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January 30, 2018 Practice Points

Wisconsin Supreme Court Holds an Employee Non-Solicitation Provision to Be a Restraint of Trade

The Lanning decision means employers should now evaluate their employee non-solicitation restrictions

by Erin (Maggie) M. Cook, Maria L. Kreiter, Margaret R. Kurlinski, and Rebeca M. Lopez

On Friday, January 19, 2018, the Wisconsin Supreme Court issued a landmark decision in Manitowoc Company, Inc. v. Lanning, Slip Op., Case No.: 2015AP1530 (Wis. Jan. 19, 2018) that applies Wisconsin’s notoriously strict restrictive covenant statute and held that the employee non-solicitation provision at issue was a restraint of trade governed by Wis. Stat. § 103.465. The court further held the provision was unenforceable for a number of reasons, including that the provision applied to “any” solicited employee and as such, it failed to limit solicitation based on the nature and competitive threat associated with the  solicited employee’s position, defendant and former employee John Lanning’s personal familiarity with the solicited employee, or Lanning’s influence over the solicited employee.

In light of these two holdings, employers should review their existing restrictive covenants with legal counsel to determine if updates are necessary. The court’s decision should also be of note to practitioners in other jurisdictions with similar statutes governing restrictive or non-compete covenants in employment agreements.

Lanning worked for Manitowoc Company as an engineer for over 25 years before resigning and becoming the director of engineering for a Manitowoc competitor. Lanning signed a number of agreements over the course of his employment, and in 2008, he signed an “Agreement Regarding Confidential Information, Intellectual Property and Non-Solicitation of Employees,” in which Lanning agreed not to solicit “any employee” of the company for two years following termination:

[F]or a period of two years . . . (either directly or indirectly) solicit, induce or encourage any employee(s) to terminate their employment with Manitowoc or to accept employment with any competitor, supplier or customer of Manitowoc. . . .

Manitowoc alleged that Lanning violated his employee non-solicit through various recruitment efforts. The trial court awarded damages and attorney fees to Manitowoc, but the Wisconsin Court of Appeals reversed the award on the grounds that the non-solicitation provision was unenforceable under section 103.465. The Wisconsin Supreme Court granted review, noting that the employee non-solicitation provision at issue has not been analyzed by any prior Wisconsin court decision.

Two-Step Analysis
Section 103.465 permits non-compete covenants as to employees “within a specified territory and during a specified time [as] lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” Id. The Wisconsin Supreme Court used a two-step approach to determine whether Lanning’s employee non-solicitation provision was enforceable under the statute. 

First, the court analyzed whether the provision acted as a restraint of trade such that it would be subject to Wisconsin’s restrictive covenant statute. Although section 103.465 refers specifically to a covenant by an employee “not to compete” with the employer after the termination of employment, it also provides that “[a]ny covenant … imposing an unreasonable restraint is illegal.” Focusing on the effect of Lanning’s employee non-solicitation provision rather than the label, the court concluded that it was a restraint of trade because it restricted Lanning’s and Manitowoc’s competitors’ ability to freely compete “for the best talent in the labor pool.” Slip Op., 2018 WI 6, ¶ 9.

The court next scrutinized the reasonableness of the provision under section 103.465 and concluded that it was overbroad on its face. The court stated in no uncertain terms that the provision created “a sweeping prohibition that prevents Lanning from encouraging any Manitowoc Company employee, no matter the employee’s job or location, to terminate his or her employment with Manitowoc Company for any reason, or soliciting any Manitowoc Company employee to take any position with any competitor, supplier, or customer of Manitowoc Company.” Id., 2018 WI 6, ¶ 56. Further, “[w]ithout a specified territory or class of employees, the provision restricts Lanning’s conduct as to all employees of Manitowoc Company everywhere” such that the provision “covers each of the 13,000 Manitowoc Company employees regardless of the business unit in which they work or where in the world they are located.” Id. ¶ 59.

Notably, it was of no import that Manitowoc sought to enforce the employee non-solicitation provision more narrowly than compelled by its plain language: Manitowoc “could have tailored the language to its specific needs” and should have done so because “[e]nforcing an overbroad restraint to the extent it can be reasonably enforced is exactly what § 103.465 was enacted to prevent.” Id. ¶¶ 50, 61.

Erin (Maggie) M. Cook, Maria L. Kreiter, Margaret R. Kurlinski, and Rebeca M. Lopez are with Godfrey & Kahn S.C. in Milwaukee, Wisconsin.

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