Farm Credit Services v. Wysocki

2000 WI App 124, 614 N.W.2d 1, 237 Wis. 2d 522, 2000 Wisc. App. LEXIS 458

• Court: Court of Appeals of Wisconsin
• Decided: May 18, 2000
• Docket: 99-1013
• Status: Published

Opinions

ROGGENSACK, J.

¶ 1. Farm Credit Services of North Central Wisconsin, ACA (FCS) brought this action against David Wysocki, a former employee. FCS seeks to enforce a covenant not to compete which is a provision of a 1983 employment contract that Wysocki entered into with Production Credit Association of Wausau (PCA of Wausau). FCS claims it is the same corporation as PCA of Wausau, operating under a new legal name which was selected subsequent to several mergers which occurred during 1986 and 1991. Wysocki contends that the covenant is unenforceable by FCS because it is not the same corporation as PCA of Wausau and even if it were, the restrictive covenant is void under the provisions of WlS. STAT. § 103.465 (1983-84).¹ We agree that even if we were to assume, arguendo, that FCS is the same corporation as PCA of Wausau, because the restrictive covenant's "specified territory," as that term is used in § 103.465, has been unilaterally enlarged by FCS, we conclude that the restrictive covenant is void. Therefore, we affirm the judgment of the circuit court dismissing this action against Wysocki.

BACKGROUND

¶ 2. Wausau Production Credit Association was formed in 1934 as an agricultural credit association pursuant to the terms of the Farm Credit Act. See 12 U.S.C. 2001-2279cc (1994 & Supp. 1999).² Wysocki was hired in 1980 and began work without a written contract of any type. The majority of his time was spent on credit-related transactions for farmers who were members of that association. By 1983, Wausau PCA had changed its name to Production Credit Association of Wausau. PCA of Wausau, which was chartered to serve a specified geographic area, then entered into a written contract with Wysocki as a "Related Services Coordinator/Loan Officer" to perform "all other duties customarily performed by one holding such position" and to provide "accounting, bookkeeping, or prepare tax returns for PCA membership." The contract also contained the following restrictive covenant:

Post-employment Competition. In consideration.of the special training and materials provided to Employee by PCA and the preparation of tax returns for persons engaged in agriculture and confidential information made available to Employee by PCA concerning the financial affairs of its members, including, in particular, information generated by the Agrifax program, it is agreed that the Employee's activities shall be restricted in accord with this paragraph. If the Employee ceases to be a PCA Employee, for any reason, the Employee shall not, for a period of one year immediately following the date of separation from PCA, directly or indirectly, engage in the business of tax preparation, tax consultation, bookkeeping, or accounting, or any other duties performed as a tax consultant for PCA with the persons(s) (sic) the Employee con-suited or serviced in performance of his/her consultant duties at any time during the one year immediately prior to the date of separation. Person(s) includes individuals, sole proprietorships, partnerships, and corporations.

¶ 3. In 1986, PCA of Wausau merged with Production Credit Association of Antigo and Production Credit Association of Neillsville, in accord with an agreement among the PC As that PCA of Wausau would be the surviving entity.³ Prior to that merger, P CA of Wausau had been authorized to serve five counties and part of a sixth: Lincoln, Marathon, Portage, Price, Wood and a portion of Taylor. After that merger and a subsequent name change in 1989, PCA of Wausau, then legally operating as PCA of North Central Wisconsin, was chartered to serve twelve counties: Clark, Forest, Langlade, Lincoln, Marathon, Oneida, Portage, Price, Taylor, Vilas, Waushara and Wood. ⁴ After its charter was amended to permit the geographic expansion of its service area, PCA of North Central Wisconsin did not enter into any additional written contracts with Wysocki, but Wysocki continued to provide services to it, as an employee.

¶ 4. In December of 1990, in anticipation of its merger with the Federal Land Bank Association of North Central Wisconsin, PCA of North Central Wisconsin changed its name to Farm Credit Services of North Central Wisconsin, ACA, under which name it continues to do business. The territory that FCS continues to serve is the same twelve counties served since 1989. However, FCS's business involves more facets than it did prior to the merger.⁵ Based on undisputed facts, FCS contends that because the mergers it participated in were statutory mergers where the merger documents chose it as the surviving entity, it is the same corporation as that which contracted with Wysocki; and therefore, it is entitled to enforce the restrictive covenant against him upon his resignation in 1998.

¶ 5. Wysocki, denying that the restrictive covenant is enforceable, moved for summary judgment of dismissal, which the circuit court granted. It concluded that FCS was not the same entity as PCA of Wausau and that even if it were, the restrictive covenant was not enforceable because the territory specified in 1983 had been enlarged unilaterally by the time of attempted enforcement in 1998.

DISCUSSION

Standard of Review.

¶ 6. This court applies the same summary judgment methodology as that employed by the circuit court. See WlS. Stat. § 802.08 (1997-98); Brownelli v. McCaughtry, 182 Wis. 2d 367, 372, 514 N.W.2d 48, 49 ( Ct. App. 1994). We first examine the complaint to determine whether it states a claim, and then we review the answer, to determine whether it joins a material issue of fact or of law. See Brownelli, 182 Wis. 2d at 372, 514 N.W.2d at 49. If we determine that the complaint and the answer join issue, we examine the moving party's affidavits, to determine whether they establish a prima facie case for summary judgment. See id. If they do, we look to the opposing party's affidavits to determine whether there are any material facts in dispute which entitle the opposing party to a trial. See id. at 372-73, 514 N.W.2d at 49-50.⁶

¶ 7. Whether a given covenant not to compete comports with the requirements of WlS. STAT. § 103.465 is a mixed question of law and fact. See NBZ, Inc. v. Pilarski, 185 Wis. 2d 827, 839-40, 520 N.W.2d 93, 97 ( Ct. App. 1994). Additionally, whether a restrictive covenant is reasonably necessary to protect the employer depends on the totality of the circumstances and is a question of law to be resolved on the basis of either factual findings made by the circuit court or a stipulation of all the relevant facts by the parties. See id.

Restrictive Covenant.

¶ 8. Wisconsin law favors the mobility of workers. See Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 214, 267 N.W.2d 242, 248 (1978); Milwaukee Linen Supply Co. v. Ring, 210 Wis. 467, 473, 246 N.W. 567, 569 (1933) (citation omitted). As a result, a contract which operates to restrict trade or competition is prima facie suspect and will be liberally construed in favor of the employee. See Wausau Med. Ctr., S.C. v. Asplund, 182 Wis. 2d 274, 281, 514 N.W.2d 34, 38 (Ct. App. 1994). The legislature codified that policy in Wis. Stat. § 103.465,⁷ which provided in relevant part:

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 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.

¶ 9. Nonetheless, restrictive covenants may serve to prevent the dissemination of confidential business information necessary to the employer and may prevent unfair competition. See Wausau Med. Ctr., 182 Wis. 2d at 283, 514 N.W.2d at 38-39. However, an " 'employer is not entitled to be protected against legitimate and ordinary competition of the type a stranger could give.'" Id. at 283, 514 N.W.2d at 39 (citation omitted). The supreme court has also explained that competition based on the ordinary skills and experience an employee has acquired through working for an employer is not unfair competition. See Behnke v. Hertz Corp., 70 Wis. 2d 818, 822, 235 N.W.2d 690, 693 (1975). In order for a covenant not to compete to be enforceable, it "must (1) be necessary for the protection of the employer; (2) provide a reasonable time restriction; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy." Fields Found., Ltd. v. Christensen, 103 Wis. 2d 465, 470-71, 309 N.W.2d 125, 128-29 (Ct. App. 1981) (citation omitted).

¶ 10. The parties do not discuss whether this covenant not to compete has been proven to be reasonably necessary to protect a legitimate business interest of F CS.⁸ That determination is dependent upon consideration of factual matters which, unless there is a stipulation of all material facts, is inappropriate for resolution on summary judgment because the circuit court must consider at least the following: (1) the nature and character of the information sought to be protected; (2) the extent to which its secrecy is vital to the employer's ability to conduct its business; (3) the extent to which the information could be had elsewhere; (4) the extent to which the restraint inhibits the employee's ability to pursue a livelihood in the area of his personal skills; and (5) the extent to which a stranger could compete in the provision of the services the former employee would be restrained from providing. See Lakeside Oil Co. v. Slutsky, 8 Wis. 2d 157, 163, 98 N.W.2d 415, 419 (1959); Rollins Burdick Hunter of Wis., Inc. v. Hamilton, 101 Wis. 2d 460, 470, 304 N.W.2d 752, 757 (1981); Wausau Med. Ctr., 182 Wis. 2d at 287, 514 N.W.2d at 40. Additionally, what is reasonable changes from case to case, so that what may be unreasonable in one case is not in another. See Wausau Med. Ctr., 182 Wis. 2d at 285, 514 N.W.2d at 39 (citation omitted). Therefore, because we have not been presented with a stipulation of all material facts, if we were asked to determine whether the restrictive covenant FCS seeks to enforce is reasonably necessary to protect a legitimate business interest of FCS, we would not be able to do so on the record before us.

¶ 11. However, instead of addressing whether the covenant is reasonably necessary to protect the employer, FCS and Wysocki focus their arguments on whether the covenant that FCS seeks to enforce "specified" a territory, as is required by WlS. STAT. § 103.465. It is possible for a restrictive covenant to "specify" a territory through the use of a customer route, see Chuck Wagon Catering, Inc. v. Raduege, 88 Wis. 2d 740, 754, 277 N.W.2d 787, 793 (1979), or through a geographic restriction which does not restrain the employee's activities in a geographic territory into which his former work has not taken him. See Wisconsin Ice & Coal Co. v. Lueth, 213 Wis. 42, 45, 250 N.W. 819, 820-21 (1933).

¶ 12. Wysocki contends that between 1983, when the restrictive covenant was entered into, and 1998, when he resigned and began his own tax preparation business, the territory within which FCS seeks to restrain him was unilaterally doubled in size. Therefore, the covenant which FCS seeks to enforce is not consistent with the non-competition agreement Wysocki signed in 1983. FCS contends that fact is irrelevant because the covenant restrains him from doing business only with people for whom he has provided services in the twelve months preceding his termination. It cites the supreme court's opinions in Chuck Wagon and Hunter as holding that a customer-based restrictive covenant is a specified territory which is a reasonable restraint on competition, as a matter of law.

¶ 13. As discussed earlier, we cannot determine, as a matter of law, that this restraint is reasonable, as the record is insufficient in regard to the necessary findings of fact. However, we do conclude, as a matter of law, that the restrictive covenant that FCS seeks to enforce applies within the twelve-county area described in its charter. However, in 1983, due to the charter of PCA of Wausau, that covenant could not have been applied to six of those twelve counties. Therefore, because FCS unilaterally enlarged the specified territory of the restrictive covenant beyond that to which the parties agreed in 1983, it is unenforceable.

¶ 14. The requirements for an enforceable customer-based statement of territory were examined in detail in Chuck Wagon. There, the supreme court considered whether a customer-based restraint that formed part of a lease for a sales route, where products were sold at the customer's place of business rather than at the employer's place of business, was reasonably necessary to protect the employer's business. In reaching its ultimate conclusion, the supreme court reasoned that there is a foundational difference between a route salesperson and a non-route salesperson. It relied on Van Zeeland and its conclusion that route salespeople were different because they developed customers that "were dependent exclusively" upon the salesperson who provided goods or services to them. See Chuck Wagon, 88 Wis. 2d at 750, 277 N.W.2d at 791 (citing Van Zeeland, 84 Wis. 2d at 215, 267 N.W.2d at 249). We also note that in Van Zeeland, the court concluded that a post-employment prohibition on contacting Van Zeeland's customer list, without any additional geographic limitation, was held to be unenforceable:

That paragraph provides that the employee will never, without time limitation, disclose the list of customers to any person. Even were this customer list a trade secret, subject to protection within a reasonable geographic area and for a reasonable period of time, this provision, which sets no limits with respect to either, is unreasonable and void.

Van Zeeland, 84 Wis. 2d at 218, 267 N.W.2d at 250. Therefore, reconciling Van Zeeland with Chuck Wagon, we conclude that the restriction on solicitation of route customers in Chuck Wagon complied with the requirement of WlS. Stat. § 103.465 to "specify" the territory because the geographic territory which Raduege served on the route and the route's customer list were coextensive. Stated another way, the prohibited customer list in Chuck Wagon did define a geographic territory, as well as those customers within it, because it covered only those businesses on Raduege's route; it did not cover persons in areas different from the route that Raduege rented from Chuck Wagon when the lease was signed.

¶ 15. For the covenant at issue here, because of the geographic restriction of PCA of Wausau's charter, the 1983 non-competition agreement did have an unstated geographic restriction, just as Raduege's route provided an unstated geographic restriction in Chuck Wagon. The present covenant, when it was signed, applied to customers drawn from a geographic area comprised of only five counties and part of a sixth. The customers Wysocki served for PCA of Wausau could not have been drawn from a larger or from a different geographic area. In essence, those five and one-half counties were Wysoeki's "route."

¶ 16. However, in 1998, interpretation of the covenant consistent with the charter then applicable to F CS would preclude Wysocki from providing services to customers in twelve counties. Therefore, the customer list for which FCS seeks an injunction against Wysocki is no longer limited by what would have been the specified territory of the covenant in 1983. Rather, the geographic component of the covenant has been unilaterally doubled by FCS through the amendment of its charter.

¶ 17. One could argue that the amended charter provided only an attempted change in the scope of the covenant because Wysocki did not agree to it. However, once the charter was amended, the covenant could not reasonably be interpreted to apply to only those counties to which it applied in 1983; and, FCS does not contend that it does.⁹ Furthermore, restrictive covenants are "subject to common law contract principles as well as § 103.465, STATS., requirements." NBZ, 185 Wis. 2d at 836, 520 N.W.2d at 96. And the policies that underlie the statute prohibit "blue lining" a restrictive covenant by cutting back the restriction asserted by the employer to one which may be legally enforceable. See Streiff v. American Family Mut. Ins. Co., 118 Wis. 2d 602, 607-09, 348 N.W.2d 505, 508-09 (1984). Therefore, because PCA of Wausau's geographic territory of service was limited by its charter and applicable federal law in 1983 when the covenant was entered into and because of FCS's subsequent, unilateral enlargement of the geographic component of the "specified territory," we conclude the restrictive covenant is void and unenforceable against Wysocki.

¶ 18. Furthermore, we conclude that Hunter, a case on which FCS relies heavily, provides no support for the contention that this restrictive covenant has not changed the specified territory within which it is effective. There, the supreme court determined only one issue: whether a territorial limitation of a restrictive covenant was required to be expressed in geographic terms as an "absolute prerequisite to a valid and enforceable agreement." See Hunter, 101 Wis. 2d at 467, 304 N.W.2d at 755. It concluded that a statement of a geographic territorial limit is not always essential to a valid covenant not to compete; therefore, some customer-based restrictions may be reasonable.¹⁰ See id. at 464, 304 N.W.2d at 754. However, because the record was insufficient to determine whether the covenant before it was reasonable, it remanded the matter for further proceedings.¹¹ See id. The supreme court did not address the issue upon which our opinion turns: whether the restraint which the employer seeks to enforce has changed the "specified" territory over which the restrictive covenant was agreed to have an effect. Accordingly, we conclude that Hunter is not dis-positive of this case.

CONCLUSION

¶ 19. Even if we were to assume, arguendo, that FCS is the same corporation as PCA of Wausau, because the restrictive covenant's "specified territory," as that term is used in WlS. STAT. § 103.465, has been unilaterally changed by FCS, we conclude that the restrictive covenant is void. Therefore, we affirm the judgment of the circuit court dismissing this action against Wysocki.

By the Court. — Judgment affirmed.

1 All references to the Wisconsin Statutes are to the 1983-84 version unless otherwise noted.

2 The Farm Credit Act was established to assist farmers by increasing the availability of "sound, adequate, and constructive credit. To accomplish this objective, Congress created a farmer-owned cooperative credit system ...." Smith v. Russellville Prod. Credit Assn, 777 F.2d 1544, 1547 (11th Cir. 1985). The production credit associations and the federal land banks form parts of an integrated system of farmer-owned banks and associations which are individually chartered to serve designated geographic areas and particularized credit needs. See 12 U.S.C. §§ 2071, 2091. All institutions created under the Farm Credit Act are regulated by the Farm Credit Administration, an independent federal agency. See 12 U.S.C. § 2002(a).

3 PCAs are permitted to merge subsequent to an agreement of their memberships and the approval of the Farm Credit Administration. Often they are permitted to combine their geographic areas of service when they merge, but the Farm Credit Administration sometimes refuses to allow charter amendments which permit this. See Buckeye Prod. Credit Ass'n v. United States, 792 F. Supp. 827, 832 (D.D.C. 1990).

4 Initially after the 1986 merger, PCA of Wausau was authorized to serve fourteen counties and part of a fifteenth. However, in 1989, its service area was restricted to twelve counties, and has remained constant for those same twelve counties since 1989.

5 Initially, PCA of Wausau was limited by its charter and applicable federal law under which it was authorized to extend credit to farmers, which credit was secured by personal property. It had no authorization to make real estate loans. However, that authorization was given after the merger with the Federal Land Bank Association of North Central Wisconsin in 1991.

6 All of the facts stated above are taken from the parties' filings that were before the circuit court for its consideration of the summary judgment motion.

7 1995 Act 225, § 347, effective May 1, 1996, amended WlS. Stat. § 103.465 to make it gender neutral and 1997 Act 253, § 81, effective June 19,1998, made minimal word changes, none of which affect the substantive meaning of the statute, as we interpret it in this opinion.

8 The employer has the burden of proving the reasonable necessity of a restrictive covenant before’it can be enforced. See Geocaris v. Surgical Consultants, Ltd., 100 Wis. 2d 387, 388, 302 N.W.2d 76, 77 (Ct. App. 1981).

9 The dissent suggests that we should enforce the restrictive covenant for the five counties and part of a sixth county covered by PCA of Wausau's charter in 1983. However, FCS has not argued to us that it wishes to enforce the covenant in only those counties. See Streiff v. American Family Mut. Ins. Co., 118 Wis. 2d 602, 607-09, 348 N.W.2d 505, 508-09 (1984).

10 There is a great deal of dicta in Hunter. Therefore, it must be read with care to separate out that which is necessary to the court's ultimate conclusion and that which is simply an interesting quote from another case.

11 We reached the same result, a remand for a reasonableness determination, in General Medical Corp. v. Kobs, 179 Wis. 2d 422, 435, 507 N.W.2d 381, 386 (Ct. App. 1993).