An engineer’s employment contract provision imposing a post-termination restriction against soliciting former co-workers to quit or to accept employment with a competitor, supplier, or customer is an unenforceable restraint of trade under a new decision of the Wisconsin Court of Appeals. Manitowoc Co. v. Lanning, 2015AP1530 (Aug. 17, 2016).
This week’s decision reversed a judgment for more than $1 million in attorneys’ fees and costs won by the employer after the trial court found that the engineer had repeatedly breached the covenant by soliciting his former colleagues for a direct competitor. On appeal, the court held that the covenant against soliciting employees was a restraint of trade within the purview of section 103.465 of the Wisconsin Statutes, and failed to meet the law’s requirements. The court rejected the employer’s argument that the clause was not a restraint on competition, holding that because the “provision does not allow for the ordinary sort of competition attendant to a free market, which includes recruiting employees from competitors,” it is a restraint of trade under Wisconsin law. The court then concluded that because the clause barred the engineer’s solicitation of “any employee” of the company – including employees in a division separate from the one in which the engineer worked, and other employees the engineer never even knew worked for the company – it was too broad to be enforceable.
Non-Solicitation Covenants Are Common and Can Be Enforced If Properly Limited
Restrictions against post-termination solicitation of employees are common in employment agreements. Under the holding in Manitowoc Co. v. Lanning, these covenants are subject to close scrutiny as restraints of trade. To be enforceable, the provision must be necessary to protect a legitimate interest of the employer, and must be reasonably limited in duration and scope to serve the employer’s legitimate interest and go no further. Specifically, an employee signing such a restriction should be barred from soliciting only those co-workers as to whom the signing employee would enjoy an advantage derived from his or her employment in competing to hire them. Such an advantage might arise because the signing employee supervised the co-workers and with the employer’s support gained their personal allegiance, or it might stem from the signing employee’s access to confidential information about the co-workers.
Limits Should Focus on What Makes the Competition Unfair, Not Who the Competitor Is
The covenant in the Lanning case prohibited the engineer from soliciting employees for jobs not only with competitors of the former employer, but also with its customers or suppliers. Dicta in the opinion seems to suggest that in order to sustain a non-solicitation provision like this one, an employer “need[s] to show that the provision serves some legitimate and unique competitive interest” in barring work with customers and suppliers. Id. ¶ 29. The employer in Lanning had focused its case on proving that the engineer and his new employer, a competitor, had been engaged in “systematic poaching” of employees, and argued that its interest in avoiding that predatory conduct justified the broad restriction. The court found that interest insufficient to justify the restriction as to employment with customers and suppliers.
But, as the court recognized in holding that section 103.465 applies to this covenant, the competition with which the clause is concerned is competition in the market for employees, not necessarily competition in the product market the employer serves. Id. ¶ 17. Customers and suppliers compete in the employment market just as competitors do. The real problem in Lanning was not that the employer failed to show any protectable interest, but that it failed to recognize the limits of that interest and to shape the covenant accordingly.
Properly Limited Non-Solicitation Provisions
Lanning should not be read to preclude employers from using properly limited non-solicitation provisions to protect themselves from unfair competition for employees, whether that unfair competition comes from competitors, customers, suppliers, or any other third party. What makes the competition unfair is the use by a former employee of confidential information or goodwill of the former employer with respect to its employees to solicit those employees away. So, for instance, an employee who was an executive or supervisor could reasonably be barred for a time from soliciting employees as to whom he or she acquired goodwill by supervising and rewarding them using the former employer’s resources, or about whom he or she received confidential information concerning their performance and compensation. But unlike the covenant in Lanning, the restriction would have to be limited to barring solicitation of only those employees as to whom the executive or supervisor had acquired goodwill or confidential information by virtue of his or her former position.
Clients may want to have their employment agreements reviewed in light of Manitowoc Co. v. Lanning to see if revisions are necessary because of this new development.