Thursday, October 8, 2009
Supreme Court of Wisconsin Rules on Several Important Restrictive Covenant Issues (Star Direct v. Dal Pra)
Wisconsin has long been known as an employee-friendly state when it comes to interpreting non-compete agreements. One of the primary reasons involved a previous construction of that state's governing statute, which leaned heavily against enforcement of any part of a non-compete clause if even one part was deemed unreasonable or overbroad. Without the ability to sever part of a non-compete covenant, employers often lost the balance of their case because of the strict rule on divisibility.
That will now change, given the Supreme Court of Wisconsin's decision in Star Direct v. Dal Pra. The case arose out of dispute between Star Direct, a seller of novelties and sundries to gas stations and convenience stores, and one of its former route salesmen, Eugene Dal Pra. As is often the case, Dal Pra began looking for other employment opportunities when his former employer was sold. In this case, Star Direct took over the business from CB Distributors. Eventually, Dal Pra went off and started his own business, exploiting many relationships he had developed as a CB Distributors (and later Star Direct) employee.
Dal Pra won in the circuit court, successfully challenging three separate restrictive covenants - an industry non-compete extending 50 miles from Rockford, Illinois; a customer non-solicitation clause; and a confidentiality clause. The court of appeals affirmed. In the Supreme Court, Dal Pra did not achieve the same success.
The Court concluded the industry-wide non-compete was invalid, but upheld the other two covenants. Most interestingly, the Court discussed the overbreadth of the non-compete clause, as well as Wisconsin's severability rule.
First, the Court found that the non-compete was too broad since it prohibited Dal Pra from engaging in any business "which is substantially similar to or in competition with the business of the Employer." The phrase "substantially similar to" ultimately invalidated the provision. The Court held that, by definition, the clause extended to businesses not in competition with Star Direct, because to hold otherwise would virtually ignore the terms "substantially similar to." The only logical interpretation was that Star Direct intended the capture more than just competitors, and a clause this broad served no protectable interest. Because of Wisconsin's statutory prohibition, the Court could not blue-pencil or strike the offending words, and the entire clause was invalid as an overbroad restraint of trade.
The second issue is related to this last point. Previous cases sanctioned a broad interpretation of Wisconsin's statute and suggested that contract provisions were indivisible if they governed similar types of activities. In practice, this would mean that a customer non-solicitation clause in another paragraph often would fall if the industry non-compete were held invalid. Additionally, confidentiality agreements met a similar fate, despite the fact they are not true restraints of trade. The end result is that employers who ended up drafting an enforceable agreement in all but one respect lost the entire benefit of the bargain.
The Court has now changed that rule. The contract in Dal Pra contained separate paragraphs governing the non-compete, non-solicit and non-disclosure clauses. They were not textually linked in any way and could operate independently of one another. So for instance, if the non-compete were simply taken out entirely, the non-solicit could stand on its own without any cross-reference or dependence on the non-compete clause. In view of this, the Court found the otherwise valid confidentiality and customer non-solicitation covenants could stand.
For practitioners in Wisconsin, covenants should be separately labeled and contained in different paragraphs. Defined terms, such as "Competing Business" or "Restricted Territory", should be in their own contract section and not contained in the same paragraph as any restrictive covenant. Failure to separate these terms out could jeopardize otherwise enforceable restrictions.
The decision in Dal Pra, at least pertaining to severability, injects some common sense into Wisconsin law. Business attorneys can at least draft agreements with some modicum of confidence that they will be upheld and not struck down on a technicality.
Court: Supreme Court of Wisconsin
Opinion Date: 7/14/09
Cite: Star Direct, Inc. v. Dal Pra, 767 N.W.2d 898 (Wis. 2009)