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The so-called blue pencil rule is: if the terms of a restraint are divisible the court will strike the overly broad language of a restraint and enforce the valid restraints in the contract. Under the blue pencil rule, if the terms of a restraint are indivisible, that is, the contract itself furnished no basis for dividing the restriction into reasonable and unreasonable portions, the whole covenant is void if any part of the restriction is unreasonable.
From 1967 until March 31, 1980, plaintiff Dennis Streiff worked as an agent for defendant American Family Mutual Insurance Company under American Family's standard Career Agent's Agreement. Provision 5h of the agreement prohibited solicitation of defendant's customers, provision 5i made plaintiff's extended earnings forfeited if plaintiff violated 5h, and provision 5i(4) made the earnings forfeited if plaintiff was a manager for a competitor anywhere in the United States. The agent’s agreement was terminated on April 1, 1980. Immediately after termination, Streiff publicly announced that he would no longer be working for American Family and encouraged his clients to buy insurance with another insurer through him. Following Streiff's public announcement and his communication with his American Family clients, American Family refused to pay Streiff his extended earnings, asserting that Streiff had failed to comply with two conditions of the agency agreement. Streiff instituted the present action to claim his extended earnings under the agency agreement. The trial court granted summary judgment to defendant. The appellate court affirmed the trial court’s judgment, hence, the current petition.
Could defendant refuse payment of plaintiff’s extended earnings on the basis of provision 5i of the agency agreement?
The Court reversed summary judgment for defendant, finding the provisions indivisible pursuant to Wis. Stat. § 103.465, and unenforceable as an unreasonable restraint of trade. According to the Court, the provisions were indivisible because plaintiff had to first comply with 5h in order to receive the extended earnings under 5i. As the terms were not distinct, mutually exclusive, independent provisions that came into play in totally different fact situations, they were read together rather than separately. Defendant conceded provision 5i(4) was unenforceable in geographic scope. Defendant's equitable argument to blue pencil around the invalid provision because of plaintiff's misconduct was prevented by § 103.465. Under sec. 103.465 if an indivisible covenant imposed an unreasonable restraint, the covenant was illegal, void, and unenforceable even as to so much of the covenant as would be a reasonable restraint.