Under Wisconsin law, for a non-compete agreement, or any other form of restrictive covenant, to be enforceable it needs to be supported by adequate consideration (something of value received by the employee). While Wisconsin courts have previously decided that the execution of a restrictive covenant at the commencement of the employment relationship constitutes adequate consideration, the law was unclear whether continued employment constituted adequate consideration where an existing at-will employee was required to sign a restrictive covenant. A decision by the Wisconsin Supreme Court last week, however, addressed this issue and clarified when requiring current employees to sign restrictive covenants would be enforceable under Wisconsin law.
The issue was addressed in Runzheimer Int’l, Ltd. v. Friedlen, 2015 WI 45, which involved an employer (Runzheimer) that sued a former employee (Friedlen) for violating a non-compete agreement after Friedlen was fired and began working for a competitor. Friedlen had worked for Runzheimer for 15 years as a business development consultant when Runzheimer required him to sign a non-compete agreement. Runzheimer gave Friedlen two weeks to consider the agreement, but told him he would be fired if he did not sign it. Friedlen signed the agreement, but was terminated approximately one year later. The issue before the Supreme Court was whether the non-compete agreement was enforceable and supported by adequate consideration.
Friedlen argued that the non-compete agreement was invalid because he had not received any additional consideration when he signed the agreement, while Runzheimer argued it had provided Friedlen consideration by continuing his employment and not exercising its right to terminate him. The Supreme Court struggled with the notion that an employer could require an existing employee to sign a non-compete agreement, and then turn around and terminate that employee. The Court nevertheless held that an employer can lawfully require an existing at-will employee to sign a non-compete agreement as a condition of further employment without providing any further consideration or benefit to the employee.
This decision represents a significant victory for employers who desire to protect their business interests by ensuring that former employees do not unfairly compete or solicit their customers after ending the employment relationship. Employers can now compel existing at-will employees to sign such agreements in exchange for continued employment without providing any further monetary consideration to the employee. The employer must be willing to terminate the individual, however, if the employee refuses to sign the restrictive covenant.
There is a caveat. Employers must be careful to ensure that the promise of continued employment is not illusory. As noted by the Supreme Court, under its interpretation of the law, an employer could require an employee to sign a restrictive covenant and then immediately fire the employee, as the employee remains an at-will employee. The Court recognized the employer’s right to terminate the employment relationship at any time, but cautioned that employers must be careful in exercising that right. The Court noted that if Runzheimer had fired Friedlen shortly after he signed the non-compete, Friedlen could have sued Runzheimer for “fraudulently inducing” him to sign the non-compete, violating its “duty of good faith and fair dealing,” and voided the non-compete agreement.
The bottom line is that employers can force existing at-will employees to sign non-compete agreements and need not offer any consideration other than promising not to fire the employee at the time they sign the agreement. The Supreme Court, however, did not define how long an employer must continue to employ the employee after he or she signs the restrictive covenant to avoid such a claim. An employer that requires an existing at-will employee to sign a restrictive covenant and then shortly thereafter seeks to terminate the individual must be mindful of the risks associated with that decision.
If you have questions about this material, please contact Oyvind Wistrom by email at email@example.com or by phone at (414) 273-3910, or any other attorney you have been working with here at Lindner & Marsack, S.C.