- Wisconsin Court Refuses to Enforce Non-Competition and Non-Solicitation Covenants That Included Provisions Extending Restrictions in the Event of a Breach
- April 16, 2008
- Law Firm: Winston & Strawn LLP - Chicago Office
In H & R Block E. Ents. Inc. v. Swenson, 745 N.W.2d 421 (Wis. Ct. App. 2007), the Wisconsin Court of Appeals held that two-year non-competition and non-solicitation covenants entered into by employees of H & R Block Eastern Enterprises Inc. ("H & R Block") were unenforceable because they provided they would be "extended by any period(s) of violation." The defendants were six former employees of H & R Block who left to start a new competing business. H & R Block brought suit, alleging that the former employees were breaching the restrictive covenants in their employment agreements. The trial court granted summary judgment in favor of the former employees.
On appeal, the Wisconsin Court of Appeals acknowledged that H & R Block had a clear interest in protecting its customer goodwill after the employees' departure, and further assumed that the two-year duration was reasonable. The Court took issue with the extension of the two-year period by "any period(s) of violation." H & R Block contended that the provisions were reasonable because "the effect is to restrain the former employees for a total of only two years, and if two years is reasonable, then the extension for a violation to make up a total of two years is reasonable as well," as "a one-day violation leads to a one-day extension, a one-week violation to a one-week extension" The Court rejected H & R Block's argument on several grounds.
The Court first stated this provision did not clearly define to employees how the provisions would operate. The Court used several rhetorical questions to illustrate its point: "What constitutes a one-day violation? Is it any day in which there is any contact with a company client for whom one of the listed services is being provided? Does the violation then extend until the service is completed for that client? If there are contacts with different company clients on one day for the purposes of providing the listed services, does that count as a one- day violation, the same as if there were contact with only one company client in a day?" Because the contract did not answer these questions, the Court found the employee could not tell how long an extension would be for conduct in violation of these provisions.
The Court then held that there could be legitimate disputes between a former employee and H&R Block over whether particular conduct violated the clauses, and an employee would not have the answer to such a dispute until resolved by a court. As such, the effect of the extension provision was to make the duration of the restraint not a fixed and definite period, but rather a time period contingent upon outcomes the employee could not predict.
The Court rejected H & R Block's argument that other courts have extended time periods in restrictive covenants as an equitable remedy. The Court distinguished the issue of "whether the length of a time period in a restrictive covenant is reasonable" from the issue of "whether an extension of the time period is necessary to provide a remedy to the employer after a breach has been determined." The latter would be a matter of the Court's discretion.
TIP: Employers are advised to carefully review covenants that provide for extensions in the event of a breach in order to prevent such extensions from invalidating otherwise valid restrictions.