worked for 29 additional months before Runzheimer involuntarily ended his employment. Friedlen then obtained a job with a competitor and Runzheimer sued to enforce the non-compete. The trial court granted summary judgment in favor of Friedlen, concluding that the non-compete was invalid for lack of consideration because Friedlen did not receive anything of value when he signed the restrictive covenant during his employment.
The Wisconsin Court of Appeals certified to the Wisconsin Supreme Court the unresolved question under Wisconsin law of whether an employer’s forbearance of its right to terminate an existing at-will employee in exchange for the employee agreeing to a restrictive covenant constituted lawful consideration.
The Wisconsin Supreme Court reversed the trial court and ruled in favor of Runzheimer.1 The Court surveyed cases from across the nation, including the Minnesota Supreme Court’s frequently cited decision in Freeman v. Duluth Clinic, 334 N.W.2d 626, 630 (Minn. 1983) (restrictive covenants signed after the commencement of employment must be supported by “substantial economic and professional benefits… that would not have been open to [the employee] had he refused to sign the covenant”), and concluded that Minnesota and other jurisdictions that do not recognize continued employment as lawful consideration are in the “distinct minority.”2 The Court ruled that Runzheimer’s promise not to fire Friedlen immediately for failure or refusal to sign a non-compete was forbearance of the employer’s right to terminate and therefore lawful consideration: “Runzheimer’s promise was that it would not fire Friedlen at that time and for that reason. Thus, Runzheimer performed immediately when it forbore its legal right to fire Friedlen at that time.”3
The fact that Runzheimer did not promise to employ Friedlen for a particular length of time did not matter because, according to the Court’s majority opinion, the law only concerns itself with the existence—not the adequacy—of consideration.4 Friedlen had argued that the employer’s forbearance from firing an employee was illusory and not really consideration because the employer could fire the employee shortly after signing. The Court minimized this concern, commenting that employees were adequately protected from immediate termination by existing principles of fraud in the inducement of contracts and the covenant of good faith and fair dealing.5 The Court’s opinion was authored by Justice Prosser, formerly the Republican Speaker of the Wisconsin Assembly and the subject of a hotly contested judicial election in 2011 that became a proxy for those supporting and opposing Gov. Scott Walker.
Chief Justice Abrahamson (a member of the Court’s liberal wing who has vehemently disagreed with Justice Prosser and the Court’s conservative wing on many issues)6 filed a concurring opinion, stating her understanding that the majority opinion found lawful consideration because Runzheimer agreed to forbear from firing Friedlen “for a reasonable time.”7 According to Chief Justice Abrahamson, the majority opinion in effect transformed an at-will relationship into an employment contract for a reasonable duration and employing Friedlen for 29 months after he signed the covenant provided the consideration.
The Court’s opinion in Runzheimer takes an entirely different view than the approach used in Minnesota to determine consideration for restrictive covenants. Minnesota courts have repeatedly held that a current employee lacks bargaining power when presented with a non-compete agreement and told to sign it or face termination. Under Minnesota law, a current employee must receive “real benefits” for signing a covenant after employment has begun.8 The benefits must be directly attributable to the signing of the restrictive covenant.9 The employer’s forbearance in not terminating the employee immediately for refusing to sign the covenant is not recognized as lawful consideration. As a result, Minnesota employers generally seek to obtain restrictive covenants with current employees by offering additional compensation or benefits, specialized training or increased advancement opportunities, or access to confidential business information.
While the Wisconsin Supreme Court was deciding Runzheimer, the Wisconsin state Senate was considering a bill that would dramatically broaden the circumstances of non-compete enforcement in Wisconsin. Among other things, the proposed legislation would do the following:
- Repeal Wisconsin’s statute governing enforceability of restrictive covenants, Wis. Stat. §103.465, including the current provision that an unreasonable restraint is illegal, void, and unenforceable even as to so much of the covenant that would be a reasonable restraint.10
- Identify a broad range of protectable business interests that would support the use of restrictive covenants, not only an employer’s established relationships with current customers but also “prospective customers.”
- Create a rebuttable presumption that non-compete restrictions of six months or less are reasonable (and restraints longer than two years are unreasonable).
- Forbid Wisconsin courts from considering the “individualized economic or other hardship” upon the person against whom enforcement is sought unless there are “exceptional personal circumstances.”
- Prohibit use of statutory construction tools to interpret covenants narrowly.11
According to the bill’s proponents, the proposed changes would make Wisconsin more business friendly and competitive.12 Sponsors of the bill have stated one of its purposes is to attract national companies from neighboring states where non-compete enforcement may be less predictable. The proposed law has strong and vocal supporters and opponents. The bill did not make its way out of committees in the 2015 Legislature, but may be revisited in 2016.13
Consequences for Minnesota Employers
Minnesota employers should be aware of what is happening next door and how judicial and legislative changes in Wisconsin may affect Minnesota employers. The law in Minnesota and Wisconsin on the key, threshold issue of whether continuation of existing employment supports a non-compete agreement is now in conflict. To the extent that recent legislative proposals may predict future trends, Wisconsin may become a more favorable venue than Minnesota for enforcing restrictive covenants.
Minnesota employers may want to rethink choice of law provisions in employment agreements if there is a legitimate issue about whether Minnesota or Wisconsin law applies. Both Minnesota and Wisconsin courts generally recognize a contract’s stated choice of law provisions, so long as application of non-forum law would not violate fundamental public policy.14
If a Minnesota-based employer has employees who live or work in Wisconsin, there may be grounds for selecting Wisconsin as the law governing an employment agreement with restrictive covenants.
It may also be time for Minnesota litigants to revisit the issue of whether continued employment—particularly employment for a “reasonable duration” as suggested in the Wisconsin concurring opinion—may be enough to support a non-compete without trying to condition the non-compete explicitly on a raise, promotion, or access to confidential information. In actuality, continued employment for a substantial period of time often does provide employees with additional compensation, responsibilities, and insights into the company. Some Minnesota cases have found consideration for restrictive covenants signed by existing employees if they received additional income and experience after signing a covenant, even without clear evidence that these benefits were directly in exchange for signing the agreement.15 Although courts would inevitably need to draw a line somewhere between employment that continues for a “reasonable duration” and short term employment that does not provide sufficient value or consideration, the approach taken by the concurring opinion in Runzheimer may provide Minnesota employers an argument in favor of enforceability in cases where the employer provided real benefits during continued employment but did not expressly condition receipt of such benefits upon signing the covenant.
Non-compete agreements implicate important public policies: employers’ interests in protecting business relationships and information, employees’ interests in mobility and advancement, and the community’s interests in fostering free markets and innovation while also providing predictability and stability. The differing approaches taken by Minnesota and Wisconsin on the key issue of consideration reflect the ongoing tensions between these underlying and often conflicting policies.
ANSIS VIKSNINS is a partner at Lindquist & Vennum LLP in Minneapolis, where he practices primarily in the areas of employment law and litigation.
Runzheimer International, Ltd. v. Friedlen, 362 Wis.2d 100, 862 N.W.2d 879 (2015).
2 862 N.W.2d at 888.
3 862 N.W.2d at 890 (emphasis in the original).
4 862 N.W.2d at 891.
6 The Court’s opinion in Runzheimer was issued on 4/30/2015 and identifies the author of the concurring opinion as “Chief Justice” Abrahamson. One day earlier, after voters approved an amendment to the state constitution that allowed the justices to elect their Chief Justice rather than designating the most senior serving justice as Chief Justice, the justices had elected a new Chief Justice. Chief Justice Abrahamson objected to this election, claimed it was invalid as a violation of due process, and filed an unsuccessful federal lawsuit seeking reinstatement as Chief Justice.
7 862 N.W.2d at 897.
8 Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993) (“There is no independent consideration unless the employer provides real benefits beyond those already obtained by the employee in a previous contract”); Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 741 (Minn. 1982) (training did not constitute independent consideration for non-competition agreement because it was part of a prior employment agreement); Jostens, Inc. v. National Computers Systems, Inc., 318 N.W.2d 691, 703 (Minn. 1982) (no evidence that signing non-compete provided employees greater wages, promotion, or access to technical information).
9 Sanborn, 500 N.W.2d at 164 (non-competition agreement lacked consideration because there was no evidence that the employee received a promotion or that the increase in salary was attributable to signing the non-competition agreement); Nat’l Recruiters, 323 N.W.2d at 741 (no independent consideration where no advantage inured to employee’s benefit specifically as a result of signing); Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85 (Minn. Ct. App. 1985) (no independent consideration where employee did not receive benefits directly in exchange for signing restrictive covenant); Freeman, 332 N.W.2d at 630 (consideration inadequate where employees who did not sign restrictive covenants received similar benefits).
10 Historically, under the so-called “red pencil” doctrine, Wisconsin law has expressly prohibited courts from narrowing overly broad restrictive covenants in order to make them more reasonable and enforceable. Minnesota and many other states follow the “blue pencil” doctrine that allows courts to reform and modify overly broad covenants in order to make them enforceable.
11 2015 Wisconsin Senate Bill 69, viewable at docs.legis.wisconsin.gov/2015/related/proposals/sb69.
12 “Wisconsin legislators propose strengthening ‘noncompete’ agreements,” Milwaukee Journal Sentinel, 6/6/2015.
13 In recent years, the Minnesota Legislature has also considered but not adopted a bill that would have major impact on the enforcement on non-compete agreements. However, unlike Wisconsin, the bill proposed in Minnesota would have made non-compete agreements unenforceable except in connection with the sale of a business. In 2013, DFL Representatives Atkins and Hausman introduced H.F. No. 506, which would declare void contracts that prohibit a party from “exercising a lawful profession, trade, or business” except in the sale of a business, dissolution of a partnership, or termination of a limited liability company. The bill died in committee.
14 St. Jude Medical, S.C., Inc. v. Biosense Webster, Inc., 994 F.Supp.2d 1033 (D. Minn. 2014); General Med. Corp. v. Kobs, 179 Wis. 2d 422, 507 N.W.2d 381 (Wis. Ct. App. 1993).
15 Overholt Crop Ins. Service v. Bredeson, 437 N.W.2d 698 (Minn. Ct. App. 1989).