Wednesday, May 27, 2015

Wisconsin Court of Appeals Holds Promise of Continued Employment Constitutes Consideration in Restrictive Covenant

In a landmark case out of the Wisconsin Court of Appeals, the Court finally addressed the issue of whether an employer's forebearance of its right to terminate an existing at-will employee in exchange for the employee agreeing to a restrictive covenant constitutes lawful consideration.  The Court held that it does constitute lawful consideration for signing a restrictive covenant and further held, in addressing the circuit court's opinion that the employer's promise not to fire the employee immediately if he signed the restrictive covenant was an illusory promise and did not constitute consideration, that an employee would be protected by other contract formation principles such as fraudulent inducement or good faith and fair dealing.

The plaintiff in the case, David Friedlen, had been an employee of Runzheimer International Limited since 1993, as an at-will employee, but in 2009, Runzheimer required all its employees to sign restrictive covenants, preventing them from working for competitors for two years after employment with Runzheimer ended  (the Court of Appeals discussed the difference between covenants signed by current employees and covenants presented to new hires).  Friedlen signed the agreement, but was fired two years later.  Friedlen then consulted with an attorney on the enforceability of the restrictive covenant and was advised that it was unenforceable for lack of consideration and so Friedlen took a job with a competitor of Runzheimer which prompted them to file suit against both Friedlen and his new employer.  A Milwaukee County Circuit Court Judge held that the restrictive covenant's promise of continued employment was not lawful consideration and held the restrictive covenant as unenforceable.  Runzheimer then appealed.

In arriving at this conclusion, the Court noted that jurisdictions throughout the country are split o whether forebearance of the right to terminate an at-will employee is lawful consideration for an employee's promise to forego certain rights and that the jurisdictions that hold that a promise not to fire is not lawful consideration for a covenant not to compete represent the "distinct minority."  The Court also noted that the American Law Institute supports their holding.

The case was remanded back to circuit court because the record and arguments before the Court of Appeals was undeveloped on the issue of reasonableness of the covenant's terms.  Justice Shirley Abrahamson wrote a concurring opinion where she points out that the majority's holding is "ambiguous and troublesome."  After all, the Court held a promise of continued employment constitutes consideration but completely fails to address exactly how much continued employment is reasonable.  That is, what if an employee is fired one month later?  6 months later?  1 year later?  When might the principles of fraudulent inducement or good faith and fair dealing arise? 

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