By: Stephen D. R. Taylor
Kohner, Mann & Kailas, S.C.
The Wisconsin Supreme Court recently issued a significant ruling that expands the scope of interests an employer may reasonably protect and argues for reevaluating the format and scope of existing and future non-compete agreements.
Star Direct v. Dal Pra involved a route salesperson for Star Direct who left the company to found his own venture. Serving the same geographic area, although not offering directly competing products, some of Dal Pras sales were to current or recent former customers of Star Direct (although not customers with whom Dal Pra had had personal contact). Del Pras contract of employment contained three distinct and separate restrictive clauses.
The Court explicitly confirmed that an employer can have sufficient interest in preventing solicitation of former customers that had ceased to buy from it within the last year of employment. Even if Del Pra had never had contact with them during his employment with Star Direct, the Court reasoned that his general knowledge of prices, marketing techniques, margins and other confidential information would provide him with the intelligence needed to undercut his former employer in a way no ordinary competitor could.
In Star Direct, the Court held that a business cannot seek to prohibit non-competitive activity which is not materially harmful to a former employers business interests. Thus, it struck down a clause that prohibited "engaging in substantially similar business." The governing statute holds that if an unreasonable restraint is found the entire covenant not to compete is void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint. Wis. Stat. 103.465. The consensus interpretation of that language had long been that employment agreements represent a single covenant, comprised of clauses. Thus, if any unreasonable restraint is found, the whole agreement would be void and incapable of legal enforcement.
However, the Star Direct Court deemed covenant to refer not to the agreement as a whole, but to each separate clause. Thus, it concluded, the prohibition on "engaging in substantially similar business" could be voided while leaving all other prohibitions enforceable, if the agreement was appropriately drafted.
Given the widespread former consensus that one void clause would undermine enforceability of the whole agreement, many current non-compete arrangements may not be worded properly. The author of the agreement had no reason to draft in a fashion that ensured that individual clauses could be severed. Therefore, all restrictive employee agreements should be reviewed to see if they are effective post Star Direct. In addition to form and structure, employers with an interest in protecting against solicitation of recent former clients will wish to consider inserting such clauses. Moreover, the decision may impact other aspects of the wider agreement, such as optimal choice of law.