Continued Employment: Lawful Consideration in Non-Competes?

Factual Background Runzheimer International, Ltd., employed David Friedlen at will for more than 15 years before Runzheimer required all of its employees to sign non-compete agreements. The agreement provided, in relevant part, that for a period of 24 months following the end of Friedlen’s employment with Runzheimer, “for whatever reason,” Friedlen would not use or disclose Runzheimer’s confidential information, would not directly or indirectly sell to protected customers, and would not directly or indirectly provide services to Runzheimer’s competitors.

Runzheimer permitted Friedlen to review the non-compete agreement but told him he would be fired if he did not sign it within two weeks. Friedlen signed the non-compete agreement on June 15, 2009. On November 16, 2011, 29 months after Friedlen signed the agreement, Runzheimer terminated his employment.

Following his termination, Friedlen reached out to and began working for Corporate Reimbursement Services, Inc. (CRS), a competitor of Runzheimer. Runzheimer filed suit against both Friedlen and CRS, alleging that Friedlen breached the non-compete agreement and that CRS tortiously interfered with the non-compete agreement.

The trial court granted the defendants’ motion for summary judgment on the breach of contract claim, holding that the non-compete agreement was not supported by consideration: “Runzheimer made an illusory promise of continued employment to Friedlen. Such a promise cannot constitute consideration for the Agreement. The fact that Friedlen continued his employment with Runzheimer for years after the Agreement does not change the analysis.” Runzheimer, 2015 WI 45, ¶ 15.

Certification by the Wisconsin Court of Appeals Runzheimer appealed. The Wisconsin Court of Appeals certified the case to the Wisconsin Supreme Court, posing 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?” Runzheimer Int’l, Ltd. v. Friedlen, No. 2013AP1392, 2014 WL 1465157 (Wis. Ct. App. Apr. 15, 2014).

In certifying the case, the court of appeals pointed to the unsettled law in the wake of NBZ, Inc. v. Pilarski, 185 Wis. 2d 827, 520 N.W.2d 93 (Wis. Ct. App. 1994), and Star Direct.

In NBZ, the court of appeals held that a non-compete agreement executed by a beauty salon and an existing employee was not supported by consideration where “the evidence d[id] not show that [the salon] conditioned employment or promised to do anything in exchange for [the employee’s] signing the covenant.” 185 Wis. 2d at 839. In that case, the plaintiff, a beauty salon, required the defendant to sign a non-compete agreement after she was hired but while she was still a trainee. Id. at 833–34. Neither the defendant’s continued employment nor change from trainee to hairstylist was conditioned on signing the non-compete agreement. Id. at 839.

In Star Direct, the supreme court held that the customer clause of a non-compete agreement was reasonably necessary to protect the employer’s interests, despite the fact that the employer required only new salespeople to sign the agreement. 2009 WI 76, ¶¶ 49–51. The supreme court was “untroubled by the fact that not every salesperson had a non-compete agreement,” reasoning that the employer’s consistent practice in requiring all new salespeople to sign the agreement still demonstrated the employer’s legitimate fear of competitive risk. Id. ¶ 51. Citing NBZ, the supreme court added, “[i]n fact, employers may not compel their existing employees to sign restrictive covenants without additional consideration.” Id. ¶ 50.

The Wisconsin Supreme Court’s Decision  In Runzheimer, the Wisconsin Supreme Court reversed the decision of the trial court, holding that “an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” 2015 WI 45, ¶¶ 5, 59.

The court concluded that neither NBZ nor Star Direct was controlling. The court clarified the holding in NBZ as limited to a determination that a non-compete agreement between an employer and an existing at-will employee lacks consideration “when the employer neither conditions the employee’s continued employment on signing the covenant nor promises to do anything else in exchange for signing the covenant.” Id. ¶ 32. By contrast, it was undisputed that Runzheimer conditioned Friedlen’s continued employment on his signing the non-compete agreement.

Likewise, while recognizing that Star Direct “cited NBZ for the principle that ‘employers may not compel their existing employees to sign restrictive covenants without additional consideration,’” id. ¶ 35 (quoting Star Direct, 2009 WI 76, ¶ 50), the court explained that “Star Direct simply does not address whether an employer’s promise not to terminate the employment relationship satisfies the ‘additional consideration’ requirement it describes.” Id.¶ 37.

The court cited the majority view that forbearance of the right to terminate an at-will employee is lawful consideration—a view typically based on the theory that the expectation of continued employment is not worthless or illusory. “In Wisconsin, ‘forbearance in exercising a legal right constitutes valid consideration.’” Id. ¶ 40 (quoting Lovett v. Mt. Senario Coll., Inc., 154 Wis. 2d 831, 837, 454 N.W.2d 256 (Wis. Ct. App. 1990)). Applying that principle, the court explained that Runzheimer did not exercise its right to terminate Friedlen’s employment, electing instead to exchange its right to fire Friedlen for Friedlen’s promise not to compete with Runzheimer upon his termination. As the case presented a valid example of forbearance in exercising a legal right, the court held that the non-compete agreement signed by Friedlen was supported by lawful consideration.

The court rejected Friedlen’s argument that the promise not to fire him if he signed the agreement was illusory, explaining that it was not a promise that implicated Runzheimer’s future conduct. Instead, “Runzheimer’s promise was that it would not fire Friedlen at that timeand for that reason”—a promise that Runzheimer performed immediately by forbearing to exercise its legal right to fire Friedlen at that time. Id. ¶ 46. In addition, the court noted, an at-will employee like Friedlen has just as much power as his employer to terminate the employment relationship.

The court was also untroubled by the fact that Runzheimer’s promise not to fire Friedlen was for an indeterminate period of time, reasoning that the length of the promise’s duration goes to the adequacy, not the existence, of consideration.

The court further held that the trial court erred when it relied on Friedlen’s fear of immediate termination to determine that Runzheimer’s promise was illusory. While it was true that Runzheimer could have fired Friedlen shortly after he signed the non-compete agreement, the court rationalized that such a situation would be adequately addressed by existing contract claims, including fraudulent inducement or breach of the implied duty of good faith and fair dealing.

The Majority Rule The Runzheimer decision makes Wisconsin the thirtieth state to hold that continued employment constitutes lawful consideration to support a non-compete agreement signed by an existing at-will employee. The following chart sets forth how this issue has been decided throughout the country:

Conclusion The Runzheimer decision and others like it open the door for employers to implement or modify non-compete agreements with their existing at-will employees. In majority rule states like Wisconsin, employers can require existing at-will employees to sign non-compete agreements without having to offer additional consideration such as increased pay, a bonus, or a promotion. Before doing so, however, employers should consider the following tips:

Keywords: litigation, business torts, unfair competition, at-will employment, consideration, non-compete, restrictive covenant