Opinion ID: 1835915
Heading Depth: 3
Heading Rank: 1

Heading: The Customer Clause

Text: ¶ 23 The customer clause prohibits Dal Pra, for 24 months following termination, from interfering with or endeavoring to entice away a person or entity which is a customer or which was a customer ... within a period of time of one year prior to... termination. The clause further specifies that prohibited customers are those for which Employee performed services or otherwise dealt with or obtained special knowledge about in the course of employment. The provision also prohibits Dal Pra from approaching any such customer or past customer for prohibited purposes or cooperating with others toward that end. ¶ 24 This provision, then, expressly prohibits interfering with or attempting to entice away: (1) current customers of Star Direct that Dal Pra serviced, dealt with, or obtained special knowledge about during his employment, and (2) those who were customers during the year prior to Dal Pra's termination (past customers) whom Dal Pra serviced, dealt with, or obtained special knowledge about during his employment. ¶ 25 The circuit court concluded that the customer clause is unenforceable because Star Direct has no legitimate interest in restricting interference with past customersinterpreted as those who no longer do business with Star Direct. The court of appeals did not address the enforceability of the customer clause because it concluded that it was indivisible from the unenforceable business clause. Star Direct, Inc., No.2007AP617, unpublished slip op., ¶¶ 28-29. ¶ 26 Dal Pra finds the customer clause objectionable for three reasons. First, he argues that Star Direct has no legitimate protectable interest in prohibiting solicitation of past customers. Second, Dal Pra maintains that the provision unreasonably prohibits contact with customersboth current and pastwhom Dal Pra may not have been in contact with for years. Third, he alleges that Star Direct's failure to systematically obtain restrictive covenants shows that they are not necessary for its protection. These objections are addressed to the first of the Lakeside Oil criteria, that is, whether the restrictions are necessary for Star Direct's protection. Lakeside Oil, 8 Wis.2d at 163, 98 N.W.2d 415. The parties do not seriously dispute the clause's sufficiency under the remaining Lakeside Oil criteria. ¶ 27 To address these questions, we first look at Star Direct's protectable interests as a general matter and how they interact with the facts of this case. Second, we address Dal Pra's assertion that Star Direct has no interest in its past customers. Third, we address Dal Pra's contention that Star Direct has no interest in prohibiting competition with customers whom Dal Pra may not have serviced or interacted with for years. Finally, we discuss Dal Pra's contention that Star Direct did not systematically obtain non-compete agreements from its route salespeople, demonstrating the lack of a protectable interest. We ultimately conclude that the customer clause is reasonable and enforceable.
¶ 28 Dal Pra was a route salesperson in a very competitive business. Route salespeople generally pose an elevated threat to the employer's business due to the special personal relationships, rapport, and goodwill they develop with the employer's customers while in the employer's service. See id. at 163-64, 98 N.W.2d 415; Chuck Wagon Catering v. Raduege, 88 Wis.2d 740, 752-54, 277 N.W.2d 787 (1979); see also Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 214-16, 267 N.W.2d 242 (1978) (describing the special need for protection from route salespeople, but concluding that the former employee was akin to a non-route salesperson). In the typical and classical case of a route customer and salesperson, it is assumed that ... a special personal relationship will develop which will continue even though the salesman should commence his own enterprise or switch employers. Gary Van Zeeland Talent, Inc., 84 Wis.2d at 215, 267 N.W.2d 242. ¶ 29 This was true with Dal Pra. Star Direct invested in Dal Pra, giving him a platform from which to foster, nurture, and cultivate his customer contacts and relationships. Star Direct used marketing dollars to promote Dal Pra and sent him to industry events that further enhanced his ability to develop customer relationships. The record is clear that this was and is a fiercely competitive, relationship-based business. The customers he dealt with, then, were not simply buying product based on price or other objective factors. As Bradley Son, Star Direct's President, made clear in his affidavit, personal and professional rapport between salespeople and customers is essential to a successful and profitable business. See Lakeside Oil, 8 Wis.2d at 159-60, 98 N.W.2d 415 (upholding the reasonableness and enforceability of a restrictive covenant against a former route salesperson where [c]ustomers were obtained primarily upon the basis of the defendant's personal salesmanship and the faith and trust the defendant could engender in the customer). ¶ 30 In addition to the relationship-based nature of the business, Dal Pra's employment positioned him to obtain certain knowledge [6] regarding the specific needs and wants of his customers, the pricing of Star Direct's products, Star Direct's costs, and the profit margins Star Direct earned on certain products. Dal Pra, in our opinion, fits the classic description of the route salesperson, whose base of information and relationships could constitute a threat to Star Direct.
¶ 31 The customer clause prohibited Dal Pra from contacting past customers, defined as those who purchased from Star Direct within one year prior to his termination. Dal Pra asserts that Star Direct does not have a legitimate protectable interest in these past customers. The circuit court agreed, and so does the dissent. ¶ 32 No Wisconsin case has explicitly addressed or affirmed an employer's interest in customers who have recently chosen to cease doing business with the employer. However, Wisconsin courts, including this court, have reviewed provisions that clearly apply to past customers, and have been untroubled by this asserted interest. ¶ 33 In Rollins Burdick Hunter of Wis., Inc. v. Hamilton, 101 Wis.2d 460, 304 N.W.2d 752 (1981) (hereafter  Hamilton ), this court considered a restrictive covenant that prohibited the two defendant employees from soliciting, contacting, or doing any competitive business with anyone who had been a customer of the company during the two years preceding termination or the period of their employment, whichever was shorter. Id. at 462-63, 304 N.W.2d 752. Because the employees worked for more than two years, the two-year timeframe was applicable. Id. During those two years preceding termination, the employer had over 6,000 customers, only 175 of which had contact with the defendant employees. Id. at 463, 304 N.W.2d 752. Though the court did not discuss it, such a customer pool certainly could have included customers who had chosen to take their business elsewhere. Thus, this provision prevented the employees from contacting both current and past customers with whom they may or may not have had contact. It bears reminding that the two-year timeframe here is one year longer than the provision in the case at bar. ¶ 34 The litigants and the courts were primarily concerned that this prohibited contact with customers the employees may not have serviced at all. Id. at 463-64, 304 N.W.2d 752. On review, we determined that the employer may have a legitimate protectable interest where the employees had access to important customer information, even if they did not personally have contact with those customers. Id. at 468-69, 304 N.W.2d 752. Though not ultimately determining whether the provision was valid, we reversed the court of appeals and circuit court who had previously found the provision invalid. Id. at 471-72, 304 N.W.2d 752. ¶ 35 A similar restrictive covenant was at issue in Farm Credit Servs. of N. Cent. Wis., ACA v. Wysocki, 2001 WI 51, 243 Wis.2d 305, 627 N.W.2d 444. In that case, for one year following termination, an employee who provided accounting, bookkeeping, and tax preparation assistance was prohibited from engaging in the same business activities with persons the employee consulted or serviced at any time during the one year immediately prior to the date of separation. Id., ¶ 4. Again, though not discussing this point, the total world of possible customers that the employee could not contact included customers who may have chosen to no longer do business with the employer. We concluded that such a restriction was not invalid per se, and remanded to the circuit court for further fact-finding. Id., ¶ 16. ¶ 36 In a similar court of appeals case, the court determined that a restrictive covenant prohibiting, among other things, interference with a client who was a customer during the past two years, was reasonable as a matter of law. Techworks, LLC v. Wille, 2009 WI App ___, ¶ 6, ___ Wis.2d ___, ___ N.W.2d ___, 2009 WL 818970. Though again not discussed in the court's analysis, this provision includes customers who may have chosen to take their business elsewhere during the previous two years, and the court determined this provision was enforceable. ¶ 37 As this brief review of the case law shows, Wisconsin courts and litigants have been untroubled by an employer's asserted interest in its recent past customers. While these cases do not settle the matter, the customer clause is distinguishable from these other cases only in that it expressly divided the customers into two identifiable groupscurrent and past customers. This brings the issue to the fore, and the question is does Star Direct have that interest vis-à-vis Dal Pra? [7] ¶ 38 Star Direct does have an interest in prohibiting the solicitation of its recent past customers. First, Dal Pra obtained significant knowledge regarding Star Direct's business that could be used against Star Direct. If not prohibited, Dal Pra would be able to approach these customers with knowledge of Star Direct's prices and pricing strategies, proprietary marketing techniques, and profit margins. He would have all the information a competitor would want and need to know to effectively undercut Star Direct. ¶ 39 Second, through his employment and because of Star Direct's investment in him, Dal Pra would, as the customer clause so states, have serviced, dealt with, or have special knowledge about these customers. He would know their specific needs and product desires, and would have a relationship history with many of them. This would place him in a far better position than an ordinary competitor, and give him a distinct advantage. ¶ 40 Finally, Star Direct does have a general interest in winning back the business of its recent past customers. The record shows this is a relationship-based and highly competitive business. It takes significant effort and investment to win customers. These past customers may have chosen to take their business elsewhere only temporarily, and would still have a history with Star Direct. While an employer's prospects of rekindling customer relationships fades considerably over 15 years (as in Equity Enters., Inc. v. Milosch, 2001 WI App 186, 247 Wis.2d 172, 633 N.W.2d 662), we believe under the facts of this case that an employer is entitled to an opportunity to recoup the considerable investment of resources it made in developing and fostering customer relationships and business opportunities that were active as recently as one year prior to the employee's termination. ¶ 41 For the reasons articulated above, Dal Pra would not simply be engaging in ordinary competition with Star Direct if permitted to interfere with recent past customers. He would have a distinct competitive advantage, and this advantage would be detrimental to Star Direct's business. We render no opinion as to how much time must pass between a customer placing an order and a route salesperson's termination before the employer no longer has a legitimate protectable interest in that customer. Our holding today under the facts of this case is that the interim of one year is not too long.
¶ 42 The second argument Dal Pra makes is that the non-compete clause prohibits interference with customers whom Dal Pra may not have been in contact with for years. [8] For example, the customer clause would prohibit him from soliciting a current or past customer whom Dal Pra might have serviced when he began with CB Distributors many years ago, but has had no contact with since. Dal Pra argues that this provision is unreasonable. ¶ 43 Dal Pra maintains that the court of appeals decision in Milosch mirrors this situation and is dispositive. In Milosch, the employer attempted to prohibit the employee for 18 months following termination from doing business with any customers of the employer with whom the employee had dealt during any portion of his 15-year employment, including customers who may have long ago transferred their business to competitors. Id., ¶ 15 n. 4. The court determined that a customer serviced 15 years earlier constituted too long a timeframe for the employer to have any protectable interest. Id. (This restriction is unreasonable because it would prohibit Milosch from doing business with a customer he serviced during his first weeks of employment in 1982 who subsequently transferred his or her business to a competitor of Equable.) ¶ 44 The difference between Milosch and this case is that the customers in Milosch did not need to be recent or current customers at all; this makes all the difference. The court of appeals in Milosch specifically cited the customer whom Milosch could have serviced during the first weeks of his employment 15 years earlier who then took his or her business elsewhere. Id. ¶ 45 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. ¶ 46 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. ¶ 47 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. ¶ 48 In short, Dal Pra learned information either about the customers and/or about Star Direct's business that would give him a unique advantage against Star Direct if he was allowed to pursue current and recent past customers, even those with whom he had not recently dealt. We conclude this is reasonably necessary for the protection of the employer.
¶ 49 Dal Pra argues that the restrictions in the customer clause are unreasonable and unnecessary for Star Direct's protection as evidenced by Star Direct's alleged inconsistency in obtaining restrictive covenants from its route salespeople. ¶ 50 The record is clear that Star Direct substantially adjusted its business practices in 2002 when the new owner took over the company and began requiring all new route salespeople to sign restrictive covenants. The only route salespeople who do not have covenants not to compete are the five individuals who were employed before the current owner bought the company in 2002. As the owner stated, there was the obvious risk that the current employees would not sign them if asked to, or would leave and begin competing with Star Direct. In fact, employers may not compel their existing employees to sign restrictive covenants without additional consideration. NBZ, Inc., 185 Wis.2d at 837-39, 520 N.W.2d 93. It is also clear that Star Direct assigned great value to the prospect of preventing competition from Dal Pra in particular as evidenced by its offer of a $30,000 bonus upon his completion of 30 months of employment. The fact that Star Direct has been consistent with all new route salespeople since 2002, when it also purchased the routes from CB Distributors, demonstrates sufficient consistency in obtaining non-compete agreements and shows that Star Direct did consider the risks posed by Dal Pra leaving and competing to be very real. ¶ 51 In short, we are untroubled by the fact that not every salesperson had a non-compete agreement. Star Direct has been consistent since 2002 for all new employees, and offered Dal Pra a $30,000 bonus for his retention, demonstrating the competitive risk that it legitimately fears from post-termination route salespeople like Dal Pra.
¶ 52 We decline to permit Dal Pra to usurp for his own benefit the customers, relationships, and opportunities that Star Direct paid for and invested in. The customer clause is necessary for Star Direct's protection because without it there is nothing preventing Dal Pra from taking advantage of all of Star Direct's investment in its route and customers for his own benefit and to Star Direct's detriment. The customer clause's time restrictions, geographic restrictions, impact on Dal Pra, and impact on public policy are not seriously contested by the parties. We conclude, then, that the customer clause is reasonable and enforceable on its own merits.