A covenant not to compete is a contract, and as a contract, it needs an offer, acceptance and consideration to be enforceable. When presented at the offer of employment, as long as employment is conditioned upon signing, that is considered enough. In Star Direct v. Dal Pra, the Wisconsin Supreme Court ruled that employers may not compel their existing employees to sign restrictive covenants without additional consideration. But, the Supreme Court clarified that continued employment can be consideration as shown by Runzheimer International, Ltd. v. Friedlen.
David Friedlen (Friedlen) had worked for Runzheimer International, Ltd. (Runzheimer) for more than fifteen years when Runzheimer required all of its employees, including Friedlen, to sign restrictive covenants. Runzheimer gave Friedlen two weeks to review the covenant, after which Friedlen was required to sign it or be fired. Friedlen chose to sign the covenant and continued to work for Runzheimer for more than two years before being terminated in 2011. Friedlen then sought employment at Corporate Reimbursement Services (CRS), one of Runzheimer’s competitors. Runzheimer sued both Friedlen and CRS, alleging that Friedlen’s employment at CRS constituted a breach of the restrictive covenant.
The circuit court ruled that Runzheimer’s promise not to fire Friedlen immediately if he signed the restrictive covenant was an illusory promise and did not constitute consideration to support the agreement because Runzheimer retained “the unfettered right to discharge Friedlen at any time, including seconds after Friedlen signed the Agreement.”
The Wisconsin Supreme Court reversed stating that an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant. They admitted that, theoretically, an employer could terminate an employee’s employment shortly after having the employee sign a restrictive covenant, the employee would then be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing, so that the restrictive covenant could not be enforced. In other words, yes, they could fire him immediately, but that would be pretty shady. And if the company did do that, the employee probably can say that it was so shady that the company shouldn’t be able to enforce the non-compete provision against the now ex-employee.
However, consistent application of this condition is important. NBZ, INC. v. Pilarski provided that an inconsistent policy of requiring non-compete agreements and not basing continued employment on the execution of those agreements made the agreements unenforceable. So all for one and one for all.
Oooookaaaay, soooo? It means that if you are going to have a non-compete, you have to have it be narrowly tailored like we talked about last week, in an agreement that the employee knows what he or she is agreeing to, and all of the employees in the same category have to be subject to it. If you want one top salesperson to sign it, they all have to do so. And no bluffing. If you say “Sign it or your fired,” mean it. So don’t skate around these requirements. If you want to restrict what your employees do even after they are no longer your employees, take the time to do it right.