Vol. 75, No. 2, February 2002

Wisconsin Courts Struggle with Geography in Nonsolicitation Agreements

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Noncompete agreements expressly limit their reach to a particular geographic territory. In contrast, nonsolicitation agreements operationally limit their geographic scope by restricting competitive activities to certain customers of the employer. Wisconsin courts in Farm Credit Services of North Central Wisconsin v. Wysocki and Equity Enterprises Inc. v. Milosch have struggled with the geographic scope of nonsolicitation agreements, thus complicating the task of drafting enforceable restrictive covenant agreements.

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by Bradden C. Backer & John J. Kalter

Reasonable geographic scope has been a central requirement of valid contracts restricting the competitive activities of employees and agents under both Wisconsin's common and statutory law.¹ Some contracts, referred to in this article as "noncompete agreements," satisfy this requirement by expressly limiting their reach to a particular geographic territory. Others, denominated as "nonsolicitation agreements," operationally limit their geographic scope by restricting competitive activities to certain customers of the employer/principal.² Two recent Wisconsin court opinions - those in Farm Credit Services of North Central Wisconsin v. Wysocki³ and Equity Enterprises Inc. v. Milosch⁴ - have struggled with (indeed, have unnecessarily created) issues concerning the geographic scope of nonsolicitation agreements. Regrettably, these decisions have complicated the already daunting task of those who seek to draft enforceable restrictive covenant agreements in Wisconsin.

Wisconsin courts have been enthusiastic in their acceptance of nonsolicitation agreements, praising them as superior to noncompete agreements.⁵ Noncompete restrictions may foreclose competitive activity with entities and individuals that are not customers with whom the employee has had contact and about whom the employee obtained no confidential information. Indeed, noncompete restrictions frequently foreclose competition with entities and individuals located in the proscribed territory that have no business relationship with the employer. Nonsolicitation agreements, in contrast, focus solely on a business's or employee's actual customers; they are necessarily more narrowly focused and less burdensome to the employee because they usually are coterminous with the business interest meriting protection.

Customers That Can Be Made "Off Limits"

Historically, Wisconsin courts' principal comments concerning nonsolicitation agreements have addressed the reasonableness of the universe of customers included within the restriction. In Chuckwagon Catering Inc. v. Raduege,⁶ the nonsolicitation agreement prohibited a lessee of lunch routes from catering to customers on the leased lunch route for one year after termination of the lease. The court concluded that such a restrictive covenant was enforceable under Wis. Stat. section  103.465 as to both duration and territory. According to the court, the covenant reasonably protected the lessor's customer contacts by prohibiting the lunch route lessee from soliciting its former customers until the lessor's new route drivers could establish a relationship with those customers.

Bradden C. Backer, U.W. 1981, is a shareholder of Godfrey & Kahn S.C., Milwaukee, and provides counsel to management in employment and labor matters. He is coauthor of the State Bar's three-volume Wisconsin Employment Law treatise and Hiring and Firing in Wisconsin. John J. Kalter, Minnesota 1994, is an associate of Godfrey & Kahn S.C. and counsels management in employment and labor matters.

In Rollins Burdick Hunter of Wisconsin Inc. v. Hamilton,⁷ the agreement at issue restricted an insurance agent from "solicit[ing], contact[ing] or otherwise do[ing] any competitive business with any ... customer or client" of the employer.⁸ The Wisconsin Supreme Court rejected the court of appeals' conclusion that a restriction on competitive contact with customers with whom the employees had had no contact was per se unreasonable. "[A] flat rule invalidating all restrictive covenants whose scope exceeded a former employee's actual customer contact ... offends the notion that the validity of a restrictive covenant is to be established by examination of the particular circumstances which surround it."⁹

Remanding the case for an evidentiary hearing, the Hamilton court provided guidance for determining which customers could properly be insulated from post-employment competition in Wisconsin:

"In many instances involving route salesmen or other nonmanagement employees, the scope of actual customer contact may serve as a guide to what scope of restriction is reasonable. But the customer contact notion takes on a new dimension where the person involved is a high-level management employee who is apt to have access to confidential business information. Thus, we do not believe the determination of whether a restraint of this type is reasonably necessary for the protection of an employer can be intelligently made without a consideration of the nature and character of such information, including the extent to which it is vital to the employer's ability to conduct its business, the extent to which the employee actually had access to such information, and the extent to which such information could be obtained through other sources."¹⁰

The Wysocki and Equity Enterprises cases involved a different challenge to nonsolicitation agreements. In both cases, the courts entertained challenges to such restrictions based on their geographic scope, rather than the customers included within the restriction. Challenges to geographic scope had not previously been addressed in the context of nonsolicitation agreements, perhaps with good reason.

Vol. 75, No. 2, February 2002

Wysocki and the Geography of Employee Activities

Wysocki addressed the validity of a post-employment nonsolicitation provision that prohibited the employee from engaging in certain enumerated competitive activities "with the person(s) [sic] the Employee consulted or serviced in performance of his/her consultant duties at any time during the one year immediately prior to the date of separation." After Wysocki executed this agreement, the bank for which he worked underwent several corporate mergers. Those mergers expanded the territory of the bank's business activities into six additional counties. In the circuit court, Wysocki challenged the enforceability of this restriction by successfully arguing that "the geographic component of the covenant [had] been unilaterally doubled"¹¹ due to the expansion of the bank's territory through the mergers. As a result of this "unilateral" change, the circuit court and court of appeals concluded that the restriction was unenforceable.

In a somewhat opaque opinion, the Wisconsin Supreme Court reversed the court of appeals' decision and remanded the case for evidentiary findings as to the reasonableness of the restriction.¹² Noting that the restriction was customer-based and contained no "mention of any geographical territory," the court rejected the contention that the restriction had somehow been unilaterally enlarged.¹³ The Wisconsin Supreme Court suggested what should have been obvious - that the mergers that resulted in the expansion of the employer's business activities did not change the nature or scope of the restriction, which was, at all times, limited to those customers with whom the employee had had contact during the year preceding separation.

The court, however, failed to offer a more fundamental and helpful observation - that discussions of territorial scope are generally irrelevant in assessing the reasonableness of a nonsolicitation agreement. All nonsolicitation agreements contain an implicit limit to their geographic scope. The customers subject to a nonsolicitation restriction conduct business with the employer within a defined, albeit changing, territory. The absence of an explicit territorial limitation, accordingly, does not leave the nonsolicitation agreement with an unlimited geographic scope.

Geography and Equity Enterprises

Equity Enterprises¹⁴ offered an even more stark example of a court proceeding down the dead-end of territorial analysis in addressing the enforceability of a nonsolicitation provision. The restrictive covenant in Equity Enterprises prohibited the employee from competing with respect to certain customers during employment and for 18 months thereafter.¹⁵ Anticipating the issue addressed in Hamilton, the contract's drafters limited its nonsolicitation restrictions to customers with whom the employee had had contact on behalf of the employer.¹⁶ Unlike the restriction in Wysocki, however, the customers included within the restriction were not limited to those with which the employee had had contact during a stated period prior to separation.

The text of the court of appeals' decision identified two defects that, in its view, made the customer nonsolicitation provision per se unreasonable. First, the court faulted the provisions for the absence of a specified territorial limit: "without any specified territory, section 5.1 is void.... [T]herefore, because section 5.1 does not contain any geographical restrictions, section 5.1 fails and the jury finding that it was reasonable is an error of law."¹⁷

This rationale appears to overlook well-settled precedent rejecting a requirement that the limitation on the geographic scope of a restrictive covenant be expressed in geographic terms. In Hamilton, the Wisconsin Supreme Court observed that "[t]he respondents argue that an express geographic limitation is required by the terms of sec. 103.465, stats. ...[W]e hold that the territorial limitation of a restrictive covenant need not be expressed in geographic terms as an absolute prerequisite to a valid and enforceable agreement."¹⁸

The Hamilton court's rejection of a requirement for an express territorial limitation in a nonsolicitation provision is sensible. Contracts that restrict former employees from doing competitive business with certain customers contain a territorial limitation notwithstanding the absence of explicit geographic language. Given the inherently narrower scope of nonsolicitation agreements, it is not surprising that Wisconsin courts have embraced them as an alternative to noncompete agreements that restrict activity in a specified geographic area. Indeed, many state courts have concluded that restricting competition with respect to enumerated customers or clients can satisfy the requirement that such agreements have reasonable geographic scope.¹⁹

Perhaps inconsistently, the court of appeals also faulted the restriction for containing an unreasonably expansive implicit territorial limitation of the type that had been deemed unreasonable, according to the court, in Streiff v. American Family Mut. Ins. Co.²⁰: "Section 5.1 is silent as to what territorial parameters Milosch must abide by, thereby implying at the least a nationwide restriction.... Like the unenforceable covenant in section 5i(4) of Streiff, the implication in section 5.1 is that Equitable means to restrict its terminated agents from employment opportunities in the insurance and securities industry throughout this country."²¹

This alternative explanation for invalidating the nonsolicitation agreement also is troubling. The Streiff restriction was a noncompete provision expressed in geographic terms. In analogizing the two provisions, the Equity Enterprises court again failed to recognize the distinction between a noncompete and nonsolicitation restriction. The Equity Enterprises provision was a nonsolicitation covenant prohibiting competitive activities only with customers with which Milosch "transacted business" or which he "serviced" on behalf of [Equitable] during his employment with Equitable.

Time Limits and the Universe of Restricted Customers

In a footnote, the court of appeals in Equity Enterprises identified a third defect in the nonsolicitation agreement:

"[T]he 'customer list' restriction in this case is far from being narrowly tailored. In Wysocki, the restriction prohibited Wysocki from contacting any client he had serviced in the year prior to his date of separation. ...In contrast, the 'customer list' restriction in this case prohibits Milosch from doing business with any customer of Equitable who Milosch serviced at any time during his employment with Equitable. This restriction is unreasonable because it would prohibit Milosch from doing business with a customer he serviced during the first weeks of employment in 1982 who subsequently transferred his/her business to a competitor of Equitable. Such an over-broad restriction is invalid because preventing Milosch from contacting former Equitable customers is not reasonably necessary to protect Equitable's legitimate business interests."²²

If factually correct, this appears a more compelling basis for invalidating the Equity Enterprises nonsolicitation agreement. It is likely that the universe of customers foreclosed from competition would include businesses with whom Milosch had attenuated contact and about which he had little knowledge. Resolution of that issue, however, likely would require an evidentiary inquiry. In any event, if Wisconsin courts heed the Hamilton court's caution against per se rules in the restrictive covenant context, they will hesitate to create a per se rule invalidating all nonsolicitation agreements that lack a time-limited look-back feature that limits the universe of restricted customers.

The Need for a New Direction

The court of appeals' decisions in Equity Enterprises and Wysocki both mechanically and unnecessarily interjected geography into their appraisal of nonsolicitation agreements. The supreme court in Wysocki redirected drafters, suggesting that the expanding scope of an employer's business activities is not relevant in assessing the enforceability of such agreements. The analytical "dead end" of Equity Enterprises, however, remains unaddressed.

As a general matter, the absence of an explicit geographic limit usually should not be fatal to nonsolicitation agreements.²³ And, under no circumstances, should the absence of such language automatically result in the unenforceability of the restriction.

A strong argument also exists for a reexamination of the territorial limitation requirement of Wis. Stat. section 103.465 in the context of restrictive covenant agreements generally. The impact of technology, which permits competition wherever a former employee is located, has not yet been considered by Wisconsin courts. With the aid of modern communication equipment, a former employee now may be able to use confidential information and customer relationships to aggressively compete against a prior employer from anywhere in the world. Under these circumstances, a rigid, mechanical application of the territorial limit requirement may effectively deprive employers of any ability to protect their business relationships and information. Of course, the interests of the public and of former employees in free competition must be weighed against these employer interests. In the troubled legal waters surrounding restrictive covenants, however, the absence of such critical analysis will continue to leave employers "lost at sea."

Endnotes

1 See, e.g., Eureka Laundry v. Long, 146 Wis. 205, 208, 131 N.W. 412, 413 (1911); Holsen v. Marshall & Ilsley Bank, 52 Wis. 2d 281, 287-88, 190 N.W.2d 189, 192-93 (1971); Wis. Stat. § 103.465. Read literally, section 103.465 does not require any geographic limitation, but only applies to covenants that contain one. Courts, however, have not so limited its application.

2 Although Wis. Stat. section 103.465 applies to restrictive covenants in both the employer-employee and principal-agent context, for convenience we refer exclusively to the former.

3 Farm Credit Servs. of N. Cent. Wis. v. Wysocki, 2001 WI 51, 243 Wis. 2d 305, 627 N.W.2d  444.

4 Equity Enters. Inc. v. Milosch, 2001 WI App 186, 633 N.W.2d 662 (Ct. App. 2001).

5 See, e.g., Rollins Burdick Hunter of Wis. Inc. v. Hamilton, 101 Wis. 2d 460, 465-66, 304 N.W.2d 752, 755 (1981) ("In a proper case the preferability of a restraint expressed in terms of particular customers or particular activities over one expressed in geographic terms is evident.... The limitation expressed in terms of particular clients or customers more closely approximates the area of the employer's competitive opportunities to which he is entitled.")

6 Chuckwagon Catering v. Raduege, 88 Wis. 2d 740, 277 N.W.2d 787 (1979).

7 Rollins Burdick Hunter, 101 Wis. 2d 460, 304 N.W.2d 752 (1981).

8 Id. at 462, 304 N.W.2d at 753.

9 Id. at 468, 304 N.W.2d at 756.

10 Id. at 469, 304 N.W.2d at 756-57 (citations omitted). The court also stressed that the impact of the restraint on the employee's "ability to pursue a livelihood in that enterprise" was a factor to be considered. Id.

11 2001 WI 51 at ¶ 16.

12 Id. The court suggested that the inquiry could focus on the effect of the restriction on the employee's ability to pursue his livelihood and whether the restriction was "reasonably necessary for the protection of [the employer's] legitimate business interests."

13 Id. at ¶ 15.

14 Equity Enters. Inc. v. Milosch, 2001 WI App 186, 633 N.W.2d 662 (Ct. App. 2001).

15 Id. at ¶ 2.

16 Id.

17 Id. at ¶ 15.

18 101 Wis. 2d 460, 466-67, 304 N.W.2d at 755.

19 See, e.g., Weiss & Assocs. Inc. v. Wiederlight, 546 A.2d 216, 220 (Conn. 1988); Frontier Corp. v. Telco Communications Group Inc., 965 F. Supp. 1200, 1208 (S.D. Ind. 1997) (applying Michigan law); Platinum Management Inc. v. Dahms, 666 A.2d 1028, 1040 (N.J. Super. Ct. Law Div. 1995); Ecolab Inc. v. South Nassau Control Corp., 753 F. Supp. 1100, 1111 (E.D.N.Y. 1991) (applying New York law); American Express Financial Advisors Inc. v. Scott, 955 F. Supp. 688, 692-93 (N.D. Tex. 1996) (applying Texas law); Knight, Vale & Gregory v. McDaniel, 680 P.2d 448, 452 (Wash. Ct. App. 1984); but see Joseph U. Moore Inc. v. Howard, 534 So. 2d 935, 936 (Fla. Dist. Ct. App. 1986).

20 Streiff v. American Family Mut. Ins. Co., 118 Wis. 2d 602, 348 N.W.2d 505 (1984).

21 Equity Enters. Inc., 2001 WI App 186 at ¶ 15.

22 Id. at footnote 4. The court, however, suggested that its decision did not turn on this concern: "[N]either party has discussed the 'customer list' restriction contained in section 5.1; we usually decline to sua sponte consider an issue not raised on appeal or in the trial court." The court's comment is puzzling. The Equity Enterprises restrictive covenant is nothing but a "'customer list' restriction," and resolution of the enforceability of this provision was the central and unavoidable issue presented to the Equity Enterprises court.

23 One might argue that the absence of such a limitation would be significant where an employer had a nationwide business with customers who also were engaged in business throughout a large area. Under such circumstances, a salesperson could have a relationship with certain customer employees, but be foreclosed by a nonsolicitation agreement from seeking the business of the customer by contacting (in a new territory) individuals with whom she or he had had no prior contact. Under such limited circumstances, the territorial scope of a nonsolicitation agreement might be deemed too expansive to reasonably protect an employer's legitimate interests, although the resolution of that issue certainly would require an individualized assessment of the facts.

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