Spencer Fane LLP Logo

Wisconsin Court Considers Non-Compete in Stock Option Agreement

In Selmer Company v. Rinn, 2010 WL 2733361 (Wis. App. 2010), the court of appeals considered whether a non-compete provision contained in a stock option agreement should be interpreted strictly under Wisconsin statute § 103.465, or under the more easily met “rule of reason.” Selmer is a full-service contractor, construction manager, design-builder and industrial services firm. Id.at 1. Rinn started at the Company as a salesperson but was soon promoted to director of business development. Rinn worked very closely with customers and was considered the “face” of the company. Id. During Rinn’s employment, the Company gave key employees the opportunity to purchase stock in its parent company at a reduced price. The stock option agreement contained a nonsolicitation provision prohibiting the employee from soliciting past, present, or future customers for one year. Id. Rinn signed the Agreement and purchased stock. The court noted that Rinn was not forced to accept the offer and his refusal would not have affected his employment with the Company in any way. Id.at 2.

In August of 2007, Rinn ended his employment with the Company and initiated employment with a competing contractor. Rinn sold his company stock for a profit. Rinn also immediately began soliciting his former employer’s customers. The Company sued Rinn and his new employer, and the trial court issued an injunction. Rinn appealed, arguing that the restrictive covenant was an overly broad and unenforceable restraint under Wisconsin Statute § 103.465.

The court of appeals noted that section 103.465 endorses “a strong public policy against the enforcement of unreasonable trade restraints on employees.” Id. at 4. A contract provision governed by the statute is closely scrutinized and is prima facie suspect. The court held, however, that the statute did not apply to Rinn’s Agreement because the stock option agreement was not “inextricable” from his employment relationship, and Rinn and the Company held equal bargaining power regarding the Agreement. Accordingly, the court held that the less strict “rule of reason” applied, requiring “that a restrictive covenant not to compete after a term of employment should be reasonably necessary for the protection of the legitimate interests of the employer and at the same time should not be oppressive and harsh on the employee or injurious to the interests of the general public.” Id. at 5. The court stated that Rinn was a high-level manager who had developed close personal relationships with the Company’s customers and that the restriction was therefore necessary to protect the Company’s legitimate interests. The court concluded that the covenant was therefore reasonable and enforceable.