Opinion ID: 1835915
Heading Depth: 2
Heading Rank: 2

Heading: The Divisibility of the Restrictive Covenants

Text: ¶ 65 Wisconsin Stat. § 103.465 provides that if [a]ny covenant ... 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. This statute was passed in 1957 in response to our decisions in Fullerton Lumber Co. v. Torborg, 270 Wis. 133, 70 N.W.2d 585 (1955), and its companion case Fullerton Lumber Co. v. Torborg, 274 Wis. 478, 80 N.W.2d 461 (1957), authorizing courts to modify unreasonable covenants to make them reasonable and enforceable. See Streiff, 118 Wis.2d at 607-09, 348 N.W.2d 505 (discussing common law blue-penciling, which the court then departed with in the Torborg cases, prompting the legislature to pass Wis. Stat. § 103.465). ¶ 66 In Streiff, we addressed the divisibility of clauses under this statute. The restrictive covenant there provided that a terminated insurance agent employee could receive payment for extended earnings only if he refrained from certain competitive practices. Id. at 603, 606-07, 348 N.W.2d 505. After termination, the employer refused to pay extended earnings to the former agent, alleging that he had violated two of the restrictive provisions one prohibiting the sale of insurance for any other insurer in any state in which the employer was a licensed insurer, and the other prohibiting the solicitation of the employer's insureds. The employer eventually conceded that the first provision was unreasonably broad in its territorial scope and therefore unenforceable. Id. at 605, 607, 348 N.W.2d 505. The employer urged, however, that the provision prohibiting customer solicitation was divisible from the overbroad provision, and thus the covenant as a whole should not be declared unenforceable under Wis. Stat. § 103.465. Id. at 609, 348 N.W.2d 505. We then undertook to determine whether the contract's provisions were divisible into separate covenants. ¶ 67 The provisions of the restrictive covenant in Streiff were textually linked via a cross-referential third provision such that it was impossible to read, evaluate, or apply one without referring to the others. For instance, one provision stated that former employees would be paid extended earnings only if they complied with all other provisions in the contract. Id. at 606, 348 N.W.2d 505. A second provision was overbroad in providing for a forfeiture of extended earnings if a former employee engaged in certain insurance related activities in any state in which the employer was licensed. Id. at 606-07, 348 N.W.2d 505. A third provision prohibited certain activities related to the solicitation and servicing of the former employer's insureds, but did not expressly refer to the first provision's forfeiture of extended earnings upon non-compliance. Id. at 605-06, 348 N.W.2d 505. ¶ 68 Thus, to know what activities were prohibited under the first provision in Streiff, an employee would need to refer to all of the provisions of the contract, including the second provision (which restated the penalty for non-compliance), and the third provision (which did not). However, to understand the ramifications of not complying with the third provision, an employee would need to refer back to the first provision which mandated compliance with the contract in its entirety. The second and third provisions in Streiff, then, were textually linked by the first provision and were thereby indivisibly intertwined. ¶ 69 We therefore concluded that the provisions in Streiff, which cross-referenced each other and made entitlement to extended earnings under one provision dependent upon compliance with other provisions, were intertwined and the covenant must be viewed in its entirety, not as divisible parts. Id. at 613, 348 N.W.2d 505. ¶ 70 In Brass, the court of appeals purported to apply Streiff to restrictive covenants in a factual scenario also involving a former insurance agent employee. The court of appeals construed Streiff as providing that provisions are intertwined and indivisible when they govern several similar types of activities and establish several time and geographical restraints. Brass, 242 Wis.2d 733, ¶ 11, 625 N.W.2d 648. ¶ 71 The court of appeals in the present case applied Brass's construction of Streiff to find that the customer clause governed activity similar to and therefore indivisible from the unenforceable business clause. Star Direct, Inc., No.2007AP617, unpublished slip op., ¶ 26. Judge Vergeront, the author of the majority opinion, observed in a concurrence, however, that  Streiff does not support the conclusion that the customer clause and the business clause are indivisible and, therefore, one covenant. Id., ¶ 30. She maintained that the conclusion in Streiff was based on the textual link between the various clauses in that case. Id., ¶ 31. She stated that she would not read Streiff as establishing a test for indivisibility under which clauses are indivisible if they `govern several similar types of activities and establish several time and geographic restraints.' Id. (citing Streiff, 118 Wis.2d at 613, 348 N.W.2d 505). She expressed further concern that Brass provides a framework in which practically all restrictive covenants in an employment agreement are indivisible, and that Streiff does not require such a result. Id., ¶ 33. ¶ 72 We agree with Judge Vergeront's observations. We read Streiff as being premised primarily on the fact that the provisions were intertwined via their textual link. Nowhere does Streiff purport to establish a comprehensive test or set of factors to be analyzed for determining whether restrictive covenants are indivisible. ¶ 73 In fact, the court went out of its way to reserve much of the debate for future cases. In its discussion of the history of the adoption of Wis. Stat. § 103.465, it notes that Wisconsin used to follow the blue-pencil rule, in which it was empowered to strike the overly broad language of a restraint and enforce the divisible valid restraints. Streiff, 118 Wis.2d at 607-08, 348 N.W.2d 505. Under the blue-pencil rule, however, where the contract furnished no basis for dividing the restriction into reasonable and unreasonable portions, the whole covenant was void if any part of the restriction was unreasonable. Id. at 608, 348 N.W.2d 505. As the court in Streiff explained, we departed from this in the Torborg cases by enforcing an invalid, indivisible covenant after changing a 10-year prohibition to a three-year prohibition. Id. ¶ 74 The court in Streiff explicitly stated that it was not deciding whether a restraint which is reasonable as to activity, duration, and territory is enforceable under sec. 103.465, when the agreement includes a second restraint which is unreasonable as to activity, duration, and territory and is unenforceable under sec. 103.465. Id. at 613, 348 N.W.2d 505. In other words, the court was not purporting to decide whether Wis. Stat. § 103.465 overruled the common law distinction between divisible and indivisible contracts, or just blue-penciling of divisible contracts as was done in Torborg. See id. at 609 n. 4, 348 N.W.2d 505. ¶ 75 The court in Streiff, then, determined that the clauses in that case were indivisible, but it did not announce any new or comprehensive test for determining when a clause is divisible or not divisible under Wis. Stat. § 103.465. ¶ 76 Though the question was withheld in Streiff, we now make clear that we believe the legislative history and text of the statute do not eliminate or modify the common law rules on divisibility. The statute's prescriptions support this as they apply to any covenant, not to the whole employment contract. It specifies that if a restraint is unreasonable, the rest of that covenant is also unenforceable. See Wis. Stat. § 103.465. ¶ 77 In practice, most restrictive covenant provisions cover similar types of activity, or at least have substantial overlap. Often they will be drafted to accord with the employer's particular protectable interests. Thus, the expansive reading of Streiff offered in Brass does in fact render nearly all covenants not to compete unenforceable if one provision of one of the covenants is unreasonable. We do not believe Wis. Stat. § 103.465 or Streiff compel this result. ¶ 78 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 depend 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. [11] Overlap, even substantial overlap, between clauses is not necessarily determinative. Employers may have several protectable interests that apply in similar, though not exactly the same, situations and it makes sense to set these out in separate post-termination restrictive covenants. [12]
¶ 79 In the case at bar, the business clause, customer clause, and confidentiality clause do not reference each other. Neither is compliance with or the benefits of one dependent upon compliance with or the benefits of the other. Each deals with different interests. The business clause prohibits Dal Pra from engaging in competitive or substantially similar business activities in Dal Pra's former sales territory. This clause (though unreasonable and unenforceable as discussed above), protects a geographic territory. The customer clause is focused on protecting Star Direct's relationships with its current and recent past customers, which could be undermined by the efforts of a former route salesperson if left unchecked. The confidentiality clause prohibits the use or disclosure of confidential information. ¶ 80 There is certainly substantial overlap between these provisions. The customer clause, for example, prohibits engagement with certain current and recent past customers who, as a practical matter, will mostly be those in Star Direct's former sales territory, the area covered by the business clause. And the confidentiality clause prohibits the use of information that will basically prevent Dal Pra from engaging Star Direct customers with whom he dealt, which will be those in his former sales territory. ¶ 81 But the interests the clauses protect are (with the exception of the overbroad provisions of the business clause) legitimate and separate interests. The provisions are also not textually linked, intertwined, or mutually entangled in any way. In other words, one need not refer to the business clause or confidentiality clause, for example, to determine one's rights under the customer clause. The business clause, customer clause, and confidentiality clause may each be read, evaluated, and applied independently. Striking the overbroad business clause does not affect the independently sufficient and enunciated provisions of the customer and confidentiality clauses. ¶ 82 For these reasons, the three clauses at issue here are separate, independent, and divisible covenants. As such, the customer clause and confidentiality clause, which we have found to be reasonable, are independently enforceable despite the overbroad and unenforceable business clause.