Why it matters

Continued employment constitutes lawful consideration to enforce a noncompete agreement in Wisconsin, the state’s highest court recently ruled. The company asked all of its employees to sign restrictive covenants in 2009. A 15-year employee did so and worked there for another two years before he was terminated. When he began working for a competitor, the company sued, relying on the noncompete agreement. The employee moved for summary judgment, arguing that the agreement was unenforceable because it lacked consideration. Answering a certified question from the intermediate appellate court, the Wisconsin Supreme Court wrote that “an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” Jurisdictions nationwide are split on the issue, the court noted, joining the majority by concluding that continued employment was lawful consideration.

Detailed discussion

In 2009, Runzheimer International required all of its employees to sign restrictive covenants. The company gave employees two weeks to sign the agreement or be fired. David Friedlen, a 15-year employee of the company, elected to sign the covenant. He then worked for Runzheimer for another two years before he was terminated in 2011.

After consulting independent counsel as to the validity of the restrictive covenant (the lawyer opined that it was not enforceable), Friedlen then began working for a competitor, Corporate Reimbursement Services (CRS). When Runzheimer learned of his new job, it sued both CRS and Friedlen in Wisconsin state court, alleging the defendants breached the restrictive covenant. Friedlen and his new employer moved for summary judgment, arguing that the covenant was unenforceable for lack of consideration. A trial court granted the motion, and Runzheimer appealed.

Finding that Wisconsin law failed to adequately address 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 constitutes lawful consideration, the intermediate appellate court certified the case to the state’s highest court.

The Wisconsin Supreme Court reversed. “We hold 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 wrote. “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 began with a definition of “consideration” as “a detriment incurred by the promise or a benefit received by the promisor at the request of the promisor … Neither the benefit to the promisor nor the detriment to the promisee need be actual.” The court also noted that in 1933, the Wisconsin Supreme Court ruled that the requirement to sign a restrictive covenant as part of a hiring contract constituted lawful consideration in Wisconsin Ice & Coal Co. v. Lueth. But noting the different circumstances between a new hire and an existing employee—such as the inability to transfer easily to an equivalent job or age and family responsibilities—the court declined to rely exclusively on the Lueth decision.

Instead, the court considered two of its prior decisions on at-will employees and restrictive covenants (which it found unpersuasive) as well as opinions from other states. While jurisdictions are split on the issue, those “that hold that a promise not to fire is not lawful consideration for a covenant not to compete represent the ‘distinct minority,’ ” the court said.

Other principles might also apply, the court said. If an employee was terminated shortly after signing a restrictive covenant, the agreement would likely be a voidable contract under principles of contract law. Or an employer could breach the doctrine of good faith and fair dealing by acting in a deceitful manner.

“[W]e hold that an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for a restrictive covenant,” the court concluded. “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.”

Because the record lacked a determination as to the reasonableness of the covenant’s terms, the court remanded the case for further proceedings.

In a separate concurrence, Chief Judge Shirley S. Abrahamson characterized the majority opinion as “ambiguous and troublesome” as it effectively “transforms the parties’ at-will employment contract into an employment contract for a reasonable duration.”

“The majority opinion is in effect holding that Runzheimer implicitly promised not to terminate Friedlen’s employment for a reasonable time. Unless Runzheimer’s promise is so interpreted, the doctrines of fraudulent inducement and good faith and fair dealing are not applicable to the instant case,” Abrahamson wrote. “I understand the majority opinion as in effect holding just that: In exchange for Friedlen’s signing the covenant not to compete, Runzheimer promised not to terminate Friedlen’s employment for a reasonable time. I therefore agree with the majority opinion.”

To read the opinion in Runzheimer International Ltd. v. Friedlen, click here.