So, you just finished your orthodontic training. You enter the job market, and you find what you think is a fabulous associate’s position. The contract is to your liking, and one of the many standard clauses in it is a nonsolicitation of employees (NSE) provision. The NSE states that you, Junior, and the owner of the practice, Senior, agree that if either of you decides to end the associate relationship, you will not solicit, induce, or encourage any of Senior’s employees to leave Senior’s employment and accept employment with any competitor of Senior, including yourself. Now let’s say that after several years, the two of you decide to part ways, and you induce at least 1 of Senior’s employees to come to work with you. Not nice; but these things really do happen. Can you do this legally? This issue was addressed in The Manitowoc Company, Inc. v. John M. Lanning (No. 2015AP1530, Sup. Ct., Wis; Jan. 2018). The circuit court ruled that the NSE provision was valid and enforceable; the appellate court reversed, and this appeal to the state Supreme Court ensued.
The actual portion of the NSE giving rise to this issue read: “I will not (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.” The remainder of the provision goes into detail as to what constitutes soliciting, inducing, or encouraging.
Wisconsin has a statute that governs this issue (Wis. Stat. Sec 103.465) which states the following.
A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.
The first thing to notice is that this is an all-or-nothing statute. If any portion of the covenant is found to be unenforceable, the entire covenant, even the parts that would be enforceable, will be illegal and unenforceable.
All restrictive covenants or covenants not to compete are, in essence, restraints of trade. The court noted that restraints of trade can occur in many forms, some of which are covenants not to compete with a former employer; provisions barring the solicitation of the employer’s customers, former customers, or employees; nondisclosure and confidentiality agreements between employers and employees; and no-hire provisions between 2 employers. The court concluded that the plain meaning of the statute
restricts Lanning’s ability to engage in the ordinary competition attendant to a free market, specifically restricting Lanning’s freely competing for the best talent in the labor pool. In addition, the limitation on Lanning also affects access to the labor pool by a competitor of Manitowoc Company (including Lanning’s current employer, SANY America). Accordingly, we conclude that Lanning’s non-solicitation of employees provision is a restraint of trade governed by Wis. Stat. § 103.465.
Manitowoc argued that the NSE provision did not prevent any employee from working for anyone. It merely prevented a key employee, such as Lanning, who left its employ from raiding the company’s employee pool and taking another of the company’s employees with him. In response, the court noted that it believed that allowing 1 party to limit the ability of 1 employee to solicit other employees to come to work for a business competitor is exactly the restriction on a free labor market that the statute was designed to prevent.
A second issue was whether the covenant itself, not just the NSE, was legal under the statute; the court stated that it was not. The court began by noting that there are 5 prerequisites that any restrictive covenant must meet to be deemed enforceable. They are that the restraint must:
be necessary for the employer’s protection. Thus, the employer must have some protectable interest that is legally recognized as justifying a restriction of some type being imposed on the employee;
recognize that if such an interest is found, the time limit for the restriction must be reasonable;
provide for a reasonable geographic or territorial limit on the restriction;
not be harsh or oppressive to the employee; and
not be found to be contrary to any public policy considerations.
Wisconsin is a state that does not allow blue penciling. Hence, if 1 clause or portion of a restrictive covenant is found to be unenforceable because it runs afoul of 1 prerequisite, the entire covenant will be unenforceable. Blue penciling allows courts to either rewrite the offending clause or strike it altogether while keeping the nonoffending portion, thus allowing the provision to conform with the prerequisites as noted above.
Looking at the prerequisites one by one, the court first evaluated whether Manitowoc had a legally recognized protectable interest. The company claimed that the interest it was protecting was the loss of an employee in whom it invested time and money in training as well as the loss of the “institutional understanding, experience, and intellectual capital they possess.” The court responded that although it recognized the argument, such an interest cannot rationally or reasonably apply to all 13,000 worldwide Manitowoc employees. This type of argument is justified, but only as to “retaining top-level employees, employees who have special skills or special knowledge important to the employer’s business, or employees who have skills that are difficult to replace.” In other words, because it applied to everyone, the argument was so overly broad that in the court’s view it was deemed to extend well beyond whatever restrictions the employer needed to protect the interest in question.
Restrictive clauses and covenants, as well as contracts of employment in general, because they are drafted by the employer, can be tailored to the exact needs of the company. Thus, they are generally disfavored and strictly construed against the drafter, the company, when they do not meet legal requirements or when disputes occur between the parties involved.
Since Manitowoc did not meet the protectable-interest prerequisite, the court did not even address the remaining ones; it found for Lanning and upheld the court of appeals’ decision.
First, everyone reading this must understand 1 thing. Every state deals with restraint of trade provisions differently. Some states enforce them aggressively if they meet certain requirements. Other states allow the courts to rewrite or blue pencil offending portions to make them conform to statutory requirements. Other states consider them to be totally unenforceable from the get-go. You must know the laws of the state in which you practice when you are evaluating any contact for employment or practice transition, regardless of whether you are the buyer or the seller.
Second, assuming that they are allowed in your state, NSEs must be reasonable to be enforceable. They must address a definitive protectable interest such as Senior selling you his practice because he is retiring; then you learn a few months later that he hates retirement and wants to reopen across the street. The restrictions must be reasonable in terms of geography and the length of time they are to be in force. Geographically, what is reasonable in Smallville will often not be considered reasonable in Metropolis. Temporally, at least as far as orthodontics is concerned, restrictions may vary slightly from place to place, but 2 to 3 years is often not considered unreasonable. It cannot be punitive or harsh against the party to whom it is to be enforced. Outrageous liquidated damages provisions will often reflect this concern. Finally, it cannot be adverse to public policy concerns or considerations. Limiting access to orthodontic care because of the prohibition could be an example of this.
Over the last decade or so, those following changes in the legal environment have noticed that states are increasingly deciding that restrictive covenants and restraints on trade are becoming more and more disfavored by the courts. This leads me to the point that if you are in a practice-transition situation, regardless of whether you are the seller or the buyer, you would be best served by ensuring that legal counsel has scrutinized the terms of your contract closely, particularly regarding any clauses or covenants of this type.
Remember the old adage: he who is his own lawyer has a fool for a client.