Everyone just move along, there’s nothing to see here. This one sputtered and fizzled to a finish. The Supreme Court split evenly (3-3) on overturning or upholding the court of appeals, and so sent the case back to the court of appeals. A disappointment for those of us looking for a statement by the state’s high court.
First of all, I must apologize for the lag in posting here. I was on vacation for a week, and upon returning, have been completely underwater with a brief in the court of appeals. However, since I’ve now caught up (kind of), I anticipate that I’ll return to my schedule of regular posting. On to the interesting part.
Many of the companies with whom I work use venue provisions in the contracts they sign with customers or 
suppliers. This is, of course, particularly helpful for companies that do business throughout the world or the country. It can also be useful for companies that work statewide, making sure that they retain home-field advantage by designating the county that will serve as the site of any litigation.
Venue provisions are often contested, and almost as often, the opposing party will start an action in the venue that it prefers, rather than travel to the venue designated in the contract. While I won’t talk today about drafting strong venue provisions in general, a venue provision can carry some extra teeth by adding a separate provision to the contract requiring the payment of attorney fees.
When combined with an attorney fee provision, a strong venue provision provides extraordinary leverage. It can be challenged, but the financial risk of the litigation just increased, along with the possibility of fighting a two-front war, and being on the hook for the fees incurred in both. If you’ve already got a venue provision, add the attorney fee provision. And if you’ve already got both, consider specifically linking the two, or making clear that the fee provision applies to all litigation arising from the relationship, including any cases started in the wrong venue.
World map photo courtesy Norman B. Leventhal Map Center at the BPL flickr gallery via this creative commons license.
Employers, take heart. There’s a new case that give guidance on how to escape the glaring scrutiny cast on your non-competition/solicit agreements by Wis. Stat. s. 103.465. In The Selmer Co. v. Rinn, the Wisconsin Court of Appeals upheld a Brown County trial court decision that concluded the non-compete at issue did not fall within the reach of the statute., but rather was to be examined under the “rule of reason.” How was this possible?
The court began by citing Reiman Associates, Inc. v. R/A Advertising, Inc., 102 Wis. 2d 305, 306 N.W.2d 292 (Ct. App. 1981), for the proposition that not all non-compete agreements are governed by the statute. Specifically, it drew parallels with the facts of the Rinn case:
Rinn was, of course, an employee at the time he contracted for 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.(8) Although Rinn has received the benefit of that bargain–he exercised the stock option and more than quadrupled his initial investment–he now seeks to evade the consequences of that choice by invoking WIS. STAT. § 103.465’s protections. This case falls closer to the bargained-for exchange in Reiman than it does to the employment cases cited above.
The court appeared most convinced by the idea that while there was an incentive provided to Rinn to sign the non-compete (discount stock prices), there were no consequences if he did not sign the agreement. The court followed up with a common-law reasonableness analysis:
Having determined WIS. STAT. § 103.465 does not apply, we must determine whether the covenant not to compete satisfies the common law’s rule of reason. In determining reasonableness, we examine whether the covenant is: “(1) reasonably necessary for the protection of the beneficiary;” (2) reasonable between the parties, “particularly as to the party restrained, considering time, space, purpose, and scope; and (3) not specially injurious to the public.” Reiman, 102 Wis. 2d at 309. Whether a covenant is reasonable is a matter of law to be determined from the writing. My Laundry Co. v. Schmeling, 129 Wis. 597, 613, 109 N.W. 540 (1906).
The elements are materially identical to the Wis. Stat. 103.465 analysis, but the scrutiny is much lower. Consider this when the next non-compete discussion arises.
chains photo courtesy [sic]’s flickr gallery via this license
It should go without saying, shouldn’t it? And yet every day, people get involved in partnerships without written agreements, or where there are two partners, each of whom is a 50% partner (if I remember right, that was day one of Bus Orgs in law school). A recent, although unpublished, review of a Pierce County case once again demonstrates the potential pitfalls (they are many and deep) of not adequately thinking through a partnership.
In Bushard v. Reisman (Pierce County June 15, 2010), Bushard and Reisman formed a limited liability partnership in 1995, but didn’t enter into any written agreement. Inevitably, there was a dispute over how to run the business and in August 1999, Bushard sent a letter declaring that he was exercising his right to dissolve the partnership and wind up its affairs. This didn’t happen, Bushard didn’t push the issue, and Reisman ran the partnership profitably for the next nine years, towards the end taking a salary in addition to his partnership draws, justified because he was the one running the business, doing the work.
Not so fast, said Bushard, who asked the court to dissolve the partnership and require that Reisman, who was responsible for all the partnership’s income for the last nine years, to pay back all the salary he took. Apparently against all common sense, the circuit court agreed with Bushard:
The circuit court denied Reisman’s motion for summary judgment, concluding that Reisman was prohibited, as a matter of law, from taking a salary from the partnership without Bushard’s agreement. Bushard then moved for orders directing the winding up of the partnership and compelling Reisman to repay the amounts he took as a salary.
The court granted the motion, directing the parties “to complete the winding up of the affairs of PressEnter … and to report to the court in 60 days regarding the progress.” It also ordered Reisman “as part of the winding up of the affairs of PressEnter … to account to and reimburse PressEnter … for the amounts which he took as guaranteed draws or salary,” and dismissed his counterclaims for unjust enrichment and breach of fiduciary duty.
The appellate court agreed, holding that Reisman would have to pay back his salary, and that the partnership was to be dissolved:
When a partner dissolves a partnership, he or she may either (1) “permit the business to continue and claim his or her interest in the dissolution value as a creditor, or (2) … force the dissolved business to wind up and take his or her part of the proceeds.” Matteson v. Matteson, 2008 WI 48, ¶25, 309 Wis. 2d 311, 749 N.W.2d 557. “[T]he settlement of the former partner’s account differs depending on whether it is a wind-up or a continuation.” Lange v. Bartlett, 121 Wis. 2d 599, 601-02, 360 N.W.2d 702 (Ct. App. 1984). Therefore, it is important “for a trial court faced with making a settlement of a former partner’s account … to determine what election the retiring partner made at the point of dissolution.” Id.
Reisman argues Bushard’s election is disputed because he permitted Reisman to continue operating the business for years after initiating the dissolution. He therefore contends the court should not have ordered the parties to complete PressEnter’s winding up without determining whether Bushard in fact elected to wind up the business.
Bushard’s letter dissolving the partnership explicitly referred to “the winding up of the partnership ….” Moreover, wind-up is the default option. “Every partnership dissolution causes a wind-up rather than a continuation unless the outgoing partner ‘consents’ to a continuation.” Id. at 601-02. Thus, unless the dissolving partner expressly elects continuation, we presume he or she elected to force the business to wind up. See id. at 601.
If you’re even thinking about getting involved in a partnership, think long and hard, read this case, and then be sure you have a partnership agreement drafted by people who know what kind of trouble might result in the future.
In Gillitzer v. Andersen, the court of appeals once again addressed the divisibility of various employment-related covenants. Employees signed a contract agreeing that: 1) if the employer paid for their electric apprenticeship training, and the employee left the company’s employ within four years, the employee would repay the training costs; and 2) the employee would, for four years after leaving the company, not solicit present or past customers, employees, or disclose price or customer lists. The employee defendants, of course, left before the four years was up and Gillitzer wanted its money back.
The employees claimed that the unreasonable non-compete provision, under Streiff v. American Family Mutual Insurance Co., 118 Wis. 2d 602, 348 N.W.2d 505 (1984), was indivisible from the admittedly reasonable repayment provision, and should therefore be struck down. Gillitzer claimed that admittedly unreasonable non-compete provision, under Star Direct, Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898, was divisible from the reasonable and enforceable repayment provision.
The court ducked the decision, finding the provisions divisible under both cases:
Both cases describe the divisibility test in terms of whether the provisions must be read together to determine the meaning of either. See Streiff, 118 Wis. 2d at 612; Star Direct, 319 Wis. 2d 274, ¶78. Both acknowledge the fact-intensive nature of the divisibility analysis. See id. 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 conclude that under the court’s language in either Streiff or Star Direct, the training reimbursement provision is divisible from the non-compete provision.
Whether viewed under the Streiff or Star Direct language, the training reimbursement provision here is clearly divisible from the non-compete clauses.
For those involved in drafting, enforcing, or challenging non-compete or comparable provisions, take note of the court’s comments about both Streiff and Star Direct.
Contract picture courtesy ol slambert flickr gallery under this creative commons license.
In Polsky v. Virnich, the court of appeals has some suggestions for the Supreme Court. The court of appeals is unhappy with the rule set forth in Beloit Liquidating, calling it “not sensible.” Under Beloit Liquidating, a corporation’s officers and directors owe no fiduciary duty to the creditors of the corporation until the corporation is both insolvent and no longer a going concern:
The court’s decision flowed from its holding that “a corporation must be both insolvent and no longer a going concern before a duty is owed to the corporation’s creditors. “ . . . The court concluded that the corporation was a going concern during the relevant period of time and, therefore, “any claim asserted by Beloit Corporation’s creditors for breach of fiduciary duty and any claim on behalf of Beloit Corporation resulted in no injury to the corporation.”
Polsky, par. 11. While the Polsky court conceded that it was bound by Beloit Liquidating, it wasn’t happy about the situation.
The court of appeals commented that the law in most jurisdictions applies a fiduciary duty to officers upon the corporation’s insolvency, regardless of the “going concern” analysis.
The problem, as we see it, is this: A business can be run as a “going concern” long after it is insolvent, thus making it a relatively simple matter for the officers and owners of a closely held corporation to strip many of the remaining assets of the “sinking ship” without fear of running afoul of a duty to creditors. At oral argument before the supreme court, counsel for amicus Wisconsin Bankers Association explained
that one consequence of diminished creditor protection is that creditors will make it more difficult and more expensive for many corporations to borrow money. For example, according to the Association’s counsel, more ‘personal guaranties, regular audits, periodic examinations, [and] stricter underwriting’ will be imposed on corporate borrowers. Therefore, it appears to us that corporations as a whole would benefit if our supreme court modified the Beloit Liquidating holding to bring it into line with the majority of other jurisdictions.
Stay tuned to this issue to see if the Supreme Court takes up this issue, and whether or not it concurs with its brethren on the lower court. You can read more on this issue from Alex De Grande of the State Bar of Wisconsin.
Decaying ship photograph courtesy Michael (mx5tx)’s flickr gallery under this creative commons license.
The Milwaukee Business Journal reports that a severe outbreak of swine flu could “devastate businesses” already stretched thin on manpower by staff cuts resulting from the economic downturn. The swine flu made quite a stir a few months ago with every TV news station and many written outlets (the Business Journal was one exception) competing to provide the most over-the-top, hysterical reporting on what a worldwide pandemic this would surely turn out to be. Now that it’s back and actually making inroads, the reporting is relatively quiet.
Ironic that the same update of the Business Journal reports that Milwaukee County, like many other governmental entities (including the State of Wisconsin), has turned to furlough days to address budget concerns (this only avoids a tough decision for the time being, but that’s another story for another blog).
Used under a Creative Commons License from agoode's Flickr gallery
For-profit business, which must operate efficiently to survive, can’t afford to lose much of their workforce for a couple of weeks without severely hampering productivity. Governmental entities, apparently, have so much extra staffing that the government services can proceed uninterrupted even without a substantial portion of the workforce for a substantial period of time.
The Milwaukee Business Journal reports that a recent study ranks Wisconsin 42d among the 50 states in its tax treatment of businesses. Consider, too, the ever-increasing burden of fees imposed for “services” that used to be financed by taxes. It would be interesting to see a study of the combined impact of taxes and fees on business.
City adding machine photo courtesy flickr user Seattle Municipal Archive under this creative commons license.
