Wis. Supreme Court Accepts New Case: When Are Covenants Not to Compete Illusory for At-Will Employees?

Last month, the Wisconsin Supreme Court accepted the Court of Appeals’ certification in Runzheimer Int’l, Ltd. v. Friedlen, No. 13AP1392 (Apr. 15, 2014). The intermediate appellate court had certified the following question: “Is consideration in addition to continued employment required to support a covenant not to compete entered into by an existing at-will employee?”

This case arises out of a dispute over a covenant not to compete entered into between an employer and an at-will employee 20 years after the employment relationship began. Two years after the covenant was entered, the employer fired the employee.  The employee then began working for the former employer’s competitor.

Continued at-will employment was the only consideration that the employer provided the employee in exchange for the covenant. 

The Court of Appeals certified the case because it believed that there was conflicting authority in Wisconsin on the issue. In a previous case, the Court of Appeals implicitly held that continued at-will employment can be sufficient consideration for a covenant not to compete. NBZ, Inc. v. Pilarski, 185 Wis. 2d 827, 837-39, 520 N.W.2d 93 (Ct. App. 1994). In that case, though, there was no consideration at all because continued at-will employment was not conditioned on the employee signing the covenant not to compete.

In contrast, the Wisconsin Supreme Court recently suggested that additional consideration beyond continued employment was required. Star Direct, Inc. v. Dal Pra, 2009 WI 76, ¶50, 319 Wis. 2d 274, 767 N.W.2d 898 (“[E]mployers may not compel their existing employees to sign restrictive covenants without additional consideration.”). This statement was unnecessary for the holding, and remarkably, Star Direct cited NBZ for this proposition.

The Court of Appeals felt compelled to certify this case because of the line of cases, including Cook v. Cook and Zarder v. Humana, that limit the Court of Appeals’ power to distinguish errant statements in earlier published opinions.

This case’s outcome will affect all Wisconsin employers who have entered into or who wish to enter into covenants not to compete with existing at-will employees.

The case also provides the Court with the opportunity to revisit the line of cases that requires the Court of Appeals to certify cases such as this one to the Court—that is, a case where one non-essential sentence in an 83-paragraph opinion conflicts with an earlier decision. It will be interesting to see if the Court takes advantage of this opportunity.