BENCHMARK v. ALGER, 2008 WI App 1

306 Wis.2d 851, 743 N.W.2d 166

No. 2007AP000805.Court of Appeals of Wisconsin.
November 21, 2007.

APPEAL from a judgment and an order of the circuit court for Brown County: PETER NAZE, Judge. Affirmed.

Before Higginbotham, P.J., Dykman and Vergeront, JJ.

VERGERONT, J.

¶ 1 Wisconsin Prosthetics Orthotics, Inc.[1] (WPO) seeks to enforce a noncompete provision in an employment agreement against Perry Alger, a former employee. WPO appeals the circuit court order holding the agreement void and unenforceable for noncompliance with WIS. STAT. § 103.465[2] and granting summary judgment in Alger’s favor.

¶ 2 We conclude that under Mutual ServiceCasualty Insurance Co. v. Brass, 2001 WI App. 92, 242 Wis. 2d 733, 625 N.W.2d 648, the noncompete provision is overbroad and therefore void and unenforceable. Accordingly, we affirm.

BACKGROUND ¶ 3 The relevant facts for purposes of this appeal are not disputed. WPO is in the business of producing and servicing prosthetics and orthotics and has offices in Green Bay, Sheboygan, and Menasha. Orthotics as relevant to this case are body braces prescribed by a physician. In October 1999, WPO hired Alger to work as its only orthotist in its Menasha office. An orthotist is the technician who fabricates and fits patients with the braces. As a condition of his employment with WPO, Alger signed a “Non-Competition and Non-Disclosure Agreement.”

¶ 4 In June 2006, Alger resigned his employment with WPO and began working as an orthotist with Great Lakes Orthotics and Prosthetics, located fifteen miles from WPO’s Menasha office.[3] WPO initiated this action, contending that Alger’s employment with Great Lakes Orthotics breached the noncompetition and nondisclosure agreement and seeking injunctive and monetary relief.

¶ 5 Both parties filed motions for summary judgment. WPO’s argument was limited to the noncompete provision; it did not pursue its claim that Alger breached the nondisclosure provision. WPO’s position was that the restrictions in the noncompete provision were reasonably necessary to protect its interests and were therefore valid under WIS. STAT. § 103.465, and the reasonableness of the nondisclosure provision was not material to its motion. Alger countered that both the noncompete provision and the nondisclosure provision were unreasonable and therefore both were void and unenforceable. He also argued that case law did not permit enforcement of the noncompete provision if the nondisclosure provision was unreasonable.

¶ 6 The circuit court granted Alger’s motion and dismissed the complaint. The court concluded that the noncompete and nondisclosure provisions were indivisible under Streiffv. American Family Mutual Insurance,Co., 118 Wis. 2d 602, 612, 348 N.W.2d 505 (1984), both had to be analyzed as restrictions on competition, the nondisclosure provision was unreasonable because it contained no time limit or territorial restriction, and therefore both were void and unenforceable.[4]

DISCUSSION ¶ 7 WPO contends that the circuit court erred in granting summary judgment in favor of Alger, because, even if the nondisclosure provision is unreasonable, the noncompete provision is divisible from the nondisclosure provision and is enforceable. It is enforceable, WPO asserts, because it is reasonably necessary to protect its legitimate interests in maintaining its source of referrals from its business, the time and territory restrictions are reasonable, and it is neither oppressive to Alger nor against public policy. In identifying its legitimate interests, WPO relies on the affidavit of its president who avers that the vast majority of its business comes from area physician and clinic referrals, Alger was encouraged to and did develop special relationships with the referring physicians and clinics while employed by WPO, and he was the only WPO employee who had any contact with physicians and clinics. WPO contends that WPO has a legitimate interest in protecting these referring sources from competition from Alger.

¶ 8 Alger responds that the circuit court properly concluded that both provisions are indivisible and the unreasonableness of the nondisclosure provision invalidates the noncompete provision. He also disputes that the noncompete agreement, when considered on its own, is valid.

¶ 9 We do not address the issue whether the two provisions are indivisible, because we conclude the noncompete provision is invalid on its own.[5]

¶ 10 We review a grant of summary judgment by applying the same methodology as the circuit court and our review is de novo.Pinter v. American Family Mut. Ins. Co., 2000 WI 75, ¶ 12, 236 Wis. 2d 137, 613 N.W.2d 110. When as here, there are no genuine disputes of material fact, the question is which party is entitled to judgment as a matter of law. See
WIS. STAT. § 802.08(2).

¶ 11 The issue of law presented on this appeal involves the construction and application of WIS. STAT. § 103.465, in light of existing case law, to the undisputed facts. Section § 103.465 provides:

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 subsection, 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.

¶ 12 This statute expresses a strong public policy against the enforcement of unreasonable trade restraints on employees.Tatge v. Chambers Owen, Inc., 219 Wis. 2d 99, 114-15, 579 N.W.2d 217 (1998). In order to be enforceable, contract provisions governed by this statute must: (1) be necessary to protect the employer; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive to the employee; and (5) not be contrary to public policy.

Heyde Cos., Inc. v. Dove Healthcare, LLC, 2002 WI 131, ¶ 16, 258 Wis. 2d 28, 654 N.W.2d 830 (citations omitted). In addition, the following canons of construction are applied to restrictive covenants: (1) they are prima facie suspect; (2) they must withstand close scrutiny to pass legal muster as being reasonable; (3) they will not be construed to extend beyond their proper import or further than the language of the contract absolutely requires; and (4) they are to be construed in favor of the employee. Id.

¶ 13 The noncompete provision at issue here states in relevant part:

2. Covenant not to compete. Employee agrees that during the term of this employment with the Company, he will devote substantially all of his working time and best efforts to that employment.
In addition, the Employee agrees that during the term of this employment of the Company and for a period of twelve (12) months thereafter if the Employee voluntarily terminates his employment or has his employment terminated by the Company for just cause and within a twenty-five (25) mile radius of the Company location at which the employee is principally employed, he will not directly compete with the Company by engaging in any of the following acts, which actions shall be considered violations of this Agreement.
a. Employee shall not have any interest as a partner, proprietor, owner, stockholder, principal, agent, consultant, director or officer in any enterprise in competition with the business or the Company, other than ownership of securities of a publicly held corporation of which employee owns no more than 1% of any class of outstanding class securities.
b. Employee shall not, within the geographical limitations set forth above and for the period of one (1) year, become employed in any business or undertaking which competes in any manner with that of the Company, nor will, during that period, render any services to any person, firm or corporation any information concerning the business, products, prices, customers, customer lists, or affairs of company except when and as requested to do in and about the performance of his duties under his employment.

(Emphasis added.)

¶ 14 Thus under clause (b) Alger was prohibited, for one year and within a twenty-five-mile radius of the location where he had worked, from becoming “employed in any business or undertaking which competes. . . .”[6] Because there is no limitation on the capacity in which Alger may be employed, he is restricted from any employment in a business that competes with WPO regardless of whether the new position is one in which Alger would utilize the physician and clinic contacts he developed at WPO. Alger argues that a prohibition on employment in any capacity with a competitor is broader than reasonably necessary to protect WPO’s legitimate interests in the referrals that Alger had contact with, and the noncompete is therefore overbroad under Brass.[7]

¶ 15 In Brass we considered a provision that was similar in that it prohibited an employee from being employed in any capacity, post-termination, by a particular competitor. The employee there had been employed by an insurance company as an insurance agent and the clause provided that, following termination, he would not “engage in or be licensed as an Agent . . . or in any way be connected with the property, casualty, health or life insurance business as a representative or employee of the American National Ins. Co . . . within a period of three years from the date of . . . termination. . . .”Brass, 242 Wis. 2d 733, ¶ 8. We stated that this clause

prohibits [the employee] from accepting any type of employment with American National. This indicates, for example, that [he] could not work for American National as a claims adjuster or even as a janitor. It is unreasonable for [his prior employer] to prohibit [him] from holding any position at American National. [This provision] in its overbreadth, fails. . . .

Id., ¶ 15.

¶ 16 WPO does not directly address Alger’s argument based on Brass; indeed, WPO does not discussBrass in its reply brief. It asserts in reply that

the non-compete does not seek to define its competitors as broadly as Alger suggests. WPO is merely seeking to enjoin Alger from directly competing with its legitimate business interests by creating a company which provides nearly identical services to that of WPO, serving the very same referral sources he developed through employment at WPO.

However, WPO does not explain how the language of the noncompete provision means something other than a prohibition on employment in any capacity with a competitor.

¶ 17 It appears that WPO’s position is that, despite the broad wording of the activity proscribed in clause (b), the noncompete provision is valid because Alger’s actual conduct would violate a narrower restriction that would be reasonably necessary to protect its legitimate business interests. However, that approach is similar to the court’s approach inFullerton Lumber Co. v. Torborg, 270 Wis. 133, 70 N.W.2d 585, where the court concluded that a ten-year restriction on the specified activity was unreasonable, but a shorter period would be reasonable and enforceable; the court ultimately determined that a three-year restraint was reasonable and enforceable. See also Fullerton Lumber Co.v. Torborg, 274 Wis. 478, 80 N.W.2d 461 (1957). WISCONSIN STAT. § 103.465 was passed in response to theFullerton decision and was proposed by a legislator who was critical of the decision. As the court inStreiff explained:

The legislator wanted a restraint containing overly broad and invalid provisions to be struck down in its entirety; he apparently did not want the court to give effect to an unreasonable restraint to the extent it might be reasonable. The objection to the “Torberg” [sic] practice, as the legislator noted, is that it tends to encourage employers possessing bargaining power superior to that of the employees to insist upon unreasonable and excessive restrictions, secure in the knowledge that the promise will be upheld in part, if not in full.

118 Wis. 2d at 608-09 (citation omitted).

¶ 18 The last sentence of WIS. STAT. § 103.465 plainly expresses this intent: “Any covenant, described in this subsection, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance as would be a reasonable restraint.” Thus, in deciding whether a noncompete covenant is enforceable, we do not first inquire what the employee did and whether the employer could reasonably restrict that conduct. Instead, we focus on the noncompete covenant and first determine whether it is enforceable under § 103.465. That inquiry depends upon facts such as the nature of the employer’s business and the nature of the employee’s position with the employer. For example, inBrass it was undisputed that the employee immediately upon termination began working for American National as an insurance agent and proceeded to contact the customers of its former employer, 242 Wis. 2d 733, ¶ 2; but our analysis focused on the restrictions in the contract. Id., ¶¶ 7-16. We concluded the restriction quoted in ¶ 15 supra, was overbroad because it prohibited any type of employment with American National, specifically mentioning positions other than that of agent. Id., ¶ 15. It is only after a determination that the noncompete covenant is enforceable that we examine the employee’s conduct that allegedly constituted the breach to determine if there was a breach.

¶ 19 WPO may also be arguing that the language of the noncompete did not need to be more specific because it was obvious that Alger would not be employed by any competitive business except to work as an orthotics technician as he had done at WPO. However, we rejected a similar argument inGeocaris v. Surgical Consultants, Ltd., 100 Wis. 2d 387, 302 N.W.2d 76 (Ct.App. 1981). There we concluded that a restrictive covenant prohibiting a surgeon from practicing as a physician in a specified territory for nine months following termination of his employment with a surgical practice was not reasonably necessary because it was broader than necessary to protect the surgery practice. Id. at 389. We stated:

We reject the trial court’s conclusion that the restriction was reasonable because [the employee] was not likely to practice medicine in any capacity other than a surgeon. Although this fact may render immaterial the excessive aspect of the restriction, it is not material to the issue of whether the restriction was reasonably necessary for [the employer’s] protection.

Id.

¶ 20 In summary, although the protection of referral contacts has been recognized as a legitimate interest for purposes of a restraint on competition by a an employee, the employer must establish that the restrictive covenant imposes a restraint no greater than reasonably necessary. Id.
at 388-89. Based on the undisputed facts, we conclude WPO has not established that restricting employment in any capacity with a competitor is reasonably necessary to protect its legitimate interest in its physician and clinic referral contacts for orthotics. Accordingly, we conclude the circuit court properly granted summary judgment in favor of Alger.

By the Court. — Judgment and order affirmed.

Not recommended for publication in the official reports.