Advanced Litigation Issues: Attacking and Enforcing Restrictive Covenants

ADVANCED LITIGATION ISSUES: ATTACKING AND ENFORCING RESTRICTIVE COVENANTS

Prepared and Presented by: Bradden C. Backer

The following is based on a summary of legal and human resources principles. It is not to be construed as legal advice. Individuals should consult with legal counsel before taking any action based on these principles to ensure their applicability to a given situation.

I. BACKGROUND

A. Restrictive Covenant Agreements Are Contracts Which Arise In Many Contexts.1

1. Employment.

2. Independent contractor.

3. Buyer/seller.

4. Stockholder/partnership.

5. Stock Option/ Phantom Stock arrangements.

6. Partnership arrangements where the partners function as employees.

7. Profit-sharing plan.

B. There Are Many Kinds Of Restrictive Covenant Agreements:

1. Non-Competition Agreements – limit competition during and/or after the ` employment relationship within an explicit or implicit geographic area.

a. Agreements that do not prohibit competition, but impose negative consequences should competition occur, are treated as non-compete agreements. See e.g., Holsen v. Marshall & Ilsley Bank, 52 Wis.2d281, 190 N.W. 2d 189 (1971); Mutual Ins. Cas. Co., v. Brass, 242 Wis.2d 733, 739, 625 N.W. 2d 648 (Ct. App. 2001).

2. Non-Solicitation Agreements – limit competition by restricting the activity of an employee/former employee respecting employer customers.

3. Confidentiality/ Non-Disclosure Agreements – restrict the use and disclosure of non-public information.

4. Anti-Piracy Agreements – restrict the solicitation (and sometimes the hiring) of an employer’s employees.

1 This outline will generally limit its discussion to the employment and independent contractor relationships. For simplicity, this outline will refer to “employer” and “employee,” although the comments also generally apply to independent contractor relationships. Unique issues regarding independent contractors are addressed un Section III.

5. Assignment of Inventions Agreements – grant employers ownership rights respecting intellectual property developed by employees.

C. Litigation Contexts.

1. Employers want to enforce such a provision and must be prepared to demonstrate that the agreement is enforceable.

2. Employees subject to restrictive covenants may wish to preemptively obtain declaratory relief regarding the (un)enforceability of the restrictions or assert the unenforceability of the covenants as a defense against a breach of contract claim.

3. If an employer hires an individual who is subject to a restrictive covenant agreement and permits that employee to violate that contract, the new employer could be sued for tortious interference with that contract, a claim that carries a risk of punitive damage liability.

D. The Enforceability Of These Agreements Depends Upon The Balancing Of Three Policy Interests:

1. The employer’s interest in protecting its confidential information and customer relationships;

2. The employee’s interest in earning a living; and

3. Society’s interest in promoting free competition, i.e., minimizing trade restraints, generally, and in the labor market, particularly.

E. The Enforceability Of Restrictive Covenants Is A Matter Of State Law.

1. There is wide variance between the states in the statutory and common law responses to these agreements.

2. The law of the state specified will generally control, subject to Restatement “conflict of law” provisions. See, e.g., General Med. Corp. v. Kobs, 179 Wis.2d 422, 428-29, 507 N.W. 2d 181 (Ct. App. 1993); Beilfuss v. Huffy Corp., 274 Wis. 2d 500, 504, 685 N.W. 2d 373 (Ct. App. 2004); Cf. Martin v. Strassen Ins. Agency, 2008 WL 5220283 (Ct. App. 2008); Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1854121 *7 (E.D.Wis. 5/21/12) http://scholar.google.com/scholar_case?case=1633867184339815115&q=Priority +International+Animal+Concepts,+Inc.+v.+Bryk+&hl=en&as_sdt=2,50.

2 F. Wisconsin’s Hurdles to Enforceability.

1. “An employer is not entitled to be protected against legitimate and ordinary competition of the type that a stranger could give.” Lakeside Oil v. Slutsky, 8 Wis.2d 157, 163, 98 N.W.2d 415 (1959).

2. Statutory Law: Section 103.465 of the Wisconsin Statutes provides as follows:

A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint.

a. This statute outlaws “blue-penciling.” If A restrictive covenant agreement is unreasonable in any respect, THE RESTRICTION WILL BE UNENFORCEABLE.

i. Over sixty-five years ago, this statute was adopted for the express purpose of eliminating “blue-penciling” in the context of restrictive covenants – a power the Wisconsin Supreme Court stated existed under the common law. Fullerton Lumber v. Torborg, 270 Wis. 133, 70 N.W. 2d 133 (1955). The “blue- penciling” employed by the Court in Fullerton Lumber was essentially unrestricted contract reformation.

ii. This statute expresses a strong public policy against the enforcement of unreasonable trade restraints on employee. Tatge v. Chambers & Owen, Inc., 219 Wis.2d 99, 114-15, 579 N.W.2d 217 (1998).

iii. The question of whether restrictive covenants are divisible or indivisible can take on the appearance of “blue-penciling,” but the actuality is prohibited by Wis. Stat. §103.465. See OUTLINE, § IV, D.

b. The scope of Wis. Stat. §103.465.

i. The statute does not apply to restrictive covenant agreements negotiated as part of the sale of a business. Accordingly, the pre-Statute common law controls the

3 enforceability of such contracts, i.e. the contracts AREsubject to blue-penciling. Sommerfield v. Sommerfield, 154 Wis.2d 840, 454 N.W. 2d 55 (1990), Reiman Assocs., Inc. v R/A Advertising, Inc., 102 Wis.2d 305, 306 N.W. 2d 292 (Ct. App. 1981). ii. Stock Option agreements? Nope. Selmer Co. v. Rinn, 2010 WI App. 106, 328 Wis.2d 263, 789 N.W. 2d 621.

(1) Factual Background. This ruling arose in the context of an appeal of a trial court ruling that awarded damages for a former employee’s breach of a non-compete/ customer non-solicitation restriction and his new employer’s tortious interference with that contract. The non-compete (and a non-disclosure covenant that lacked any durational limit) were both contained in a stockholders agreement that the former employee signed after the commencement of his employment. The contract awarded the then-employee the right to purchase shares of his employer’s stock, and Mr. Rinn exercised the right to purchase eight shares – nothing close to a controlling stake. Nonetheless, he quadrupled his investment upon the sale upon termination. The stockholder- former employee argued the provisions were overbroad and unenforceable. The employer countered that the provisions were not subject to § 103.465, and the circuit court agreed. The court of appeals affirmed.

(2) Restrictive Covenants and the Applicability of Section 103.465 in the Context of Non-Employment Agreements. The court of appeals observed that the Wisconsin Supreme Court had applied § 103.465 to invalidate an amendment to a profit-sharing plan that contained a restrictive covenant in Rosplach v. Alumatic Corp., 77 Wis.2d 76, 78-80, 251 N.W. 2d 838 (1977) and in a retirement plan in Holsen v. Marshall & Ilsley Bank, 52 Wis.2d 281, 284-87, 190 N.W. 2d 189 (1971). The court also noted that the statute had been applied in a contract other than an employment agreement “where the employer nonetheless enjoys a bargaining advantage over employees.” 2010 WI App 106 at ¶ 18 (citing Heyde Companies, Inc. v. Dove Healthcare, LLC, 2002 WI 131, 258 Wis.2d 28, 654 N.W. 2d 830 (decision actually involving contract between staffing agency and its customer which affected non-party employees.))

(3) The “Sale of a Business” Exception. Nonetheless, the court of appeals likened this situation to a restrictive covenant negotiated in the context of the sale of a business. In Reiman Assocs., Inc. v. R/A Advertising, Inc., 102 Wis.2d 305, 306 N.W. 2d 292 (Ct. App. 1981), a restrictive covenant that was part of the sale of a business

4 was deemed to fall outside the ambit of §103.465 and its enforceability instead was determined under the common law’s “rule of reason.” The Rinn Court observed that §103.465 “did not materially alter the common law requirements of a valid covenant not to compete, [but] did increase the degree of scrutiny such agreements receive.” 2010 WI App 106 at ¶ 19.

(4) Why a Restrictive Covenant in a Stock Option Agreement is Comparable to One Negotiated in the Sale of a Business. “Here, unlike typical restrictive covenants, upon which a prospective employee’s position may depend, there were no consequences attached to Rinn’s refusal to accept the agreement. The circuit court found Rinn was not pressured to sign the stock option agreement, nor was his employment conditioned upon doing so. Indeed, the circuit court found Rinn’s refusal would not have affected his employment in any way. Accordingly, [the employer] held no bargaining advantage over Rinn. … This case falls closer to the bargained for exchange in Reiman than it does to the employment cases cited above.” 2010 WI App. 106 at ¶¶ 21-2.

(5) Was the Non-Compete Properly Enforced? The restriction was both a non-compete and customer no-solicitation covenant. It provided that during employment and for one year thereafter, the employee would not “directly or indirectly...[c]ontact, solicit, divert, or attempt to divert, any business from the Company or contact, solicit or entice...any past, present or future Customer of the Company or any person with whom the Company is conducting negotiations, or to whom the Company has submitted a bid [SIC] so as to cause, any of said Customers or persons not to do business with the Company or to purchase products or services sold by the Company from any source other than the Company....” Id. at ¶ 4. (Emphasis added.)

a. The court of appeals concluded these restrictions were “‘(1) reasonably necessary for the protection of the beneficiary;’ (2) reasonable between the parties, ‘particularly as to the party being restrained, considering time, space, purpose, and scope[.]’” Id. at ¶ 24 (quoting Reiman, 102 Wis.2d at 309.)

b. HUH? There is no geographic limitation, implicit or explicit, on the non-compete; restricting solicitation of “future Customers” of the employer seems difficult to justify; restricting solicitation of all past and present Customers with whom the

5 employee had no contact and about which the employee knew nothing hardly seems necessary; prohibiting solicitation of past customers that have had no recent contact is inconsistent with Star Direct. See 2009 WI 76, ¶¶ 38-41

(6) Should Rinn have been governed by the “Sale of Business’ Exception to §103.465?

a. Is the exercise of a stock option necessarily the same as or substantially similar to the sale of an entire business?

b. Reiman involved a restrictive covenant negotiated in the context of the sale of an entire ownership interest in a business. 102 Wis.2d at 307- 8. See also, Betten Co. v. Brauman, 218 Wis. 203, 208, 260 N.W. 456 (1935) (“Because those restrictions were in a contract between vendor and vendee, on the sale of a controlling interest in the business, and not in a contract which was solely one of employment made between employer and employee, there is, in law, greater scope as to the permissible restraint....”) (Emphasis added.)

iii. The statute does not apply to restrictive covenants between franchisor and franchisee. H&R Block Eastern Tax Services v. Vorpahl, 255 F. Supp.2d 930 (E.D. Wis. 2003).

iv. The statute DOES apply to confidentiality/ non-disclosure agreements. Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 218, 267 N.W. 2d 242 (1978); Tatge v. Chamber & Owen, Inc. 219 Wis.2d 99, 111-12, 579 N.W. 2d 217 (1998). c. Court-articulated test of enforceability: “This court in Lakeside Oil Co. v. Slutsky, 8 Wis.2d 157, 98 N.W.2d 415 (1959), referred to the above quoted statute and set forth five basic requirements necessary to enforcement of a restrictive covenant. These are summarized in Richards, Drafting And Enforcing Restrictive Covenants Not To Compete, 55 Marquette Law Review, 241, 242 (1971-72). They are: (1) The agreement must be necessary for the protection of the employer or principal; (2) it must provide a reasonable time period; (3) it must cover a reasonable territory; (4) it must not be unreasonable as to the employee; and (5) it must not be unreasonable as to the general public.” Chuck Wagon

6 Catering, Inc. v. Raduege, 88 Wis.2d 740, 751, 277 N.W. 2d 415 (1959). See also, Star Direct, 2009 WI 76 at ¶ 20. d. Canons of Construction

i. “Restrictive covenants in Wisconsin are prima facie suspect as restraints of trade that are disfavored at law, and must withstand close scrutiny as to their reasonableness. Streiff [v. American Family Mut. Ins. Co.] 118 Wis.2d [602,] at 611, 348 N.W. 2d 505 [(1984)]. They are not to be construed to extend beyond their proper import or farther than the contract language absolutely requires. Id. Rather, they are to be construed in favor of the employee. Id.” Star Direct, 2009 WI 76 at ¶ 19.

ii. What does “construing the agreement in favor of the employee” mean? OPTION 1: Construe to minimize the restrictive effect of the provision. OPTION 2: Construe broadly as written if it invalidates the provision. Verdict: “One of the running themes in this case is how broadly or narrowly to read restrictive covenants. As discussed earlier, it is true that we read restrictive covenants in favor of the employee. Streiff, 118 Wis.2d at 611, 348 N.W.2d 505. But this does not mean we make an effort to read a clause unreasonably in order to find the clause unreasonable and unenforceable against the employee. Though they are disfavored at law, our task is still to rightly and fairly interpret non-compete agreements as contracts. See Wysocki, 243 Wis.2d 305, ¶ 11, 627 N.W.2d 444. ("[W]e cannot allow the underlying policy of Wis. Stat. § 103.465 and our rules of construction to overwhelm the focus of our analysis in what are, at their core, contract cases.") This means we must interpret them reasonably so as to avoid absurd results, giving the words their plain meaning, reading as a whole, and giving effect where possible to every provision.” Star Direct v. Dal Pra 2009 WI 76 at ¶ 62.

iii. The burden of proving the validity of a restrictive covenant rests with the employer. Farm Credit Services of N. Central Wis, ACA v. Wysocki, 237 Wis.2d 522, 532 n.8, 614 N.W. 2d 1 (Ct. App. 2000).

iv. Suggestion that “inequality of the parties’ bargaining positions” should affect the degree of court scrutiny. “Rinn was, of course, an employee at the time he contracted for

7 the right to purchase corporate stock, and Selmer’s motivation for the offer—made explicit on the first page of the agreement—was to ‘promote [Selmer’s] growth and development... by providing increased incentives for key employees....’ However, unlike typical restrictive covenants, upon which a prospective employee's position may depend, there were no consequences attached to Rinn’s refusal to accept the agreement. The circuit court found Rinn was not pressured to sign the stock option agreement, nor was his employment conditioned upon his doing so. Indeed, the circuit court found Rinn’s refusal would not have affected his employment in any way. Accordingly, Selmer held no bargaining advantage over Rinn. Rinn was free to walk away from the transaction; instead, he seized the opportunity to purchase an ownership interest in Selmer’s parent company. In exchange for Selmer’s promise to make discount stock available, Rinn forfeited his ability to tap Selmer customers for one year following his employment.” Selmer v. Rinn, 2010 WI App 106, ¶ 21-21. [SO WHAT???] e. Standard rules of contract interpretation apply. Farm Credit Servcs, of N. Central Wis., ACA v. Wysocki, 2001 WI 51 at ¶ 12.

8 II. COMMON ISSUES/ CHALLENGES TO RESTRICTIVE COVENANTS

A. ISSUE NO. 1 – Does the Contract Satisfy the Common Law Requirements of an Enforceable Contract, e.g., Consideration?

A restrictive covenant will not be enforceable if it is not set in the context of a contract that meets the common law requirements of a valid contract. NBZ, Inc. v. Pilarski, 185 Wis.2d 827, 520 N.W. 2d 93 (Ct. App. 1994). The issue of adequacy of consideration most frequently arises when current employees are required to sign a restrictive covenant, thus raising an issue about he sufficiency of consideration. NBZ is frequently mischaracterized as standing for the proposition that agreeing to extend an at-will employment relationship is insufficient consideration. In fact, the court decided that under the facts of that case – e.g., no clear mandate for accepting the agreement, repeated inconsistency regarding requiring similarly situated employees to sign a restrictive covenant agreement – the restrictive covenant failed for want of consideration. Cf. Tinder v. Pinkerton Sec., 305 F.3d 728 (7th Cir. 2002); but see, Star Direct v. Dal Pra, 2009 WI 76, ¶¶ 49-51 (Adequate consideration when employer departed from past inconsistent execution requirement and established and consistently pursued requirement since recent past.)

B. ISSUE NO. 2 -- Confidentiality Provisions – Are They Subject To A Time Limit?

1. Strange as it may seem, Wisconsin courts have taken the position that confidentiality agreements must be subject to a time limit, presumably not to exceed two years following termination of employment. Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 267 N.W.2d 242 (1978); Tatge v. Chamber & Owens, 219 Wis. 2d 99, ¶ 14, 579 N.W.2d 217 (1998). .

2. But see, Genzyme Corp. v. Bishop, 460 F. Supp. 2d 939, 950-1 (W.D. Wis. 2006) (Restrictions that only prohibit disclosure, rather than both disclosure AND use, of confidential information may not be subject to Wis. Stat. § 103.465.)

C. ISSUE NO. 3 – Confidentiality Provisions – Do They “Carve Out” Trade Secrets From The Applicable Time Limit? or “The Inadvertent Trade Secret Protection Waiver”

1. “Trade secrets” are a subset of the universe of “confidential information.” Under the Uniform Trade Secrets Act, which has been adopted by Wisconsin, “trade secrets” are defined as follows:

“[i]nformation, including a formula, pattern, compilation, program, device, method, technique or process to which all of the following apply:

a. The information derives independent economic value, actual or potential, from not being generally known to, and

9 not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.

b. The information is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.”

Wis. Stats. Section 134.90(1)(c). The term is construed narrowly under Wisconsin law. For example, most customer lists do not qualify as a “trade secret.”

2. Under Wisconsin law, trade secrets are entitled to indefinite protection from use or disclosure by employees. A frequent drafting mistake arises when confidentiality agreements place a time limit on the use or disclosure of all confidential information; trade secrets should be excluded from this time limit. For example, in ECT International, Inc. v. Zwerlein, 228 Wis.2d 343, 597 N.W.2d 479 (Ct. App. 1999), the court of appeals held that an employer had contractually waived the greater protections which might be afforded its trade secrets under Wisconsin’s Trade Secret Act by signing an agreement which prohibited the use or disclosure of all confidential information – defined to include trade secrets -- for two years following termination of employment.

D. ISSUE NO. 4 – Confidentiality Provisions -- Effect of Defining “Confidential Information” to Include Information that is NOT Confidential, e.g., “product prices,” “any knowledge or information about any Company customer.”

1. The employer has the burden of proving that the covenant was reasonably necessary to protect its legitimate needs. Field’s Foundation, Ltd. v. Christensen, 103 Wis.2d 465, 470, 309 N.W. 2d 125 (Ct App. 1981); Geocaris v. Surgical Consultants, Ltd., 100 Wis.2d 387, 388, 302 N.W. 2d 76 (Ct. App. 1981). Restricting the use or disclosure of information that really isn’t confidential would suggest that meeting this burden would be impossible.

2. But some courts appear to overlook obvious overbreadth in the definition of Confidential Information, focusing on the examples of such information to limit the actual language of the definition: “The confidentiality clause bars Dal Pra, for 24 months following his termination, from using or disclosing ‘any information or knowledge, known, disclosed or otherwise obtained by him during his employment by Employer or CB Distributors.’ It then lists a variety of specific information that is to be deemed confidential and protected, including but not limited to knowledge ‘conceived, discovered or developed by Employee or CB Distributors,’ ‘proprietary products or procedures,’ trade secrets, customer lists, ‘marketing techniques which are not generally known in the business community, and which relate to the business of the Employer or CB Distributors or are in the nature of trade or business secrets,’ mailing lists, and special pricing information...All of the enumerated examples of protected information in the confidentiality clause are of a proprietary nature. This is important for at least two

10 reasons. First, the inclusion of examples, particularly with modifiers indicating the confidential nature of the information, shows that the circuit court's interpretation is in error. For example, the modifier ‘proprietary’ when discussing products and procedures would be rendered mere surplusage if the clause truly means ‘any information.’ Similarly, the clause prohibits the divulging of marketing techniques ‘not generally known in the business community.’ Again, this language would be surplusage under the circuit court's approach. Additionally, we think the confidential nature of the itemized examples indicates the true intent of the clause. The only reasonable construction of the clause considered in its totality is that it prohibits Dal Pra’s use of confidential information of the type identified in the examples—information of a confidential and sensitive nature that, if made public or used by Dal Pra, would be deleterious to Star Direct’s business. All of the itemized examples fit this general pattern.” Star Direct, 2009 W 76 at ¶¶ 59, 63 (Emphasis added.); See also, Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12) http://scholar.google.com/scholar_case?case=12029822921131043545&q=PPrior ity+International+Animal+Concepts,+Inc.+v.+Bryk&hl=en&as_sdt=2,50; Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1854121 (E.D.Wis. 5/21/12) http://scholar.google.com/scholar_case?case=1633867184339815115&q=Priority +International+Animal+Concepts,+Inc.+v.+Bryk+&hl=en&as_sdt=2,50

E. ISSUE NO. 5 -- Customer Non-Solicitation Provisions – Which Customers are Properly Included within the Restriction?

1. Wisconsin courts have hesitated to uncritically enforce non-solicitation provisions restricting access to all customers of an enterprise served by the employee. For example, the Wisconsin Supreme Court has concluded that in the case of a route salesperson, it is generally unreasonable to restrict an employee’s contacts with customers outside the territory to which she was assigned. Behnke v. Hertz Corp., 70 Wis.2d 818, 235 N.W.2d 690 (1975). Similarly, in Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis.2d 460, 304 N.W.2d 752 (1981), the court questioned the enforceability of a non-solicitation provision that restricted an employee from dealing with customers with whom the individual had no prior contact. The court left open the appropriateness of a more expansive non-solicitation provision in the case of an individual with supervisory responsibilities.

2. Limiting the universe of restricted customers to those with whom the employee or business had recent contact may be critical in assessing the enforceability of a non-solicitation provision.

a. In Equity Enterprises v. Milosch, 2001 WI App. 186, 633 N.W.2d 662 (Ct. App. 2001), the Wisconsin Court of Appeals cited the absence of such a provision in invalidating a non-solicitation provision. In Equity

11 Enterprises, the employer sought to restrict the employee from doing business with any customer of the company who the employee serviced at any time during his employment. The court commented that “[t]his 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 Equity. Such an overbroad restriction is invalid because preventing Milosch from contacting former Equity customers is not reasonably necessary to protect Equity’s legitimate business interests.” Id. at ¶ 15, note 4. b. Yet, In Star Direct, the Supreme Court concluded that recent contact with a customer was not essential to justify a customer non- solicitation restriction:

“Contrary to Dal Pra’s assertions, his special knowledge of customer needs, pricing, and profit margins means that there was real danger in him seeking Star Direct’s current and past customers. The fact that he would not necessarily have had recent contact with those customers does not mean Star Direct has no legitimate interest. Even if Dal Pra was not the recent servicer of a customer, he would still have some relationship with that customer, important knowledge about that customer, or maybe most significantly, special knowledge about Star Direct’s business and methods. Dal Pra’s employment contract provided unambiguous notice of the confidential ‘special knowledge’ Dal Pra gained through his employment with Star Direct. This confidential information included customer lists, account projections, customer strategy information, marketing information, expense policy manuals, billing reports, pricing information and strategies, management methods and systems, contracts with customers, correspondence with customers, customer bids and proposals, and any other confidential, unique, or secret information. Furthermore, as we stated in Hamilton, it is ‘beyond dispute’ that a former employee's possession of this type of ‘confidential business information’ ‘may be a proper subject of protection by restrictive covenant,’ even if the information is related to customers with whom the former employee had not had any contact during his employment. Hamilton, 101 Wis.2d at 469, 304 N.W.2d 752. This reasoning applies equally to customers Dal Pra may have serviced earlier in his employment.”

Star Direct, 2009 WI 76 at ¶¶ 45-7.

12 Does this mean that the Supreme Court has dispensed with the need for recent customer contact to justify a non-solicitation restriction where the employee had access to “special knowledge” about particular customers? “Special knowledge,” generally? Who knows?!

c. Share Corp. v. Momar, Inc., Case No. 10-CV-109, 2010 WL 933897 (E.D. Wis. 2011) (Unpublished.) (http://scholar.google.com/scholar_case?case=163872485536 59223475&q=+Share+Corp.+v.+Momar,+Inc.,&hl=en&as_sdt=2,50). A Customer Non-Solicitation Provision was deemed unreasonable and a former employer’s preliminary injunction motion seeking enforcement of its terms likewise was denied. The covenant prevented the employee from soliciting any customers “within his or her ‘geographic region,’ a phrase that on its face has no limiting factor and, in reality, would prevent the employee from contacting any of his or her former customers.” Id. at *3 Failure to include a “backward restriction” limiting the universe of restricted customers to those with whom employee had recent contact is fatal to the enforceability of the provision. Id. citing, Equity Enterprises, Inc. v. Milosch, 2001 WI App 186, 247 Wis.2d 172, 633 N.W. 2d 662. The court observed that Chuck Wagon v. Raduege, 88 Wis.2d 740, 277 N.W. 2d 787 (1979) is the only decision that upheld a customer non- solicitation provision which lacked an explicit “backward restriction” on the universe of customers that were subject to the proscription. In that case, the Share Corp. court observed, the employee had worked for only two years and, unlike in the situation it faced, the restriction was limited to those customers with which the employee had contact.

3. Past customers? You betcha, provided that they were “recent” customers, a term that Star Direct stated could, but might potentially include more than, customers serviced by the employeewithin the past year. Id. at ¶ 38.

4. Prospects? An employer’s interest in restricting solicitation of prospective customers appears attenuated and, in most circumstances, is unlikely to be upheld. Cf. Equity Enterprises v. Milosch, 2001 WI App. 186, 633 N.W.2d 662 (Ct. App. 2001). Where such a restriction was justified by and limited to circumstances in which an employee obtained non-public information concerning a prospective customer, the courts might be more likely to uphold such a restriction.

5. Future customers? “This subsection is also overbroad. Most significantly, it bans Bryk from soliciting future customers—whomever they may be. Wisconsin law has declared such broad restrictions unenforceable.” See e.g., Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12).

13 F. ISSUE NO. 6 – Non-Compete Provisions – Do They Have A Reasonable Duration?

1. No non-competes or restrictive covenant agreements, generally, subject to Wis. Stats. §103.465, have been enforced where the restrictions were to remain in force more than two years following termination of the employment relationship. Nonetheless, there remains the mantras that the enforceability of each restrictive covenant must be assessed on the totality of the circumstances and that there are no “per se rules,” Rollins Burdick Hunter of Wis. v. Hamilton, 101 Wis.2d 460, 471. 304 N.W. 2d 752 (1981), agreements that fail to specify any durational limitation should be, and have been, deemed unenforceable. See e.g., Holsen v. Marshall & Ilsley Bank, 52 Wis.2d 281, 190 N.W.2d 189 (1971).

2. One should not reflexively assume that two years following termination of employment will always be viewed as reasonable. When restrictions are premised on the need to protect customer relationships, Wisconsin courts have emphasized that the reasonableness of the duration of the restriction “depends upon the period of time required to obliterate in the minds of the plaintiff’s customers the identification formed during the period of the defendant’s employment.” Lakeside Oil Co. v Slutsky, 8 Wis.2d 157, 98 N.W.2d 415 (1959). In dicta, however, the Wisconsin Supreme Court has commented that a post-employment restriction of one year would perhaps always be reasonable in almost all cases involving an otherwise valid contract….” Behnke v. Hertz Corporation, 70 Wis.2d 818, 820, 235 N.W.2d 690 (1975).

3. “Tolling” provisions or provisions that extend the duration of a restriction by the length of its breach are unenforceable. H&R Block E. Enter. v. Swenson, 2008 WI App 3 (“provision extending the time period in each of the clauses ‘by any period(s) of violations....’”)

G. QUESTION NO. 7 – Non-Competition Provisions – Are They Reasonable In Their Geographic Scope?

1. The following are examples of territorial limitations that have been deemed by Wisconsin courts to be reasonable:

a. Prohibition against competition along the route formerly serviced by the employee. Chuckwagon Catering, Inc. v. Raduege, 88 Wis.2d 740, 277 N.W.2d 787 (1979).

b. Restriction limited to county where company did 75% of its business. Lakeside Oil Co. v. Slutsky, 8 Wis.2d 157 (1959), 98 N.W.2d 415 (1959).

c. Prohibition of competition within 50 mile radius of the employer from which 62% of the employer’s business was drawn. Fields

14 Foundation Ltd. v. Christensen, 103 Wis.2d 465, 309 N.W.2d 125 (Ct. App. 1981).

2. The following are examples of restricted territories, which Wisconsin courts deemed unreasonable:

a. Restriction prohibiting work in a territory larger than that worked by the salesperson. Wisconsin Ice and Coal Co. v. Lueth, 213 Wis. 42, 250 N.W. 819 (1933).

b. Provision restricting competition in any state in which the company was licensed to do business where the company was licensed in every state. Union Cent. Life Ins. Co. v. Balistrieri, 19 Wis.2d 265, 120 N.W.2d 126 (1963).

c. Unspecified territorial limitation. Holsen v. Marshall & Ilsley Bank, 52 Wis.2d 281, 190 N.W.2d 189 (1971).

d. Geographic scope that extended substantially beyond the employee;s principal place of business. Financial Equipment Company, Inc. v. Silva, 2010 WL 4782786, http://scholar.google.com/scholar_case?case=9551630049477317471&q= Financial+Equipment+Company,+Inc.+v.+Silva&hl=en&as_sdt=2,50 (E.D. Wis. 2010) (Unpublished). The restrictive covenant prohibited competition anywhere within a 120-mile radius of the company’s Germantown, Wisconsin office. The employer noted that the employee primarily worked in Northern Illinois and that Chicago is approximately 110 miles from its Germantown office. The employee countered that the restriction was unreasonable because it extends to Green Bay and Appleton, Wisconsin – areas that he never served. Indeed, the employee did not have any business relationship with any of the employer’s clients in Wisconsin. Accordingly, the court concluded that the territory specified in the restrictive covenant “encompasses a much larger area than necessary for [the employer’s] protection” and deemed it unreasonable. Id. at *5.

H. QUESTION NO. 8 – Non-Competition Provisions – Do They Contain A Reasonable “Activity-Based” Limitation?

1. Failure to limit non-compete restrictions to specific competitive activities may leave the non-compete restriction vulnerable to challenge. A prohibition which, for example, limited the right of a former employee to “provide services” to a competitor would be difficult to justify; it is difficult to imagine how an employer could claim that it was necessary to prohibit a former employee from, for example, cleaning toilets at a competitor’s facility.

15 2. The following are examples of restrictions that were deemed overly broad in the competitive activities they sought to restrict:

a. Contract restricting physician from all areas of medical practice when former employer only offered surgical services. Geocaris v. Surgical Consultants, Ltd., 100 Wis.2d 387, 302 N.W.2d 76 (Ct. App. 1981).

b. Prohibiting employees from working in the entire water treatment industry that competed with the employer where the employees worked in and had knowledge of only a small portion of that business. Nalco Chemical Co. v. Hydro Technologies, Inc., 984 F.2d 801 (7th Cir. 1993).

c. “Be in any way connected with the [XYZ] business” is overly broad by, for example prohibiting the insurance salesperson from working as a janitor in the insurance industry. Mut. Service Cas. Ins. Co. v. Brass, 2001 WI App 92, ¶ 15.

d. Ban against “associating with a competitor” deemed unreasonable. Packard & Assoc. v. Smith, 429 F. Supp.2d 1052, 1055 (W.D. Wis. 2005).

e. Prohibiting employee from performing any work for competitor. Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 *6 (E.D. Wis. 6/1/12) (“To be enforceable, the limitations in a restrictive covenant need to be limited to the scope of the employee's job duties. ‘It is generally proper for the employer, by such a contract, to exact a covenant not to compete in such territory as may constitute the field of the employee's activities, but the covenant can go no further than this.’ Behnke v. Hertz Corp., 70 Wis.2d 818, 824 (1975); see also Wisconsin Ice & Coal v. Lueth, 213 Wis. 42, 47 (1993). Accordingly, a business activity restraint should be ‘narrowly drawn.’ Nalco Chemical Co. v. Hydro Technologies, 984 F.2d 801, 805 (7th Cir.1993). Courts have therefore refused to uphold restrictive covenants in which the business activity restraint has been too broad. See, e.g., Estate of Schroeder v. Gateway Transp. Co., 53 Wis.2d 59, 69 (1971) (restriction designed to prevent employee from working elsewhere ‘in the transportation industry” unenforceable).’”).

3. But see, Duggan v. American Family Mut. Ins. Co., 2010 WL 1268175 (E. D. Wis. 2010). The non-solicitation provision at issue read as follows: “For a period of one year following termination of this agreement, you will not either personally or through any other person, agency, company or organization directly or indirectly induced, attempt to induce or assist anyone else in inducing or attempting to induce any policyholder of the Companies credited to your account at the time of termination to lapse, cancel, replace or surrender any insurance policy in force with the Companies. …”

a. The employees argued that the restriction unduly limited a broad range of conduct. “So, for example, the Agents contend that “‘[t]he covenant not to compete… prohibits the agent from discussing the reasons the agent terminated his relationship with American Family because such statements might indirectly induced a policyholder of American Family to obtain insurance quotations from another insurance company.’”

b. The court rejected this argument. “Simply put, I believe it was not per se unreasonable for American Family to insert language into the covenants prohibiting the Agents from using their persuasion or influence to cause certain American Family policyholders to cancel or terminate their in-force policies with American Family.” Id. at *9. The court stated this restriction was reasonable even as applied to the Agents’ friends and family members.

I. ISSUE NO. 9 – Non-Competition Provisions – Do They Prohibit Passive Competitive Activities After Separation, e.g., Stock Ownership?

Many non-competition agreements are drafted so broadly that they prohibit a variety of passive activities including ownership of the stock of a competitor. It is difficult to imagine what employer interest – typically protection of customer relationships or its confidential information -- can justify such a restriction. See e.g., Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12).

J. ISSUE NO. 10 – Non-Competition Provisions – Does The Agreement Contain Language Which Contemplates “Blue-Pencilling?”

Some drafters include language in restrictive covenant agreements authorizing courts to construe restrictive covenant provisions “to the fullest extent possible” in the event a court deems a restriction unreasonable. Such “blue-pencilling” language, of course, is inconsistent with the “All-Or-Nothing” rule embodied in Wis. Stats. §103.465. At least one court has used language that can be read as suggesting that the inclusion of such language in a restrictive covenant agreement, itself, may be a basis for seeking to invalidate restrictive covenant agreements. Nalco Chemical Co. v. Hydro Technologies, Inc., 984 F.2d 801, 806 (7th Cir. 1993).

K. ISSUE NO. 11 – Anti-Piracy Provisions – Does The Restriction Prohibit The Hiring Of The Employer’s Employees?

Anti-piracy provisions typically restrict employees from soliciting for employment or encouraging employees of the employer to end their employment relationship. Some provisions go beyond this and actually prohibit an employee from directly or indirectly hiring employees of the employer. A recent decision by the Wisconsin Court of Appeals calls into question the enforceability of the latter provisions. In Heyde Companies, Inc. d/b/a Greenbriar Rehabilitation v. Dove Healthcare, LLC, 2001 Wis. App. LEXIS 1088

17 (Ct. App. 2001), an employer entered into a contract with a business which supplied it workers. The employee provider’s contract restricted the customer from hiring the individuals placed at it for a period of one year following expiration of the agreement absent payments to the employee-provider of 50% of the employee’s annual salary. The court concluded that this provision was unenforceable because it violated “public policy by restricting Greenbriar therapists the right to freely sell their skills in the labor market. Without signing any agreement or even being given notice, a portion of the available labor market has been taken away.”

III. A NEW APPROACH: STAR DIRECT AND BEYOND.

A. Explicit Lessons of Star Direct v. Dal Pra

1. Recognized for the first time that employers may have a protectable interest in restricting former employees from competing for “recent” past customers. 2009 WI 76, ¶¶ 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, provided that there was a possibility that the employee had “important knowledge about that customer, or maybe most significantly, special knowledge about [the employer’s] business and methods. Id. at ¶ 45.

3. Enforced a restrictive covenant that had not been required of all similarly situated employees. Id. at ¶¶ 49-51.

4. Reaffirmed that the unenforceability of a restrictive covenant will have no effect on the enforceability of otherwise enforceable restrictive covenants where those restrictions are divisible. Id. at ¶¶ 74, 76.

5. Attempted to articulate a test for determining the divisibility of restrictive covenants.

a. The Star Direct Divisibility Test: “The foundational inquiry for determining whether a covenant is divisible is whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced. This inquiry will be fact-intensive and dependent on the totality of the circumstances. In the context of multiple non-compete provisions in a contract, indivisibility will usually be seen by an intertwining, or inextricable link, between the various provisions via a textual reference such that one provision cannot be read or interpreted without reference to the other. Restrictive covenants are divisible when the contract contains different covenants supporting different interests that can be independently read and enforced. Overlap, even substantial overlap, between the clauses is not necessarily determinative.” 2009 WI 76 at ¶ 78.

b. The prior articulation of the divisibility test – Streiff v. American Family Mut. Ins. Co., 118 Wis.2d 602, 612-13, 348 N.W. 2d 505 (1984). “As we read the agreement, sections 5h and 5i are not distinct, mutually exclusive, independent provisions that come into play in totally different fact situations so that the restraints are divisible. The two sections must be read together and both sections are applicable to Streiff in the facts of this case. When read together, sections 5h and 5i place substantially similar restraints on Streiff vis- á-vis American Family and make him subject to forfeiture of the extended earnings payments if he violates any of the restraints. … The clauses of the covenant are intertwined and the covenant must be viewed in its entirety, not as divisible parts.”

c. The arguable Brass “riff” on Streiff: “We conclude, as the Streiff court did, that the provisions at issue are intertwined and indivisible because they govern several similar activities and establish several time and geographical restraints.” Mutual Service Casualty Ins. Co. v. Brass, 2001 WI App 92, ¶ 11, 242 Wis.2d 733, 625 N. W. 2d 648 (Emphasis added).

i. Star Direct rejection: “We reject the Brass court’s construction of Streiff. ...We therefore overrule Brass’s holding in this regard. Star Direct, 2009 WI 76 at ¶ 78, n. 12.

B. Divisibility Déjà Vu -- Gillitzer Electric Co., Ltd. v. Andersen, 2010 WI App 31, 323 Wis.2d 754, 780 N.W. 2d 542.

1. Factual Background. Gillitzer provided its employees with a tuition reimbursement benefit in connection with an apprenticeship program. Recipients of that benefit were required to sign an “Educational and Non-Competition Agreement” that (i) committed the company to paying for a five year educational program, (ii) required the employee to maintain a passing grade and to follow all school rules and curriculum requirements, and (iii) stated that the employee was required to reimburse the company for all costs provided in connection with that program should the employee failed to complete the schooling, fail to maintain passing grades, or in the event of resignation or termination for cause. The agreement also contained a combination of restrictive covenants: (i) A non- compete that, for 4 years after separation, prohibited former employees from being “involved directly or indirectly” in any business that competed with Gillitzer in 4 enumerated Wisconsin counties; (ii) A customer non-solicitation restriction of 4 years duration respecting any of Gillitzer’s “present or past customers”; and (iii) a non-disclosure provision of indefinite duration. The employer conceded that the non-compete and customer non-solicitation provisions were unenforceable and contrary to Wisconsin law. The circuit court relieved the employees of the repayment obligation, reasoning that the restrictive covenant agreement was unenforceable. The Court of Appeals reversed, concluding that the tuition provisions of the agreement were divisible from the

19 restrictive covenant and that the unenforceability of the latter consequently did not affect the enforceability of the former.

2. Did Star Direct establish a new divisibility test? Gillitzer argued that the Star Direct court had created a new divisibility test – one that focused on the presence or absence of textual linkage. The Gillitzer court’s response? “We do not decide, because it is not essential to our resolution of this appeal, whether the Star Direct test for divisibility is new and different from the test set forth in Streiff. We do not decide, because it is not essential to our resolution of this appeal. We conclude that under the court’s language in either Streiff or Star Direct, the training reimbursement provision is divisible from the non-compete provision.” Id. at ¶ 12.

3. Gillitzer Divisibility Analysis. “The non-compete provision is independent of the training reimbursement provision.” Id. at ¶ 15. “The training reimbursement and non-compete provisions are not intertwined or dependent on each other for their meanings.” Id. at ¶ 16. “Additionally, unlike the provisions in Streiff, the two provisions in the Agreement do not share identical factual triggers. The shared, identical factual trigger was a basis for the court in Streiff finding that the provisions were intertwined. Here the repayment requirement is triggered by any one of three things, two of which trigger repayment even if the employee stays employed at Gillitzer -- quitting the program and receiving a failing grade. The third trigger is leaving the company before four years after completing the program. In the event of any of those three triggers, the employee is responsible to repay the program costs. On the other hand, the non-compete provision is triggered by the passage of four years after completion of the apprenticeship program or after the employee leaves the company. Accordingly, the factual triggers for the two provisions are not identical.” Id. at ¶ 17. (Emphasis in original.)

IV. PLAYING IN THE MORASSE: LITIGATION CHALLENGES IN DEALING WITH RESTRICTIVE COVENANTS.

A. Does Section 103.465 Apply to ALL “ASSISTANT[S], SERVANT[S] OR AGENTS[S]”?

1. KEY STAUTORY LANGUAGE: A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Wis. Stat. §103.465. (Emphasis Added).

20 2. Argument that only CERTAIN agents fall within the scope of this Statute.2 SEE ATTACHMENT A.

3. Argument in opposition to the notion that this agent fell within the scope of this Statute.3 SEE ATTACHMENT B.

4. The Court’s ruling on this issue. “As a threshold matter, Priority contends Bryk's reliance on Section 103.465 is misplaced because he was neither an employee nor an agent of Priority. Priority instead asserts that Bryk was retained as a “Consultant” who would “act as an independent contractor, and not as an employee or agent of [Priority].” (ECF No. 1–1 at 3.) Bryk does not dispute that he was not an employee but he does contend he was an agent as the term is used in Wis. Stat. § 103.465.

Agency status is a question of law. Brown v. Sandeen Agency, 2009 WI App 11, ¶ 18, 762 N.W.2d 850 (2008). Thus, Plaintiff's assertion of a legal conclusion—that Bryk was not its agent—is not entitled to an assumption of truth. See Dixon v. Ladish Co., Inc., 785 F.Supp.2d 746, 748 (E.D.Wis.2011). The annotations to Wis. Stat. § 103. 465 do not contain any cases defining the term “agent.” Black's Law dictionary defines an agent as one “who is authorized to act for or in place of another; a representative.” BLACK'S LAW DICTIONARY 72 (9th ed.2009). An agency is “the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.” RESTATEMENT (THIRD) OF AGENCY § 1.01 (2006).

Plaintiff most notably relies on County Materials Corp. v. Allan Block Corp.FN1 for the proposition that § 103.465 did not apply in that action (and thus should not apply here). However, as Bryk notes, the facts of County Materials are readily distinguishable from the facts underlying this dispute. County Materials involved a dispute between two corporations in which the restrictive covenant was ancillary to a patent licensing dispute. In fact, the County Materials court specifically stated “Wis. Stat. § 103. 465 does not control this action because the covenant not to compete at issue was not included as part of an employment contract.” 431 F.Supp.2d at 950. But see Heyde Companies, Inc. v. Dove Healthcare, LLC, 2002 WI 131, 258 Wis.2d 28, 654 N.W.2d 830 (holding that § 103.465 applies to “no-hire” provision of contract between two businesses).

FN1. F.Supp.2d 937, 950 (W.D.Wis.2006).

2 Excerpts taken from Plaintiff’s Brief in Opposition to Bryk’s Partial Motion to Dismiss (#29), filed in connection with Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12). 3 Excerpts taken from Bryk’s Reply Brief in Support of Bryk’s Partial Motion to Dismiss (#32), filed in connection with Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12).

Unlike the restrictive covenants in County Materials, here the covenant not to compete did arise from an employment contract (i.e. the Consulting Agreement). Furthermore, the underlying facts—as well as some of Priority's own pleadings—suggest Bryk was in fact an agent. Specifically, Plaintiff alleges “Bryk owed Priority certain fiduciary duties of agent to principal.” (ECF No. 1–1 ¶ 135.) The following four paragraphs allege a breach of Bryk's “agency duty.” (Id. ¶¶ 136–140.) Plus the Consulting Agreement itself suggests Bryk is an agent, but with limited authority: “Except for the authority to engage in the activities described in section 1 of this Agreement, consultant agrees that he is not an agent of [the] company.” In other words, the agreement states that Bryk is Priority's agent, except when he is not Priority's agent.

Given the Wisconsin's strong public policy encouraging worker mobility, its Supreme Court's liberal construction of the statute, the services called for under the agreement, and Priority's own characterization of the relationship in the contract and in its complaint, I conclude as a matter of law Bryk was an agent of Priority within the meaning of Section 103.465. The restrictive covenants at issue will be analyzed accordingly.”

Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12).

5. For additional authority holding restrictive covenants with independent contractors to fall within the ambit of §103.465, see Farmers Ins. Exch. v. Sorenson, 99 F.Supp.2d 1000, 1003 n.1, 1006 (E.D. Wis. 2000).

6. And doesn’t the term “servant” include any “agent[s]” that might theoretically fall outside the ambit of §103.465?

C. Is a Motion for Injunctive Relief Properly Considered Before Discovery?

1. Whether a restrictive covenant comports with Wis. Stat. §103.465 is a mixed question of fact and law. Techworks, LLC v. Wille, 2009 WI App 101 at ¶ 4; Farm Credit Servs. of N. Cent. Wis., ACA v. Wysocki, 237 Wis.2d 522, 529, 614 N.W. 2d 1, 4 (Ct. Ap. 2000); NBZ, Inc. v. Pilarski, 185 Wis.2d 827, 840, 520 N.W. 2d 93 (Ct. App. 1994).

2. But see, Geocaris v. Surgical Consultants, Ltd., 100 wis.2d 387, 388, 302 N.W. 2d 76 (Ct. App. 1981) (Whether particular restrictions regarding time and geographic scope are necessary to protect employer interests to be resolved on the basis of the facts.)

2. But although particular factual matters may be relevant in assessing the

22 reasonableness of a restrictive covenant, they are seldom contest and that issue has been characterized as one of law, not fact. My Laundry Co. v. Schmeling, 129 Wis. 591, 109 N.W. 540 (1906); Fields Fndtn, Ltd. v. Christensen, 103 Wis.2d 465, 309 N.W. 2d 125 (Ct. App. 1981); Jacobs v. Sunrise Med. HHG, Inc., 2006 U.S. Dist LEXIS 50518, *6-7 (W.D. Wis. 2006) (“Generally, the enforceability of a covenant not to compete is a question of law[,] which would not require witness testimony.” )

3. The Talisman for Opposition to Granting Such Relief Before Discovery: Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis.2d 460, 470, 304 N.W. 2d 752 (1981) (“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. As to whether the restraint is unreasonable to the employee, we do not see how such a determination could be made without considering additionally the extent to which the restraint on competition actually inhibits the employee's ability to pursue a livelihood in that enterprise, as well as the particular skills, abilities, and experience of the employee sought to be restrained. These, of course, are not exhaustive, since the very essence of what is reasonable involves the totality of the circumstances.”)

4. Selection of Cases that Granted Relief Without Discovery: See e.g., Heyde Cos., Inc. v. Dove Healthcare, LLC, 2002 WI 131, affm’g 2001 WI App 278; Mut. Service Cas. Ins. Co. v. Brass, 2001 WI App 92; Equity Enterprises, Inc. v. Milosch, 2001 WI App 186.

5. Share Corp. v. Momar, Inc., Case No. 10-CV-109, 2010 WL 933897 (E.D. Wis. 2011) (Unpublished.) (http://scholar.google.com/scholar_case?case=163872485536 59223475&q=+Share+Corp.+v.+Momar,+Inc.,&hl=en&as_sdt=2,50).

a. Emphasis on Factual Inquiry. Presented with a motion to dismiss its breach of contract claim by its defendant former employees, the plaintiff argued that the reasonableness of the restrictive covenants at issue required a “fact-intensive exercise that requires further development of the record [beyond the bare pleadings] in every case.”

b. Case Authority. The court noted a number of cases, beginning with Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis.2d 460, 304 N.W. 2d 752 (1981), “that required development of the record before deciding whether a restrictive covenant is enforceable under Wisconsin law.”

23 c. But Not Always ... “This court recognizes that development of the record may be necessary in some cases to determine the reasonableness of a restrictive covenant. Yet, this does not change those instances in which the law is absolutely clear as to what is reasonable and what is not. If the plaintiff pleads factual content that is, on its face, not reasonable, then the plaintiff has failed to state a claim upon which relief may be granted. In such instances, further development of the record is not necessary. This is the approach taken by a branch of the Western District of Wisconsin in Friemuth v. Fiskars Brands, Inc., 681 F. Supp.2d 985 (W.D. Wis. 2010).”

D. The Divisibility-No Blue Pencil “Shouldn’t-Be” Muddle.

1. An enforceable restrictive covenant is rendered unenforceable if part of an indivisible, invalid covenant. Streiff v. Amer. Fam. Mut. Ins. Co., 118 Wis.2d 602, 614, 348 N.W. 2d 505 (1984).

2. This concept is a logical outgrowth of the mandate of §103.465 and reinforces that statute’s prohibition against blue-penciling.

3. Conversely, the enforceability of restrictive covenant is unaffected by an invalid, divisible covenant contained in the same contract. Star Direct, 2009 WI 76 at ¶¶ 74, 76.

4. The Star Direct Divisibility Test: “The foundational inquiry for determining whether a covenant is divisible is whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced. This inquiry will be fact-intensive and dependent on the totality of the circumstances. In the context of multiple non-compete provisions in a contract, indivisibility will usually be seen by an intertwining, or inextricable link, between the various provisions via a textual reference such that one provision cannot be read or interpreted without reference to the other. Restrictive covenants are divisible when the contract contains different covenants supporting different interests that can be independently read and enforced. Overlap, even substantial overlap, between the clauses is not necessarily determinative.” 2009 WI 76 at ¶ 78.

5. When does the assessment of the divisibility of restrictive covenants morph into proscribed blue-penciling?

a. Covenant Not To Compete. Employee agrees that he shall not at any time during the Restricted Period (as hereinafter defined), directly or indirectly, as a proprietor, agent, officer, director, employee, partner, stockholder, consultant, owner or otherwise: (i) Acquire an ownership interest in, work for, render advice or assistance to or otherwise engage in the business of the Company with

24 or for any Competitor (as hereinafter defined); or (ii) Divert, or attempt to divert any business from the Company or contact, solicit, or entice, or attempt to contact, solicit or entice any present or future customer of the Company or any person with whom the Company is conducting negotiations or to whom the Company has submitted a bid so as to cause, or attempt to cause, any of said customers or persons not to do business with the Company or to purchase products or services sold in the business from any source other than the Company; or (iii) Induce, attempt to induce or hire any person who is or has been an employee of the Company to accept employment with a Competitor. HELD: DIVISIBLE. Priority International Animal Concepts, Inc. v. Bryk, et al., 2012 WL 1995113 (E.D. Wis. 6/1/12).

b. Employee agrees that during her employment with the Company and for two (2) years thereafter, she will not provide services of the same or substantially similar type that she provided to the Company on behalf of herself or to any individual or entity anywhere within 50 miles of the Company’s facility. Employee further agrees that during her employment with the Company and for two (2) years thereafter, she will not provide services of the same or substantially similar type that she provided to the Company on behalf of herself or to any individual or entity anywhere within 25 miles of the Company’s facility. Employee further agrees that during her employment with the Company and for two (2) years thereafter, she will not provide services of the same or substantially similar type that she provided to the Company on behalf of herself or to any individual or entity anywhere within 10 miles of the Company’s facility. HOLDING: ???

E. Is a provision that restricts an employee from doing business with his former employer’s suppliers enforceable? What employer interest is implicated by such a restriction?

F. To what extent should the Employee’s Ability to Understand the Restriction Affect Enforceability? For example, customer on-solicitation restrictions without a list of restrictedcustomers? Or a Confidentiality Agreement with an incomprehensible definition of “Confidential Information”?

25 ATTACHMENT A

Section 103.465 “invalidates covenants not to compete in certain situations.” Cnty. Materials Corp. v. Allan Block Corp., 431 F. Supp. 2d 937, 950 (W.D. Wis. 2006). Section 103.465 does not, however, apply to all contracts in restraint of trade. Heyde Cos., Inc. v. Dove Healthcare, LLC, 2002 WI 131, ¶ 29, 258 Wis. 2d 28, 654 N.W.2d 830 (Abrahamson, S., concurring); see also Selmer Co. v. Rinn, 2010 WI App 106, ¶ 19, 328 Wis. 2d 263, 789 N.W.2d 621 (“Yet not all noncompete agreements fall within WIS. STAT. § 103.465’s ambit.”). By its terms, Wis. Stat. § 103.465 applies only to covenants in an employment or agency relationship: A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this subsection, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint. Wis. Stat. § 103.465 (emphasis added).

The public policy underlying this section is that Wisconsin favors the mobility of workers. Genzyme Corp. v. Bishop, 460 F. Supp. 2d 939, 947 (W.D. Wis. 2006). This statute was not enacted for the protection of Bryk, or any other independent contractor5 who provides services to a myriad of “principals.” See infra, Argument Sec. 2(b).

5 “‘Whether one is an employee or an independent contractor generally should be determined from the facts of the particular case, and from a proper construction of the contract as a whole.’” Mueller v. Luther, 31 Wis. 2d 220, 225, 142 N.W.2d 848, 851 (1966) (quoting Weber v. City of Hurley, 13 Wis. 2d 560, 568, 109 N.W.2d 65, 69 (1961)). 12 Case 1:12-cv-00150-WCG Filed 04/02/12 Page 12 of 32 Document 29

(a) Bryk Was A Contract Consultant, Not An Employee Or An Agent of Priority As Those Terms Are Used In Wis. Stat. § 103.465. Accepting Priority’s well-pleaded facts as true, as this Court must,6 Bryk was neither an employee nor an agent of Priority for purposes of § 103.465. Instead, Bryk “contracted to consult” with Priority. (Compl. ¶ 2.) Bryk was retained as a “Consultant” (Compl. Ex. 1, p. 1) who would “act as an independent contractor, and not as an employee or agent of Company.” (Compl. Ex. 1, p. 3.) Priority and Bryk agreed that Bryk’s services “shall be non-exclusive” and that he “may provide services to or be employed by third parties.” (Compl. Ex. 1, p. 1.) The parties further agreed that Bryk would not “represent or hold himself out as having authority to bind” Priority (Compl. Ex. 1, p. 3), and that the Agreement would not create “an agency or employer/employee relationship between the parties.” (Compl. Ex. 1, p. 9.) Based on these allegations,7 Priority has pleaded sufficient facts to find that the consulting arrangement described by the Agreement did not create an employment relationship between Bryk and Priority, nor did it create the type of agency relationship that would subject the Agreement to the provisions of Wis. Stat. § 103.465.

(b) Wis. Stat. § 103.465 Applies Only To Agreements With Employees Or Agents; Wis. Stat. § 103.465 Does Not Apply To Bryk’s Agreement.

26 Section 103.465 was intended to protect the relationship between employer and employee and between principal and agent—where the employer/principal controls the employee’s/agent’s ability to earn a living. Bryk agrees that he was not an employee of Priority. However, in direct

6 Dixon, 785 F. Supp. 2d at 748. 7 Yet another clause that shows that Bryk was not an employee of Priority is Section 4(a), which provides, in part: “Compensation payments made under this Agreement in consideration of Consultant’s performance of the Services shall not be subject to withholding for federal, state, or local income or employment taxes.... Consultant shall be responsible for any and all self-employment taxes, federal, state and local income taxes...and other required deductions, payments or contributions.” (Compl. Ex. 1, p. 2.)

13 Case 1:12-cv-00150-WCG Filed 04/02/12 Page 13 of 32 Document 29 contravention of the plain and unambiguous terms of the Agreement and without any support, Bryk contends that he was an agent as that term is used in Wis. Stat. § 103.465. Again, Bryk is wrong. Even if one were to look beyond the specific terms of the Agreement, without additional facts, the Court could not determine the relationship created as a matter of law. The annotations to Wis. Stat. § 103.465 do not contain any cases defining the term “agent.” Black’s Law Dictionary, however, defines an agent as “[o]ne who is authorized to act for or in place of another; a representative.” Black’s Law Dictionary 72 (9th ed. 2009). An agency is “the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” Restatement (Third) of Agency § 1.01 (2006). Wisconsin law recognizes that Wis. Stat. § 103.465 cannot govern each of these agency relationships.8 Nothing in Priority’s complaint provides the facts necessary to establish any such relationship. To the contrary, the facts contained in Priority’s complaint more closely approximate the finding in the County Materials Corp. case, where the Western District of Wisconsin held that a production agreement did not create the kind of agency that is governed by Wis. Stat. § 103.465. County Materials was a manufacturer of concrete block, and defendant Allan Block developed, marketed and licensed technology for the manufacture of concrete block. Cnty. Materials Corp.,

8 Priority has stated a claim against Bryk for Breach of Agency Duty (Count VI), in which it alleges, “As a consultant for Priority, Bryk owed Priority certain fiduciary duties of agent to principal.” (Compl. ¶¶ 134-139.) By asserting here, and throughout Bryk’s Agreement, that he was not an agent of Priority for purposes of Wis. Stat. § 103.465, Priority does not waive its claim based on Bryk’s fiduciary duties, or concede that any element of this claim is not satisfied. Rather, Priority asserts that Bryk is an agent for purposes of owing certain fiduciary duties to Priority, but that his Agreement was not an agency agreement governed by Wis. Stat. § 103.465.

14 Case 1:12-cv-00150-WCG Filed 04/02/12 Page 14 of 32 Document 29 431 F. Supp. 2d at 940-41. The parties9 entered into a production agreement, whereby Allan Block shared its confidential technology with plaintiff so that plaintiff could manufacture Allan Block’s concrete blocks and sell them. Cnty. Materials Corp., 431 F. Supp. 2d at 941. This agreement included a covenant not to compete:

27 The parties agree that during the term of this agreement, and for a period of eighteen months following the termination of this agreement, Producer will not directly or indirectly engage in the manufacture and/or sale of any other mortarless, stackable, concrete block retaining wall product, with [limited exceptions for concrete block products that plaintiff already manufactured]. Cnty. Materials Corp., 431 F. Supp. 2d at 942.

Analyzing the law to be applied to the covenant, the court reasoned: “Wis. Stat. § 103.465 does not control this action because the covenant not to compete at issue was not included as part of an employment contract. Additionally, plaintiff did not serve as an assistant, servant or agent of defendant.” Cnty. Materials Corp., 431 F. Supp. 2d at 950. Accordingly, the court did not subject the covenant to the exacting scrutiny of a § 103.465 analysis.10 Bryk’s Agreement is not an employment contract or a contract reflecting the type of agency requiring protection to ensure worker mobility. (See Compl. Ex. 1, pp. 1, 3, 9-10.) Instead, it is akin to the production agreement in County Materials Corp. in that Bryk was retained to offer a service, but was not hired as an employee to work exclusively for Priority. (See Compl. Ex. 1, p. 1.) And like the manufacturer in County Materials Corp., Bryk received confidential information from Priority for the limited purpose of providing the consulting services he was retained to perform. (See Compl. ¶¶ 16, 17, 23.) The Agreement could not be

9 The original parties to the agreement were Allan Block and plaintiff’s predecessor, County Concrete Corporation. County Concrete Corporation thereafter assigned its rights to plaintiff. 431 F. Supp. 2d at 941. 10 Wisconsin state and federal courts have also held that § 103.465 is not applicable to a franchise agreement, H & R Block E. Tax Servs., Inc. v. Vorpahl, 255 F. Supp. 2d 930, 933-34 (E.D. Wis. 2003), a covenant not to compete incident to the sale of a business, Rinn, 2010 WI App 106, ¶¶ 21-22, or a stock option agreement, Reiman Assocs., Inc. v. R/A Advert., Inc., 102 Wis. 2d 305, 309-10, 306 N.W.2d 292, 295-96 (Ct. App. 1981).

15 Case 1:12-cv-00150-WCG Filed 04/02/12 Page 15 of 32 Document 29 clearer in establishing that it is not an employment agreement, nor was Bryk granted the rights of an agent to act on behalf of Priority. Accordingly, Wis. Stat. § 103.465 does not apply and cannot be relied upon to gauge the reasonableness of the Agreement’s provisions.

28 ATTACHMENT B

In a recurring theme, Plaintiff seeks to avoid the full effect of Wisconsin law in response to the challenges to its restrictive covenants. In response to Dr. Bryk’s Motion, Plaintiff argues that “Section 103.465 does not apply to the restrictive covenants in Bryk’s Agreement because, according to the specific terms of the Agreement, Bryk was neither an employee nor an agent of

Priority.”4 The reason for advancing this argument is transparent; implicitly acknowledging the defects in the restrictive covenants of the Consulting Agreement, Plaintiff seeks to persuade this

Court that, not bound by this statute, it has the power to reform those unreasonable restrictions.

Over sixty years ago, section 103.465, Wis. Stat., was enacted by the Legislature to overrule a decision by the Wisconsin Supreme Court that granted a court the power to re-write, i.e., “blue pencil,” an unreasonable restrictive covenant so that, rather than declaring the provision void, it conformed with the court’s assessment of reasonableness, rather than the over-reaching drafter’s.5 Section 103.465 reflects the Wisconsin Legislature’s judgment that a party that creates an unreasonable restrictive covenant should bear the consequences of the chilling effect of such a provision on worker mobility - - a ruling that the restriction is void and unenforceable.

Plaintiff’s argument against the applicability of this statute is constructed by the following syllogism:

(i) Section 103.465 applies only to “[a] covenant by an assistant, servant or

agent not to compete with his employer or principal during the term of the employment

or agency, or after the termination of that employment or agency...”;6

4 Priority International Animal Concepts, Inc.’s Response Memorandum of Law in Opposition to Defendant Bryk’s Partial Motion to Dismiss (hereinafter “Plaintiff’s Brief”) at p. 9. 5 For a comprehensive discussion of the Wisconsin’s common law on restrictive covenants and the reasons for and effect of the adoption of Wis. Stat. §103.465 on that common law, see Streiff v. Amer. Family Mut. Ins. Co., 118 Wis. 2d 602, 607-09, 348 N.W.2d 505 (1984). 6 Wis. Stat. § 103.465 (Emphasis added).

29 (ii) “Accepting Priority’s well-pleaded facts as true, as this Court must, Bryk

was neither an employee nor an agent of Priority for purposes of § 103.465. Instead,

Bryk was retained as a ‘Consultant’ who would ‘act as an independent contractor”;7

(iii) Therefore § 103.465 does not apply to the Consulting Agreement’s

restrictive covenants, and this Court can and should correct any unreasonable aspects of

those constraints on Dr. Bryk’s conduct.

This argument is disingenuous, misleading and should be rejected for three reasons:

1. Plaintiff states that its assertion that Dr. Bryk is not an agent must be accepted because of its “well-pleaded facts”: “Bryk ‘contracted to consult’ with Priority. (Compl. ¶ 2.)

Bryk was retained as a ‘Consultant’ (Compl. Ex. 1, p. 1) who would ‘act as an independent contractor, and not as an employee or agent of Company.’”8

THIS IS A DISTORTED PRESENTATION OF PLAINTIFF’S OWN PLEADINGS.

• In Paragraph 135 of the Complaint, Plaintiff alleged that “Bryk owed Priority

certain fiduciary duties of agent to principal.”9 The following four

paragraphs each allege a breach of Dr. Bryk’s “agency duty.”10

• Paragraph 6 of the Consulting Agreement - - attached to the Complaint - -

does indeed, as stressed by Plaintiff, state that Priority and Dr. Bryk “agree

and acknowledge that consultant [sic] is acting and will act as an independent

contractor, and not as an employee or agent of Company.”11 BUT

7 Plaintiff’s Brief at p. 13 (Emphasis added; internal citations omitted). 8 Id. 9 Emphasis added. 10 Plaintiff highlights this glaring inconsistency with the following curious declaration: “...Priority asserts that Bryk is an agent for purposes of owing certain fiduciary duties to Priority, but that his Agreement was not an agency agreement governed by Wis. Stat. §103.465.” (Plaintiff’s Brief at p. 14, n.8.) No, the Consulting Agreement actually was the requisite manifestation of the assent of its parties to have “the agent act on the principal’s behalf and subject to the principal’s control....” Restatement (Third) of Agency § 1.01 (2006). 11 Complaint, Ex. 1.

30 PLAINTIFF OMITS ANY COMMENT ABOUT THE VERY NEXT

SENTENCE which modifies and limits this pronouncement: “Except for

the authority to engage in the activities described in section 1 of this

Agreement, consultant [SIC] agrees that he is not an agent of company

[SIC]....”12 Thus, the Consulting Agreement states that Dr. Bryk IS an agent

of Plaintiff, subject to certain limits, for purposes of performing the activities

described in Section 1 - - which, together with Exhibit A, incorporated in that

Agreement, describe Dr. Bryk’s duties under the contract.

Plaintiff argues that Dr. Bryk’s restrictive covenants are not subject to § 103.465 because he is not an employee or agent. Yet contrary to Plaintiff’s characterization of its pleadings, both they and the Consulting Agreement describe Dr. Bryk as its agent!

2. Relying on Dixon v. Ladish Co., Inc.13, Plaintiff states that, having asserted in its

Complaint that Dr. Bryk was neither its employee nor agent, this Court must “accept all well-pleaded facts as true, and draw all possible inferences in favor of plaintiff”14 and therefore must evaluate the challenged restrictive covenants without reference to Wis. Stat. §103.465.

Plaintiff’s reading of Dixon, however, is disturbingly selective:

The court reads the complaint in the light most favorable to the plaintiff, accepts all well-pleaded facts as true, and draws all possible inferences in favor of plaintiff. Factual allegations are presumed true, “even if doubtful in fact.” However, conclusions of law are not entitled to this assumption of truth.15

Agency status is a question of law. Brown v. Sandeen Agency, 2009 WI App 11, ¶ 18,

762 N.W.2d 850 (2008). Consequently, the entire foundation upon which Plaintiff’s efforts to

12 Id. (Emphasis added). 13 785 F.2d 746, 748 (E.D. Wis. 2011). 14 Plaintiff’s Brief at p. 8. 15 Dixon v. Ladish Co., Inc., 785 F. Supp. 2d at 748 (Internal citations omitted; emphasis added).

31 evade §103.465 rests, crumbles. Plaintiff’s assertion of a legal conclusion - - that Dr. Bryk was not its agent - - “is not entitled to an assumption of truth” and its restrictive covenants clearly apply to “an assistant, servant or agent ... during the term of the employment or agency, or thereafter....”16

3. Plaintiff fails to mention Pollack v. Calimag,17 in which the court applied

§ 103.465 in determining the enforceability of a restrictive covenant between an individual serving as an “independent contractor” and a corporate principal.

Plaintiff’s efforts to demonstrate that § 103.465 does not apply to all restrictive covenants also are misleading. Plaintiff correctly cites Justice Abrahamson’s concurrence in Heyde Cos.,

Inc. v. Dove Healthcare, LLC, 18 for the proposition that “Section 103.465 does not ... occupy the field of contracts in restraint of trade.” Yet Plaintiff fails to mention that Justice Abrahamson and the majority applied section 103.465 in invalidating the no-hire restriction in that case.19

Plaintiff’s efforts also are unavailing because none of the cases it cites in its effort to avoid § 103.465 involve anything like this restrictive covenant or the facts asserted in its

Complaint.20 Selmer21 held that § 103.465 did not govern the enforceability of a restrictive covenant contained in a stock option agreement, just as its progenitor Reiman Associates, Inc. v.

R/A Advertising, Inc.,22 held that the statute didn’t apply in the sale of a business. But how are restrictive covenants agreed to in the sale of an ownership interest in any way relevant to the restrictive covenants in the Consulting Agreement?

16 Wis. Stat. § 103.465. 17 57 Wis. 2d 222, 228, 237, 458 N.W.2d 591 (Ct. App. 1990). 18 2002 WI 131, ¶ 29, 258 Wis. 2d 28, 654 N.W.2d 830. 19 Id. at ¶¶ 13-16, 23. 20 See Plaintiff’s Brief at p. 12. 21 2010 WI App 106, 328 Wis. 2d 263, 789 N.W.2d 621. 18 102 Wis. 2d 305, 306 N.W.2d 292 (Ct. App. 1981).

32 Finally, Plaintiff places great reliance on County Materials Corp. v. Allan Block Corp.23 that § 103.465 did not apply in that action. Plaintiff finds significance in this holding because

“the facts contained in Priority’s Complaint more closely approximate the findings in the County

Materials Corp. case....”24 - - a dispute between two corporations in which the restrictive covenant was ancillary to their patent licensing dispute. The court’s holding in County

Materials, however, turns on facts wholly different than those in this case and arose in the context of an entirely different legal issue:

Wis. Stat. § 103.465 does not control this action because the covenant not to compete at issue was not included as part of an employment contract. Additionally, plaintiff did not serve as an assistant, servant or agent of defendant. Accordingly, because plaintiff failed to cite any other public policy ground which would warrant overriding the choice of law provision the Court will honor the parties’ express agreement and interpret the covenant not to compete under Minnesota law.25 \

County Materials simply does not control the result in this case.

In sum, the restrictive covenants challenged by Dr. Bryk arose in the context of what the

Complaint and the parties’ contract described as an agency relationship. Unlike the contract in

County Materials, the Consulting Agreement specified that Wisconsin law should govern disputes, and in this case, that means § 103.465 must determine the enforceability of those restrictive covenants.

23 431 F. Supp. 2d 937, 950 (W.D. Wis. 2006). 24 Plaintiff’s Brief at p. 14. 25 431 F. Supp. 2d 937, 950 (W.D. Wis. 2006).