Continued Employment is Lawful Consideration For a Restrictive Covenant (Wisconsin)

Runzheimer International, Ltd. v. David Friedlen and Corporate Reimbursement Services, Inc. - Wisconsin Supreme Court

Facts:  David Friedlen ("Friedlen") had been an employee of Runzheimer International ("Runzheimer") since 1993 as an at will employee.  However, in 2009, Runzheimer required all employees to sign a restrictive covenant that would prevent the employees form working for competitors for two years after employment with Runzheimer ended.  Friedlen signed the agreement but was subsequently fired two years later.  

After consulting with an attorney and being advised the the covenant was unenforceable, Friedlen went to work for a competitor of Runzheimer.  Runzheimer subsequently filed suit against Friedlen and his new employer.  The Milwaukee County Circuit Court Judge who initially heard the matter ruled that the covenant's promise of continued employment was not lawful consideration and therefore ruled that the covenant was unenforceable. 

Holding:  Initially, the Court noted that jurisdictions across the country are split on whether forbearance of the right to terminate an at will employee amounts to lawful consideration.  In a nod to which way it would lean, the Court established that jurisdictions that hold a promise not to fire is not lawful consideration represent a "distinct minority."  On the other hand, with jurisdictions that hold a promise not to fire is lawful consideration, the Court pointed out that those employees are obtaining the expectation of continued employment, which is not illusory. 

When looking at Wisconsin caselaw, it is important to note that it has been established that "forbearance in exercising a legal right is valid consideration...".   As well, a contract will be held to be illusory when it is "conditional on some fact or event that is wholly under the promisor's control and his bringing it about is left wholly to his own will and discretion...".  

In this case, the Court noted that Runzheimer promised not to exercise its right to end the employment relationship with Friedlen at that time in exchange for Friedlen signing the restrictive covenant.  As a result, Runzheimer's forbearance of the right to terminate the at will employment of Friedlen constituted valid consideration and was not illusory as a result of Runzheimer's forebearance of its right at that time...rather than in the future.

Judgment:  The Wisconsin Supreme Court reversed the lower court's ruling and held that an employer's forbearance in exercising its right to terminate an at will employee amounts to lawful consideration when dealing with a restrictive covenant.

The Takeaway:  This was a very interesting case to read, as I have some experience in restrictive covenants/non-competes.  I think the Court's reasoning makes sense here when you walk through it.  First, Runzheimer was giving up its right to terminate Friedlen in exchange for Friedlen signing the covenant.  On the other hand, in exchange for Runzheimer waiving this right, Friedlen agreed to a covenant restriction of two years.  As a result, there was a bargained for exchange, valid consideration, and consequently a valid restrictive covenant. 

Readers might also remember a case from Hawaii last year in which a court held that continued employment was not lawful consideration for a non-compete.   (Continued Employment Not Lawful Consideration...in Hawaii).  Interesting to see how different states/circuits view the issue.

Date:  April 30, 2015

Opinion:  https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCYQFjAB&url=https%3A%2F%2Fwww.wicourts.gov%2Fsc%2Fopinion%2FDisplayDocument.pdf%3Fcontent%3Dpdf%26seqNo%3D141078&ei=uJZoVdvRFYiUyQTy3oK4CQ&usg=AFQjCNG1OBNhiJYSpG0o_kWmn1e52EduEw&sig2=Yz9XhwRu79_Zy7DJuejCrw&bvm=bv.94455598,d.b2w&cad=rja