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The Wisconsin Supreme Court recently issued a decision holding that continued employment is adequate consideration for restrictive covenants. The state’s highest court held that an employer’s forbearance of its right to terminate an at-will employment relationship can support a restrictive covenant.
David Friedlen had worked for Runzheimer International, Ltd. for more than 15 years when Runzheimer asked all of its employees, including Friedlen, to sign restrictive covenants. Friedlen signed the restrictive covenant and continued to work for Runzheimer for more than two years before he was discharged. After being discharged, Friedlen began to work for one of Runzheimer's competitors.
Runzheimer sued both Friedlen and its competitor, alleging that Friedlen's new employment breached the terms of their restrictive covenant. Friedlen moved for summary judgment, arguing that the covenant was unenforceable because it lacked consideration. A Milwaukee County circuit court held that Runzheimer's promise not to fire Friedlen if he signed the restrictive covenant was an illusory promise and did not constitute consideration to support the agreement because Runzheimer had the “unfettered right” to discharge Friedlen, even seconds after Friedlen signed the agreement.
Runzheimer appealed, and the Wisconsin Court of Appeals certified the case to the Wisconsin Supreme Court because Wisconsin law failed to adequately address the issue of whether an employer's forbearance of its right to terminate the employment of an existing at-will employee in exchange for the employee agreeing to a restrictive covenant constitutes adequate consideration.
On April 30, 2015, the Wisconsin Supreme Court held that “an employer's forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” The court added that although an employer could theoretically terminate an employee's employment shortly after having the employee sign a restrictive covenant, the employee in those circumstances would be protected by other contract formation principles, such as fraudulent inducement or good faith and fair dealing, so that the restrictive covenant could not be enforced.
Runzheimer International Ltd. v. Friedlen, Wis., No. 2013AP1392 (April 30, 2015).
Professional Pointer: This decision has clarified Wisconsin law on what constitutes sufficient consideration for a restrictive covenant. The Wisconsin legislature is considering a new bill that is expected to replace the current statute that governs restrictive covenants in employment. That new law, which will apply to agreements entered into, modified, or extended after the law becomes effective, includes a provision that addresses what constitutes adequate consideration at different times in the employment relationship.
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