June 30, 2015

A. Summary of the Significance of this Case: Star Direct reflects a fundamental  shift in the approach taken by the Wisconsin Supreme Court in assessing the reasonableness and enforceability of restrictive covenants in employment. In the process of commenting on certain unsettled issues, the Court exhibited a greater willingness to view such agreements as enforceable rather than has historically been shown in its prior decisions and the decisions of Wisconsin’s lower courts.

B. Factual Background: Star Direct distributes various novelties and sundries to  convenience stores, service stations, truck stops and travel centers. Eugene Dal Pra was employed as one of the company’s route salespersons, a position that the Court deemed central to the company’s “business model.” His employment was conditioned upon his acceptance of an agreement that contained three separate restrictive covenants that limited his competition for 24 months following the termination of his employment: (i) a “customer clause,” which restricted his solicitation of, and competition for, current and recent past customers of the company for whom he had performed services, with whom he had dealt, or about whom he had obtained special knowledge over the course of his employment; (ii) a “business clause,” which prohibited Dal Pra’s engagement in “substantially similar or competitive” businesses within his prior assigned sales territory; and (iii) a “confidentiality clause,” which restricted the use or disclosure of “all information or knowledge, disclosed or otherwise obtained by him during his employment . . . .” The “customer” and “business” clauses contained, in pertinent part, the following language:

Customer Clause
…Employee shall not interfere with, or endeavor to entice
away from Employer any person, firm, corporation,
partnership or entity of any kind whatsoever which is a
customer of Employer CB Distributors or which was a
customer of Employer or CB Distributors within a period
of time of one year prior to the termination of Employee’s
employment with Employer, for which Employee
performed services or otherwise dealt with on behalf of
Employer or relative to which Employee obtained special
knowledge as a result of his position with Employer; and
Employee shall not approach any such customer or past
customer for any such purpose or knowingly cooperate
with the taking of any such action by any other person,
firm, corporation, or entity of any kind.”
Business Clause
…Employee shall not, directly or indirectly… become
engaged in any business which is substantially similar to or
in competition with the business of the Employer, within a
fifty (50) mile radius of Rockford, Illinois.

After approximately four years of employment with Star Direct, Dal Pra quit his job  and established his own distribution company. This business competed with Star Direct (selling the same sort of articles to the same sort of customers, and, in some cases, to the same customers) in a manner that violated both the “business clause” and “customer clause.” Star Direct sued Dal Pra, seeking both injunctive relief and damages. Presented with cross-motions for summary judgment, the circuit court denied the employer’s motion  and granted Dal Pra’s, concluding that each of the three restrictive covenants was unenforceable, and that each was indivisible and “inextricably entwined” from the others.

In an unpublished opinion, District IV of the Court of Appeals concluded that the “business clause” was unenforceable and that it was indivisible from the “customer clause,” which therefore rendered it unenforceable as well. The Court of Appeals did not analyze the enforceability of the “customer clause,” apart from, what it deemed to be, its fatal and indivisible link to the “business clause,” nor did it analyze the enforceability of the
“confidentiality clause” or its indivisibility from the other restrictive covenants.

C. Supreme Court’s Holding: The Supreme Court reversed the Court of Appeals, in part, and remanded the case to the circuit court for further proceedings. The five-Justice majority, in an opinion authored by Justice Gableman, rejected all challenges to the enforceability of the “customer” and “confidentiality” clauses. The Court agreed that the “business” clause was unreasonably overbroad and unenforceable because it barred
engaging in non-competitive, as well as competitive enterprises. However, the Court found the business clause divisible from the other two, and therefore, the unreasonableness of the business clause had no effect on the enforceability of the customer or confidentiality clauses. Accordingly, it remanded the case to the circuit court for further proceedings. Justice Bradley, joined by Justice Abrahamson, authored an opinion which agreed
with the majority’s conclusion that the business clause was not reasonably necessary to protect Star Direct, and therefore, unenforceable. They disagreed with the majority’s conclusion that the customer clause was reasonable as applied to past customers, including those never serviced by Dal Pra. Both accused the majority of judicial activism and lack of judicial restraint in its reliance on “silent precedent” - - “the new interpretive tool created today by the majority that silence on an issue signals approval…” - - to support its analysis of the customer clause. 2009 WI 76 at ¶ 85 (In justifying its conclusion about the permissibility of restricting competition respecting recent past customers, the majority relied on decisions that had upheld the enforceability of customer non-solicitation provisions which the majority stressed could have included past customers. None of the decisions, however, directly analyzed the issue. Id. at ¶¶ 33-36). Justice Abrahamson also wrote her own dissent, which stressed her view that the majority’s overall approach was inconsistent with the legislative history and public policy underlying § 103.465.

D. Lessons from Star Direct:

1. Recognized for the first time that employers may have a protectable interest in restricting former employees from competing for “recent” past
customers. ¶¶ 32, 38-41.
2. Ruled that restrictions against solicitation of current customers who have had no contact, let alone recent contact, with the former employee may be enforceable. ¶¶ 45-8.

3. Consideration.
a. Enforced a restrictive covenant that had not been required of all similarly situated employees. ¶¶ 49-51.
b. Is continued employment sufficient consideration? “[E]mployers may not compel their existing employees to sign restrictive covenants without additional consideration.” ¶ 50 (citing, NBZ, Inc. v. Pilarski, 185 Wis. 2d 827 at 837-39, 520 N.W.2d 93 (Ct. App. 1994). i. Does NBZ, Inc. stand for the proposition for which it is cited in Dal Pra? ii. Runzheimer International, Ltd. v. Friedlen, 2013AP1392 (April 15, 2014) (Certified for Supreme Court review on the issue of what additional consideration is required in a restrictive covenant agreement in the context of an at-will relationship.)
4. Concluded that the unenforceability of a restrictive covenant will have no effect on the enforceability of otherwise enforceable restrictive covenants where those restrictions are divisible. ¶¶ 74, 76.
5. Attempted to articulate a test for determining the divisibility of restrictive covenants - - one that expressly repudiated the notion that the similarity of the restrictions’ subject matter - - was the proper focus in resolving this issue. ¶¶ 3, 78, n. 12.