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To determine the enforceability of covenants not to compete, the court employs a five-factor analysis. 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. 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.
Dove Healthcare, LLC 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 Greenbriar 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. The Agreement between Dove and Greenbriar 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 Greenbriar, any Greenbriar therapists or therapist assistants are hired or utilized by [Dove], [Dove] shall pay Greenbriar a fee of fifty percent (50%) of the subject Greenbriar employee's annual salary.
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. 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.
Thus, 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. The circuit court entered a judgment in favor of Greenbriar and awarded Greenbriar liquidated damages in the amount of $ 62,124.40. 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.
Is the no-hire provision contained in the contract between Dove and Greenbriar without the consent and knowledge of the affected employees unenforceable?
With regard to the first factor, Greenbriar argued 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 could 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 was not necessary for its protection.
With respect to the third factor, the territorial restriction in this case was potentially problematic. Greenbriar acknowledged 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 were 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 was 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 restricted Greenbriar's employees with respect to all of these facilities, which was arguably an unreasonable territorial restriction. Greenbriar did not dispute that these facilities would have to pay the 50% fee if any of them wanted to hire a Greenbriar employee, but it claimed that there was no evidence that Greenbriar therapists would be less likely to be hired because of the fee. The court did not agree. It was 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.
Notwithstanding whether the territorial restriction of the no-hire provision is reasonable, with respect to the fourth and fifth factors, it was clear that the no-hire provision was 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. 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. 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 was 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 required 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, was harsh and oppressive to the employees and is contrary to public policy, in violation of § 103.465.