Avoiding 103.465

Posted by Attorney Roger L. Pettit in Employer-Employee Relationship, Business Management / Comments

July 13, 2011 marked the one (1) year anniversary of a Wisconsin Court of Appeals’ decision that adds a twist to the development of the law interpreting restrictive covenants for employees. In the case of Selmer Company v. Rinn, the Court of Appeals upheld an injunction and other damages against a former employee who violated his agreement not to solicit the company’s customers and to refrain from disclosing its confidential information.

The decision is not important for the result, as the employee clearly violated the restrictions and compounded his error by ignoring the preliminary injunction resulting in sanctions which dismissed his counterclaim for back wages. The importance of the decision is that the restrictive covenants that were enforced in this case were not restrictive covenants agreed to by the employee as a condition of his employment.  The restrictions were based upon his decision to purchase shares of company stock at reduced value.  Had Rinn decided not to purchase the stock, the restrictive covenants would not have applied, and his employment would not have been affected by the refusal.

The court decided that because the restrictions were not tied to Rinn’s continued employment, the agreement’s restrictive covenant is not subject to the exacting scrutiny demanded by Wisconsin Statute §103.465, but must instead be evaluated according to the common law rule of reason.

Before the Selmer case, the only exception to the strict analysis of restrictive covenants under Wisconsin §103.465 was if the restrictive covenants were incidental to the sale of a business.  This case expands that rationale by allowing employers to impose restrictive covenants in return for a benefit that does not affect the employees continued employment, such as an enhanced benefit package, or as a condition of accepting a severance package upon termination of employment.