Runzheimer Decision Signals Change of View Toward Restrictive Covenants

The Wisconsin Supreme Court has issued its decision in Runzheimer International, Ltd. v. Friedlen, 2015 WI 45, holding that an employer’s agreement to refrain from terminating a current at-will employee, without any further promise or benefit, constitutes lawful consideration for signing restrictive covenants, such that the restrictive covenants at issue would not be deemed unenforceable on that basis. This is an important development in the law governing restrictive covenants in Wisconsin, particularly from an employer’s perspective. Historically, Wisconsin law on the issue of restrictive covenants has been considered more employee-friendly, disfavoring the use of restrictive covenants, resolving doubts about the validity of such covenants in favor of the employee, and imposing strict requirements on their enforceability.

Restrictive covenants, in an employment context, are contracts that, among other things, preclude an employee from competing against an employer, soliciting an employer’s customers or employees to leave the employer’s company, or disclosing and/or using an employer’s confidential information either during the term of employment relationship or thereafter. A restrictive covenant, like any other contract, requires an offer, acceptance and consideration. As the court in Runzheimer explained, consideration is the evidence of the intent of the parties to be bound by a contract and consideration is “a detriment incurred by the promise or a benefit received by the promisor at the request of the promisor” or a “promise for a promise, or the exchange of promises”. Examples of consideration that have been found sufficient to enforce a restrictive covenant entered into between an existing at-will employee and an employer include increased wages, a promotion, a bonus, a fixed term of employment, or access to protected information. While it is clear that restrictive covenants require consideration, Wisconsin courts previously had not squarely addressed whether continued employment of an existing at-will employee, without anything else, is lawful consideration supporting enforcement of a restrictive covenant. The Wisconsin Supreme Court has now provided clarity on this issue through its decision in Runzheimer.

Runzheimer focuses on a situation in which an employer asked a long-time employee to sign a restrictive covenant and told the employee that continued employment was contingent upon signing the covenant. The employee signed the restrictive covenant, worked for the employer for over two additional years, and was then lawfully terminated. After being hired by a competitor, the former employer sued the employee, alleging, among other claims, a breach of the restrictive covenant. In defense of this claim, the employee argued that the restrictive covenant was unenforceable because it lacked consideration, i.e., the employer did not provide anything in exchange for the employee’s agreement to sign the restrictive covenant.

The Wisconsin Supreme Court disagreed with the employee and held that the employer’s “forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant” because the promise of continued employment has value. In so holding, the Court made clear to Wisconsin employers and employees that a restrictive covenant will not be held unenforceable simply because it was presented to the employee on a “take it or leave it” basis. The Court also clarified that the employer, when presenting the restrictive covenant to the employee, must specifically indicate that immediate termination will result if the employee refuses to sign the agreement.

As a result of this decision, employers can now approach existing at-will employees with restrictive covenants and require those employees to sign the covenants or face termination, without having to promise additional financial consideration such as a promotion, bonus or a raise. Employers must be prepared, however, to uniformly follow through on such mandates when employees refuse to sign, as failing to do so, on some or all occasions, could give rise to an argument that the promise was illusory and not true consideration for the covenant.

Employers should be aware, though, that the Court in Runzheimer warned that such restrictive covenants still could be thrown out for other reasons. For example, terminating the employee immediately or very shortly after the employee signs the agreement presented on such a basis may deem the agreement unenforceable. Also, the restrictive covenants would still be subject to the current laws set forth in Section 103.465 of the Wisconsin Statutes, which mandates that restrictive covenants are enforceable only if they (1) are necessary to protect the employer, (2) provide a reasonable time restriction, (3) provide a reasonable territorial limit, (4) are not harsh or oppressive to the employee, and (5) are not inconsistent with public policy. Under existing law, if one of these elements is not met, the entire restrictive covenant would be deemed unenforceable because courts currently are not permitted to “blue pencil” or modify provisions to make the restrictive covenant consistent with legal requirements and enforceable.

Additional important changes to existing restrictive covenant law have been proposed through 2015 Senate Bill 69. We will keep you informed of any progress with this proposed legislation. At this point, however, employers can cautiously use an agreement to refrain from terminating a current at-will employee as consideration for a restrictive covenant, as provided in the Runzheimer decision.

If you have any questions about this article, please contact your Davis & Kuelthau attorney or the author, Anthony J. Steffek, at 920.431.2237 /