NBZ, Inc. v. Pilarski

• Decision Date: 08 June 1994
• Docket Number: No. 93-2219,93-2219
• Citation: 185 Wis.2d 827,520 N.W.2d 93
• Parties: , 1994-1 Trade Cases P 70,640, 9 IER Cases 1030 NBZ, INC., d/b/a Studio 890, Plaintiff-Appellant, v. Paula PILARSKI, Defendant-Respondent.
• Court: Wisconsin Court of Appeals

Page 93

520 N.W.2d 93

185 Wis.2d 827, 1994-1 Trade Cases P

70,640, 9 IER Cases 1030

NBZ, INC., d/b/a Studio 890, Plaintiff-Appellant, v. Paula PILARSKI, Defendant-Respondent.

No. 93-2219.

Court of Appeals of Wisconsin.

Submitted on Briefs April 26, 1994.

Opinion Released June 8, 1994.

Opinion Filed June 8, 1994.

Before BROWN, NETTESHEIM and SNYDER, JJ.

BROWN, Judge.

The issues in this case arise from a covenant not to compete executed between NBZ, Inc., doing business as Studio 890--a hairstyling concern--and Paula Pilarski, a former Studio 890 employee. The first issue is whether restrictive covenants in employment contracts, subject to the requirements of § 103.465, STATS., are also subject to common law contract principles requiring that a contract be supported by consideration. We hold that covenants not to compete must be supported by consideration and affirm the trial court on this issue.

The second issue is whether the covenant executed after the start of employment was supported by consideration. We affirm the trial court's findings of fact that no consideration accrued to Pilarski in exchange for signing the covenant.

The third issue is whether Studio 890's appeal was frivolous under RULE 809.25(3), STATS., because it was filed "solely for purposes of harassing or maliciously injuring another." We hold that the appeal was not frivolous.

The facts are as follows. Studio 890 is a beauty salon in Elm Grove, Wisconsin. The salon hired Pilarski on April 17, 1989 and placed her in its training program. While in training, Pilarski was paid a salary based on an hourly wage, ranging from $3.35 to $4.25 an hour. On May 23, 1989, while Pilarski was still in training, Studio 890 and Pilarski executed an "Employee Agreement and Commitment" ¹ and an "Agreement Not to Compete."

The covenant not to compete provided that Pilarski would be restricted for one year after employment termination from competing within a five-mile area of the employer's place of business. The covenant also provided that "it is understood and agreed between Employer and Employee that Employer's customers and customer relations are the most important assets and Employer could not continue to do business without its customers."

Pilarski finished the training program in approximately August 1989 and became a hairstylist at Studio 890. As a hairstylist, Pilarski was either paid 47.5% of the gross revenue generated by her work or, alternatively, a guaranteed salary based on an hourly wage.

Pilarski left the salon's employment on August 21, 1990. On September 4, 1990, Pilarski began working at Henry Steven's Salon, a salon which was started by another former employee of Studio 890. Henry Steven's Salon was within five miles of Studio 890. This other employee had not executed a covenant not to compete.

Studio 890 brought an action against Pilarski for a permanent injunction requiring her to terminate her employment at Henry Steven's Salon. The trial court dismissed the action. The trial court held that under Behnke v. Hertz Corp., 70 Wis.2d 818, 821, 235 N.W.2d 690, 692 (1975), covenants not to compete must be supported by consideration and that the covenant executed in this case was not supported by consideration. The trial court further held that the covenant was not valid under § 103.465, STATS., because it was not reasonably necessary for the protection of the employer.

First, we address the issue of whether a covenant not to compete subject to § 103.465, STATS., must be supported by consideration. This issue involves the interpretation of a statute. The interpretation of a statute presents a question of law which we review de novo. See Awve v. Physicians Ins. Co., 181 Wis.2d 815, 821, 512 N.W.2d 216, 218 (Ct.App.1994).

Section 103.465, STATS., sets forth the requirements for an enforceable restrictive covenant in an employment contract but does not address on its face the question of whether a restrictive covenant must be supported by consideration. ² The common law required restrictive covenants in employment contracts to be supported by consideration. Durbrow Comm'n Co. v. Donner, 201 Wis. 175, 178, 229 N.W. 635, 636 (1930). Studio 890 contends that § 103.465 abrogated the common law requirement. Studio 890 further argues that if the legislature had intended consideration to be a requirement, it would have explicitly stated the requirement in this section.

We disagree with Studio 890 and hold that covenants not to compete are subject to common law contract principles as well as § 103.465, STATS., requirements. In Behnke, 70 Wis.2d at 821, 235 N.W.2d at 692, our supreme court cited with favor a law review article stating that § 103.465 was "based almost completely upon the pre-existing structure of the common law as established in Wisconsin and elsewhere." Id. (citing George A. Richards, Drafting and Enforcing Restrictive Covenants Not to Compete, 55 MARQ.L.REV. 241 (1972)). Because Behnke addressed the reasonableness of a restrictive covenant and not the issue of whether there was a contract in the first place, we read Behnke as persuasive but not as resolving this issue. Furthermore, our independent research did not reveal any case law reaching the issue.

The plain meaning of this statute does not answer the consideration question; thus, we hold that the statute is ambiguous as to this issue. See Hainz v. Shopko Stores, Inc., 121 Wis.2d 168, 173, 359 N.W.2d 397, 400 (Ct.App.1984). Therefore, we turn to canons of statutory construction for guidance. See id. The canons of construction provide that a statute does not abrogate any rule of common law unless the abrogation is so clearly expressed as to leave no doubt of the legislature's intent. Waukesha County v. Johnson, 107 Wis.2d 155, 162, 320 N.W.2d 1, 4 (Ct.App.1982). A statute in derogation of the common law must be strictly construed so as to have minimal effect on the common law rule. ³ Id.

We hold that an intent to abrogate the common law is not clearly expressed in § 103.465, STATS. A covenant not to compete is a contract. See Behnke, 70 Wis.2d at 820, 235 N.W.2d at 692. Although § 103.465 does not contain the word "consideration," the section also does not contain the words "offer" and "acceptance." It is hornbook law that "offer," "acceptance" and "consideration" are elements of an enforceable contract. See 1 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS §§ 11, 112 (1963). The existence of an offer and acceptance are mutual expressions of assent, and consideration is evidence of the intent to be bound to the contract. See id. We do not discern from § 103.465 any legislative intent to abandon the principles by which a contract is formed in the first instance.

Next, we address the second issue of whether the trial court erred when it found that there was no consideration for the execution of the covenant after employment began. ⁴ Studio 890 argues that continued employment alone will serve as consideration for a covenant not to compete. However, Studio 890 does not offer any authority for this proposition and our independent research did not reveal any such authority. Thus, we conduct our analysis of this issue under the contract principle that an exchange of promises may constitute consideration for a bilateral contract. ⁵ See Ferraro v. Koelsch, 124 Wis.2d 154, 164, 368 N.W.2d 666, 671-72 (1985).

The party seeking to avoid a contract has the burden of proving failure of consideration. Jax v. Jax, 73 Wis.2d 572, 586, 243 N.W.2d 831, 839 (1976). Whether consideration supports a contract presents a question of fact. See Gertsch v. International Equity Research, 158 Wis.2d 559, 576, 463 N.W.2d 853, 860 (Ct.App.1990) ; Jax, 73 Wis.2d at 586, 243 N.W.2d at 839. We must uphold the trial court's findings of fact unless clearly erroneous. Section 805.17(2), STATS.

We hold that the trial court's findings of fact are not clearly erroneous and support its conclusion that the covenant was not supported by consideration. The trial court found that continued employment was not conditioned on signing the covenant. The trial testimony supports this finding. The president of the corporation testified that during certain time periods the company had a policy to ask employees to sign the restrictive covenants, but at other times the company did not have such a policy, "There has been one, there hasn't been one and then there has been one." The president further testified, "If somebody said I will not sign it, I don't know what I would do. I never had anyone do that."

Furthermore, Pilarski was still in training at the time of signing the covenant. Thus, there is no indication that a change of status from trainee to hairstylist served as consideration for Pilarski's promise and we do not address whether a change of status alone would serve as consideration. We hold that the evidence does not show that Studio 890 conditioned employment or promised to do anything in exchange for Pilarski's signing the covenant. Therefore, we affirm the trial court's finding of no consideration.

Having decided that the covenant fails under common law contract analysis, we need not address the § 103.465, STATS., requirements. However, even if we were to reach the issue of whether the covenant satisfies the statutory requirements, we would be hard pressed to hold that the covenant was valid. Under § 103.465, the court's first inquiry is whether the covenant was reasonably necessary to protect the employer. ⁶ Fields Found., Ltd. v. Christensen, 103 Wis.2d 465, 470, 309 N.W.2d 125, 128 (Ct.App.1981). Whether the 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 factual findings. Id. at 473, 309 N.W.2d at 130. "[T]o enforce a restraint, the employee must present a substantial risk either to the employer's relationships with his customers or with respect to confidential business information."...