Heyde Companies v. Dove Healthcare, LLC

2002 WI 131, 654 N.W.2d 830, 258 Wis. 2d 28, 19 I.E.R. Cas. (BNA) 801, 2002 Wisc. LEXIS 1073

• Court: Wisconsin Supreme Court
• Decided: December 27, 2002
• Docket: 01-0863-FT
• Status: Published

Opinions

WILLIAM A. BABLITCH, J.

¶ 1. Heyde Companies, Inc. petitions this court to review a decision of the court of appeals,¹ which reversed the judgment of the circuit court for Eau Claire County, Eric J. Wahl, Judge. The court of appeals held that an employee's individual right and freedom to contract may not be restricted by a contract between two employers unless the employee is aware of and consents to such a restriction. We agree. A no-hire provision agreed to by employers that restricts the employment opportunities of employees without their knowledge and consent constitutes an unreasonable restraint of trade, in violation of Wis. Stat. § 103.465 (restrictive covenants) and the public policy of the state. Accordingly, we hold that the no-hire provision contained in the agreement between Green-briar and Dove is unenforceable.

¶ 2. Dove Healthcare, LLC (Dove) is a health care provider that operates nursing homes. Heyde Companies, Inc. (Heyde) owns Greenbriar Rehabilitation (Greenbriar), which furnishes physical therapists to nursing home facilities. In June 1997, Dove and Green-briar entered into a Therapy Services Agreement (Agreement), whereby Greenbriar was to provide physical rehabilitation services and place physical therapists at Dove's Eau Claire facility. Although the physical therapists worked at Dove's facility, they remained at-will employees of Greenbriar.

¶ 3. The Agreement between Dove and Green-briar contained a "no-hire" provision, which stated in relevant part:

[Dove] acknowledges and agrees that it will not, directly or indirectly, solicit, engage, permit to be engaged or hire any Greenbriar therapists or therapist assistants to provide services for [Dove] independently, as an employee of [Dove] or as an employee of a services provider other than Greenbriar or otherwise during the term of this Agreement. ... and for a period of one (1) year thereafter without the prior written consent of Greenbriar. If, after prior written consent by Green-briar, any Greenbriar therapists or therapist assistants are hired or utilized by [Dove], [Dove] shall pay Green-briar a fee of fifty percent (50%) of the subject Green-briar employee's annual salary.

¶ 4. On October 26, 1999, Dove terminated its Agreement with Greenbriar, effective December 31, 1999. Shortly after terminating the Agreement, Dove hired one current and three former Greenbriar employees. Dove did not seek Greenbriar's written consent, nor did it pay 50% of the employees' salaries in accordance with the no-hire provision.

¶ 5. The employees hired by Dove testified in their affidavits that they did not know about the no-hire provision in the Agreement between Greenbriar and Dove that placed restrictions on their ability to be employed by Dove. Some of the employees hired by Dove testified that they inquired whether they would be bound by a non-compete agreement and were told by Greenbriar that they would not be subject to such restrictions.

¶ 6. In 1999, Greenbriar had contracts with approximately 35 nursing home facilities, including Dove, and employed approximately 33 therapists out of the 273 therapists who worked in the Eau Claire/Chippewa Falls area. Greenbriar primarily contracted with facilities located in the Eau Claire/Chippewa Falls area, although it also had contracts with a few facilities in the eastern part of the state.

¶ 7. Greenbriar filed suit against Dove on March 10, 2000, alleging that Dove breached the no-hire provision in the Agreement and sought payment of the 50% contractual fee for the Greenbriar employees who were hired by Dove. Dove moved for summary judgment, claiming that the no-hire provision was unenforceable and an unlawful restraint of trade. The circuit court denied Dove's motion for summary judgment. Greenbriar and Dove stipulated to findings of fact on liability and presented evidence on the issue of damages. The circuit court entered a judgment in favor of Greenbriar and awarded Greenbriar liquidated damages in the amount of $62,124.40.

¶ 8. Dove appealed the circuit court's decision. On October 23, 2001, the court of appeals reversed the judgment of the circuit court and held that the no-hire provision was an unreasonable restraint of free trade because the employees had no knowledge of the provision and did not sign any covenant not to compete. Greenbriar petitioned this court for review.

¶ 9. At issue is whether a no-hire provision contained in a contract between employers, without the knowledge and consent of the affected employees, is unenforceable as an unreasonable restraint of trade. Determining whether no-hire provisions are enforceable is a question of law. This court reviews questions of law de novo, benefiting from the analyses of the circuit court and court of appeals. In re Corey J.G., 215 Wis. 2d 395, 405, 572 N.W.2d 845 (1998).

¶ 10. In general, parties are free to contract as they see fit, provided that the contract does not impose obligations that are contrary to public policy. Journal/Sentinel, Inc. v. Pleva, 155 Wis. 2d 704, 710-11, 456 N.W.2d 359 (1990). Public policy may be expressed by statute, administrative regulation, or by the court's expression of the policy of the common law. N. States Power Co. v. Nat'l Gas Co., 2000 WI App 38, 232 Wis. 2d 541, 545-46, 606 N.W.2d 613 (Ct. App. 1999) (citing Pedrick v. First Nat'l Bank, 267 Wis. 436, 438-39, 66 N.W.2d 154 (1954); M&I First Nat'l Bank v. Episcopal Homes, 195 Wis. 2d 485, 507, 536 N.W.2d 175 (Ct. App. 1995); Hawkins Realty Co. v. Hawkins State Bank, 205 Wis. 406, 417, 236 N.W 657 (1931)). In analyzing the enforceability of a no-hire provision, we review Wis. Stat. § 103.465(1999-2000),² which deals with restrictive covenants in employment contracts.

I — 1

¶ 11. Section 103.465 was enacted in response to Fullerton Lumber Co. v. Torborg, 270 Wis. 133, 70 N.W.2d 585 (1955), where the court enforced an invalid covenant not to compete insofar as it was reasonable. Id. at 147. The court in Fullerton Lumber held that the 10-year period prescribed under the restraint in question was unreasonable, but that a 3-year period was reasonable; accordingly, the court upheld the covenant for a 3-year period. Id. The legislature disagreed with this analysis and enacted § 103.465 in order to invalidate overly broad covenants in their entirety, and not allow courts to give effect to invalid covenants even to the extent that they are reasonable. Streiff v. Am. Family Mut. Ins. Co., 118 Wis. 2d 602, 608, 348 N.W.2d 505 (1984). Under § 103.465, "Any covenant, described in this subsection, 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."

¶ 12. Greenbriar argues that Wis. Stat. § 103.465 was enacted to protect employees, who often have unequal bargaining power, from unreasonable covenants not to compete with their employers. Greenbriar asserts that, on its face, § 103.465 only applies to restrictive covenants between employers and their employees, and not agreements between employers.

¶ 13. Wisconsin Stat. § 103.465 is broadly entitled "Restrictive covenants in employment contracts," although it only refers to covenants between employers and employees. While a covenant not to compete is typically made between an employer and its employees, it is possible, as illustrated in this case, that a restrictive covenant may be made between employers that acts as a covenant not to compete on the employees. Greenbriar argues that § 103.465 does not apply in this case because the no-hire provision was agreed to by Greenbriar and Dove, not Greenbriar and its employees. However, the explicit purpose of § 103.465, as plainly stated in the statute, is to invalidate covenants that impose unreasonable restraints on employees. This court has recognized that § 103.465 essentially deals with restraint of trade and has held that the statute applies regardless of whether a restriction is labeled a "non-disclosure" provision or a "covenant not to compete." Tatge v. Chambers & Owen, Inc., 219 Wis. 2d 99, 111-12, 579 N.W.2d 217 (1998); see also Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 218-20, 267 N.W.2d 242 (1978). In Tatge, this court reasoned that "it would be an exercise in semantics to overlook Wis. Stat. § 103.465 merely because paragraph 1 of the agreement is not labeled a 'covenant not to compete." Tatge, 219 Wis. 2d at 112.

¶ 14. Similarly, the fact that Greenbriar attempts to restrict its employees through a no-hire provision with Dove instead of a restrictive covenant with its employees does not change the underlying analysis. The effect of the no-hire provision is to restrict the employment of Greenbriar's employees; it is inconsequential whether the restriction is termed a "no-hire" provision between Dove and Greenbriar or a "covenant not to compete" between Greenbriar and its employees. Greenbriar is not allowed to accomplish by indirection that which it cannot accomplish directly. For example, in holding that a state statute violated the 13th Amendment of the U.S. Constitution, the U.S. Supreme Court reasoned that "What the state may not d.o directly it may not do indirectly. . . . [An] act of Congress deprives of effect all legislative measures of any state through which, directly or indirectly, the prohibited thing. . . may be established or maintained . . . ." Bailey v. Alabama, 219 U.S. 219, 244-45 (1911) (emphasis added). Likewise, in analyzing a state tax statute, the Court stated that the "statute seeks to accomplish by indirection that which the state is constitutionally prohibited from doing directly. Such attempted evasion of the Government's constitutional immunity from state taxation cannot legally be permitted to succeed." United States v. City of Detroit, 355 U.S. 466, 478-79 (1958). This court has also recognized that "[t]here is no doubt of the general truth, that, in questions of this nature [constitutionality of a statute], the means are not to be regarded, but only the end, and that the restraints of the fundamental law cannot be avoided by indirection." State ex rel. Haswell v. Cram, 16 Wis. 343, 345 (1863).

¶ 15. In addition, it is well-established under statutory canons of construction that social legislation and statutes promoting a public interest are to be liberally construed in favor of those intended to benefit from them. See, e.g., Paikoff v. Harris, 185 Misc.2d 372, 377 (N.Y. App. Term 1999); Indiana v. Kokomo Tube Co., 426 N.E.2d 1338, 1345 (Ind. Ct. App. 1981). In the context of penal statutes, this court has held that "if strict construction thwarts the purpose of the legislation, the rule of strict construction does not apply" and that the "dominating purpose of all [statutory] construction is to carry out the legislative purpose." German v. Wisconsin Dep't of Transp., 2000 WI 62, ¶ 27, 235 Wis. 2d 576, 612 N.W.2d 50 (citing State v. Kittilstad, 231 Wis. 2d 245, 262, 603 N.W.2d 732 (1999); State v. Robe, 96 Wis. 2d 48, 70, 291 N.W.2d 809 (1980))³. We therefore find unpersuasive Greenbriar's argument that the statute on its face does not apply.

¶ 16. It cannot be disputed that this no-hire provision acts as a restrictive covenant on Greenbriar's employees. Therefore, to determine its enforceability, we employ the five-factor analysis that is used to evaluate covenants not to compete. Lakeside Oil Co. v. Slutsky, 8 Wis. 2d 157, 162-63, 98 N.W.2d 415 (1959). A restrictive covenant must: (1) be necessary to protect the employer; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive to the employee; and (5) not be contrary to public policy. Id.; see also Streiff 118 Wis. 2d at 613 n.5. In addition, the following canons of construction are applied to restrictive covenants: (1) they are prima facie suspect; (2) they must withstand close scrutiny to pass legal muster as being reasonable; (3) they will not be construed to extend beyond their proper import or further than the language of the contract absolutely requires; and (4) they are to be construed in favor of the employee. Streiff, 118 Wis. 2d at 610-11 (citing Zimmerman v. Brennan, 78 Wis. 2d 510, 514-15, 254 N.W.2d 719 (1977); Gary Van Zeeland Talent, 84 Wis. 2d at 218-19).

¶ 17. Greenbriar argues that the no-hire provision satisfies the first factor because it is necessary for protecting its interest in maintaining its employees, and to avoid serving as an involuntary employment recruiting agency for Dove. Although some kind of restriction might be necessary, Greenbriar can adequately protect itself through a reasonable covenant not to compete that complies with Wis. Stat. § 103.465. Therefore, contrary to Greenbriar's claim, the no-hire provision with Dove is not necessary for its protection.

¶ 18. With respect to the second factor, the one-year time limit seems reasonable.

¶ 19. With respect to the third factor, the territorial restriction in this case is potentially problematic. Greenbriar acknowledges that it has contracts with other nursing home facilities, in addition to Dove, which contain the same no-hire provision. Consequently, the employment opportunities of Greenbriar's employees are restricted not only with respect to Dove, but also with respect to all of the other facilities that have contracts with Greenbriar. In fact, Greenbriar is seeking damages from Dove for an employee who never even worked at the Dove facility. In 1999, Greenbriar had contracts with approximately 35 facilities, including Dove, throughout Wisconsin. The no-hire provision restricts Greenbriar's employees with respect to all of these facilities, which is arguably an unreasonable territorial restriction. Greenbriar does not dispute that these facilities would have to pay the 50% fee if any of them wanted to hire a Greenbriar employee, but it claims that there is no evidence that Greenbriar therapists would be less likely to be hired because of the fee. We cannot agree. It is apparent that a nursing home facility would prefer to hire therapists who are not subject to a 50% salary "fee" that must be paid to a former employer, thereby putting the Greenbriar therapists at a disadvantage in obtaining employment.

¶ 20. Notwithstanding whether the territorial restriction of the no-hire provision is reasonable, with respect to the fourth and fifth factors, it is clear that the no-hire provision is harsh and oppressive to Greenbriar's employees and is contrary to public policy. The former Greenbriar employees who were hired by Dove testified that they had no knowledge of the no-hire provision and that Greenbriar did not ask them to sign a non-compete agreement. One of the employees hired by Dove testified that she specifically asked Greenbriar whether she would be bound by a non-compete agreement and was told that she would not be subject to such restrictions. The court of appeals has held that a valid covenant not to compete requires knowledge and consideration by the affected employee. NBZ, Inc. v. Pilarski, 185 Wis. 2d 827, 835-36, 520 N.W.2d 93 (Ct. App. 1994). This court has also implicitly recognized the necessity of consideration in referencing an employee's decision to sign a covenant not to compete that he or she deems unreasonable. Tatge, 219 Wis. 2d at 116.

¶ 21. Greenbriar is not prevented from protecting its interest in maintaining its employees, but it must do so through a valid restrictive covenant in compliance with Wis. Stat. § 103.465. Greenbriar is not allowed to circumvent the protections under § 103.465 by restricting the employment opportunities of its employees through contracts with other employers without their employees' knowledge and consent. An employer cannot indirectly restrict employees in a way that it cannot do directly under § 103.465. At the very least, § 103.465 requires that employees know that they are subject to a restrictive covenant and that they consent to such a restriction. Accordingly, the no-hire provision, which restricts Greenbriar's employees without their knowledge and consent, is harsh and oppressive to the employees and is contrary to public policy, in violation of§ 103.465.

¶ 22. Furthermore, the fundamental right of a person to make choices about his or her own employment is well-established. "[N]o one has the legal right... to deprive a person of the right to labor for whomsoever he will, with the consent of such other." Cheek v. Prudential Ins. Co. of America, 192 S.W. 387, 393 (Mo. 1916); aff'd by Prudential Ins. Co. v. Cheek, 259 U.S. 530, 547-48 (1922) ("[Corporations had no lawful right to enter into a combination or agreement the effect of which was to . . . deprive former employees of their constitutional right to seek employment."). According to the U.S. Supreme Court, an individual's right to make choices about his or her own employment may not be negated by business decisions that circumscribe the employment relationship.

That freedom in the making of contracts of personal employment, by which labor and other services are exchanged for money or other forms of property, is an elementary part of the rights of personal liberty and private property....

But the right to conduct business . .. and as such to enter into relations of employment with individuals, is not a natural or fundamental right... and a State in authorizing its own corporations ... may qualify the privilege by imposing such conditions and duties as reasonably may be deemed expedient in order that the corporation's activities may not operate to the detriment of the rights of others [i.e. employees] with whom it may come in contact."

Cheek, 259 U.S. at 536.

¶ 23. Thus, the no-hire provision between Green-briar and Dove is unenforceable because it is harsh and oppressive to the employees, is against public policy, and goes beyond what is necessary for Greenbriar to protect its legitimate interest in protecting the investment it has in its employees. Greenbriar is essentially attempting to enforce a covenant not to compete, which it is allowed to do, but the restriction must be reasonable in accordance with the requirements under Wis. Stat. § 103.465.

¶ 24. In addition, the few cases from other jurisdictions that have upheld no-hire provisions are distinguishable from the case at bar. Greenbriar points out that the Virginia Supreme Court has addressed the same issue and held that a no-hire provision between employers was enforceable and not against public policy. Therapy Serv., Inc. v. Crystal City Nursing Ctr., Inc., 389 S.E.2d 710 (Va. 1990). The court in Therapy Services analyzed whether the no-hire provision constituted an unreasonable restraint of trade under antitrust principles. Importantly, the court concluded that the "restriction is reasonable .. . because it does not in any way inhibit the affected employees from seeking employment as therapists with any employer other than Crystal City." Id. at 712. In this case, the employment opportunities of the Greenbriar employees are restricted with respect to all of the facilities that Greenbriar has a contract with, even if an employee has never worked at any of the other facilities except for Dove. Similarly, in Webb v. West Side Dist. Hosp., 144 Cal. App. 3d 946 (Cal. App. 1983), the court upheld a no-hire provision because it was limited to the physicians who had been placed at the hospital by Webb. The court reasoned that the clause was not unreasonable because it did not include physicians employed by Webb who had never actually worked at the hospital, (distinguishing Hospital Consultants, Inc. v. Potyka, 531 S.W.2d 657, 665 (Tex. Civ. App. 1975), which held that a no-hire provision was unenforceable because it went beyond what was necessary to protect Potyka's interest by restricting physicians who had never worked at the hospital).

II

¶ 25. Notwithstanding whether the no-hire provision between Greenbriar and Dove is a facial violation of Wis. Stat. § 103.465, the provision nonetheless clearly violates the public policy of the state as expressed through the common law and § 103.465 for all the reasons stated above. As discussed in section I, the no-hire provision agreed to by Greenbriar and Dove unquestionably constitutes harsh treatment to Greenbriar's employees since the employees were not aware that they would be subject to this kind of a restriction when they decided to take a job with Green-briar. Consequently, the no-hire provision in this case constitutes an unreasonable restraint of trade in contravention of Wisconsin's public policy. As this court has stated, if a "contract is void for ... reasons, such as public policy... or creates an undue hardship on the employee a court of equity will not enforce it." Lakeside Oil, 8 Wis. 2d at 162.

¶ 26. In sum, the no-hire provision in the Agreement between Greenbriar and Dove is an unreasonable restraint of trade and went beyond what was necessary for Greenbriar to protect its interest in maintaining its employees. Greenbriar can adequately protect its interest through a reasonable restrictive covenant in accordance with Wis. Stat. § 103.465. A no-hire provision that restricts the employment opportunities of employees without their knowledge and consent is harsh and oppressive to the employees, in violation of Wis. Stat. § 103.465 and the public policy of the state. Accordingly, we hold that the no-hire provision in this case is unenforceable.

By the Court. — The decision of the court of appeals is affirmed.

1 Heyde Companies, Inc v. Dove Healthcare, LLC, 2001 WI App 278, 249 Wis. 2d 32, 637 N.W.2d 437.

2 All references to the Wisconsin Statutes are to the 1999-2000 version unless otherwise indicated.

103.465 Restrictive covenants in employment contracts. A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, 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 covenant, described in this subsection, 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.

3 See also Wisconsin Indus. Sch. for Girls v. Clark County, 103 Wis. 651, 659, 79 N.W 422 (1899) (statute must be construed to give effect to the evident legislative intent though the result seems contrary to the strict letter of the statute); Fleischmann Const. Co. v. United States, 270 U.S. 349, 360 (1926) (strict letter of an act must yield to its evident spirit and purpose in order to give effect to the intent of the legislature); Paikoff v. Harris, 185 Misc.2d 372, 376 (N.Y. App. Term 1999) (in construing statute, court should consider the mischief sought to be remedied and construe statute so as to suppress the evil and advance the remedy").