Employers Can Condition Continued Employment of Employee on Employee Signing Non-compete

On April 30, 2015, the Wisconsin Supreme Court decided Runzheimer International, LTD. V. Friedlen, 2015 WI 45, 362 Wis.2d 100, 862 N.W. 2d 879 and held that an employer may condition the continued employment of an employee on the employee signing a restrictive agreement, such as a non-compete.  The decision helps to clarify what constitutes adequate consideration for an employee entering into a restrictive covenant with their employer.  However, the Court did not address whether the agreement was reasonable.

In Runzheimer the employee, Friedlen, was required to sign an agreement which included confidentiality and non-compete provisions (the “Agreement”).  Friedlen had been an employee of Runzheimer for more than 15 years before he was asked to sign the Agreement.  Friedlen was given two weeks to review the Agreement.  If he did not sign the Agreement, then he would be fired.

Friedlen signed the Agreement and remained employed by Runzheimer until his termination, 29 months later.  Following his termination, Friedlen sought employment with a competitor of Runzheimer.  Friedlen was offered a position with the competitor and accepted the position after his attorney concluded that the Agreement was unenforceable.  Runzheimer filed suit against Friedlen for breaching the Agreement and Friedlen moved to dismiss Runzheimer’s claims.

The issue on appeal was whether the promise of continued employment, with no definite continuation period, of an existing at-will employee constituted valid consideration for a restrictive agreement.  In other words, under such circumstances, is an employee actually receiving a benefit in exchange for signing the restrictive agreement?

The Court unambiguously held that a promise of continued employment to a current at-will employee was sufficient to constitute valid consideration for entering into a restrictive agreement.  The Court concluded that Runzheimer’s promise not to terminate Friedlen upon the expiration of the two week review period, so long as the Agreement was signed by Friedlen, was valid consideration.  In fact, Runzheimer performed under the Agreement “immediately when it forbore its legal right to fire Friedlen at that time.”  Forbearance in exercising a right, in this case the right to terminate without cause, constitutes valid consideration.

While the decision clarifies the consideration issue under such circumstances, employers should still exercise caution under such arrangements.  This is especially true if an employee is terminated shortly after signing a restrictive agreement or there exists evidence of the employer’s intent to terminate the employee regardless of whether the employee signs the restrictive agreement.

It is also important to emphasize that the Court did not address the reasonableness of the Agreement.  Even when the elements of contract formation are met, a restrictive agreement can still be found unenforceable if it is determined that the restrictions do not pass Wisconsin’s reasonableness test.

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