State justices to decide covenant concern

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When David Friedlen was asked by his employer of almost 20 years to sign a restrictive covenant or lose his job, he signed on the dotted line.

But when Friedlen was fired two years later, in 2011, from his at-will employment and started working for a direct competitor, he claimed the restrictive covenants were unenforceable and not supported by additional consideration.

After the trial court agreed with Friedlen on summary judgment, the District 1 Court of Appeals certified a basic question to the Wisconsin Supreme Court in Runzheimer International Ltd. v. David Friedlen, 2013 AP 1392: Is a restrictive covenant that is signed by an existing at-will employee enforceable when the only consideration given was continuing employment and participation in an ongoing employee incentive program?

Case history

In his time with Waterford-based Runzheimer, Friedlen worked in sales, product management and product development before returning to regional sales.

His history with the company was put on the line in 2009 when Runzheimer asked its employees to sign off on new restrictive covenants or be fired. According to the covenants, after leaving the company, employees would not discuss or make use of any company trade secrets, would not use or disclose any confidential company information for 24 months, would not sell to or solicit any “restricted” customers any products or services similar to those offered by the company, and would not provide to any competitor in their sales areas any “restricted services” for 24 months.

Friedlen signed and, in the two years that followed, collected his routine pay, benefits and more than $20,000 in bonuses from a company incentive plan. He was fired around Thanksgiving 2011 and took a sales position effective Jan. 2, 2012, with Corporate Reimbursement Services Inc., one of Runzheimer’s main competitors.

Runzheimer sued less than three weeks later. The three-count complaint accused Friedlen of breach of the restrictive covenants, misappropriation of trade secrets and tortuous interference with a business contract.

By his own admission, Friedlen freely solicited Runzheimer customers while working for his new employer and provided details about his previous employer’s business plans and strategies to better target current and future customers.

But Friedlen contended that the 2009 restrictive covenants could not be enforced because there was no new consideration given.

The arguments

The state Supreme Court heard oral arguments on the case in October.

According to Friedlen’s counsel, the promise of continued employment at an at-will employer and participation in the incentive program was no promise at all and merely illusory. Counsel argued the company could have fired Friedlen after the covenants were signed, and the incentive program was a part of Friedlen’s employment for years.

But counsel for Runzheimer asserted case law and public policy strongly dictate that the covenants should be enforceable.

There is little dispute that Wisconsin employers can have new at-will employees sign enforceable restrictive covenants, according to Friedlen’s brief. The seminal 1933 case of Wisconsin Ice & Coal Co., v. Lueth, 213 Wis. 42, has been on the books for more than 80 years.

In that case, Lueth tried to avoid the terms of restrictive covenants signed as a new employee, saying that the promise of at-will employment was not sufficient consideration. The justices rejected Lueth’s argument as inconsistent with state law, noting that the promise of initial employment, coupled with the other tasks and obligations an employer undertook, was adequate consideration.

The same reasoning, according to Runzheimer’s brief, also should apply to existing employees who sign restrictive covenants.

It is black-letter law that forbearance from exercising a legal right such as terminating an employee constitutes valid consideration, according to counsel for Runzheimer.

“The mere possibility that some deceitful employer might fraudulently induce its employees to sign a restrictive covenant should not deprive all honest employers of the benefits of protections entered into freely and at arm’s length,” according to Runzheimer’s brief.

As long as the restrictive covenants are supported by some consideration, that usually is enough, Runzheimer concluded. Courts don’t traditionally get into the quagmire of trying to decide exactly how much consideration is enough.

Friedlen countered that there is no need to look to Lueth to determine if the Supreme Court should extend its decision for workers already employed. Counsel argued the court’s more recent decision in Star Direct Inc. v. Dal Pra, 2009 WI 76 is dispositive and controlling, stating that: “[E]mployers may not compel their existing employees to sign restrictive covenants without additional consideration.”

Counsel for Runzheimer characterized the Star Direct court’s language as dicta and thus not controlling. Friedlen responded that when the Supreme Court takes the time and effort to note a point, even if that point is not essential to the court’s final order in the case, no appellate court has the right to dismiss it as “dicta,” citing Zarder v. Humana Ins. Co., 2010 WI 35 and other cases in support.

Runzheimer also contended that Star Direct was not on point because the employee did not face definite firing if the restrictive covenants were not signed. Friedlen responded that the case evidence suggested that the Star Direct employee did not know if she would be terminated.

A recent Wisconsin Supreme Court case, NBZ Inc. v. Pilarski, 185 Wis.2d. 827 (1994), did not reference Lueth as controlling on the question of adequate consideration for restrictive covenants signed by existing employees.

Both Friedlen and Runzheimer argued jurisdictions around the country, as well as Wisconsin law and public policy, support their positions.

Counsel for Friedlen suggested Wisconsin law and policy support employees’ freedom to reasonably move from job to job.

Runzheimer asserted that companies need to have some protection for valuable and unique company practices and secrets and that courts typically don’t try to determine what constitutes “adequate” consideration.

A decision is expected by the term’s end in June.