On July 14, 2009, the Wisconsin Supreme Court issued its long-awaited decision in the matter of Star Direct, Inc. v. Dal Pra, 2009 WI 76. As observers of non-competition law in Wisconsin know, judicial treatment of non-competition agreements has been unpredictable, at best; and, at worst, downright hostile. In several very important respects, the Dal Pra decision represents an important turning point in Wisconsin judicial treatment of non-competition agreements. In short, Dal Pra has made it significantly easier to draft and enforce non-competition agreements in Wisconsin.
- Businesses with employees in Wisconsin will want to:
- Immediately review all non-competition agreements.
- Consider removing “defensive” language in non-competition agreements designed to avoid hostile judicial interpretation.
- Consider multiple separate clauses to address concerns regarding unfair competition.
- Ensure that each clause affecting post-employment competition is linguistically and analytically separate.
While several other issues (discussed below) were decided by the Supreme Court, two main issues were presented:
Q: If one distinct clause in a non-competition agreement is invalidated, what happens to remaining non-competition clauses?
A: If one clause is unreasonable, this only invalidates other clauses if the clauses are “intertwined.” The Supreme Court held that this question is resolved by determining: “whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced.” Dal Pra, ¶ 78. “In the context of multiple non-compete provisions in a contract, indivisibility will usually be seen by an intertwining, or inextricable link, between the various provisions via a textual reference such that one provision cannot be read or interpreted without reference to the other. Restrictive covenants are divisible when the contract contains different covenants supporting different interests that can be independently read and enforced.” Id. The Supreme Court emphasized that “overlap, even substantial overlap, between clauses is not necessarily determinative.” Id. This overturns a Court of Appeals decision which held that if one of two clauses is unreasonable, both clauses are invalid if both have the effect of limiting post-employment competition.
Q: In determining whether a non-competition agreement is reasonable, or not, how should courts go about interpreting the agreement?
A: The Supreme Court held that “it is true that we read restrictive covenants in favor of the employee.” “But,” the Court explained, “this does not mean we make an effort to read a clause unreasonably in order to find the clause unreasonable and unenforceable against the employee. Though they are disfavored at law, our task is still to rightly and fairly interpret non-compete agreements as contracts. This means we must interpret them reasonably so as to avoid absurd results, giving the words their plain meaning, reading as a whole, and giving effect where possible to every provision.” Dal Pra, ¶ 62 (citations and internal quotes omitted). This is significantly different than how many courts have, in fact, interpreted non-competition agreements – which is to imagine possible interpretations which would lead to unreasonable results -- and, if such interpretations can be imagined, then to invalidate the agreement.
The Supreme Court also decided three other important issues:
Q: Does a Wisconsin employer have a valid interest in barring employees from soliciting recent former customers (as opposed to current customers)?
A: The Supreme Court held: “[W]e believe under the facts of this case that an employer is entitled to an opportunity to recoup the considerable investment of resources it made in developing and fostering customer relationships and business opportunities that were active as recently as one year prior to the employee's termination.” Dal Pra, ¶ 40. “We render no opinion as to how much time must pass between a customer placing an order and a route salesperson's termination before the employer no longer has a legitimate protectable interest in that customer. Our holding today under the facts of this case is that the interim of one year is not too long.” Dal Pra, ¶ 41.
Q: Is it strictly necessary to have every similarly situated employee sign a non-competition agreement in order to have an enforceable agreement for any employee?
A: No. The Supreme Court held: “In short, we are untroubled by the fact that not every salesperson had a non-compete agreement.” Dal Pra, ¶ 51.
Q: Does a Wisconsin employer have a valid interest in barring an employee from soliciting customers that were formerly serviced by that employee, but who were more recently serviced by someone else within the company?
A: Yes. The Supreme Court held: “In short, Dal Pra learned information either about the customers and/or about Star Direct's business that would give him a unique advantage against Star Direct if he was allowed to pursue current and recent past customers, even those with whom he had not recently dealt. We conclude this is reasonably necessary for the protection of the employer.” Dal Pra, ¶ 48.
Dal Pra represents the most significant development in Wisconsin non-competition law since passage of Wisconsin’s non-competition law, Wis. Stat. § 103.465. Enforcement of agreements, and fair judicial treatment, are now much more realistic business goals. Businesses with non-competition agreements should review and revise them, now. Businesses which have not implemented non-competition agreements should evaluate doing so, now.
For more information, please contact Eric H. Rumbaugh at firstname.lastname@example.org or 414.225.2742.
For an in-depth analysis of the the Dal Pra case, please click here.