Schetter v. Newcomer Funeral Serv. Grp., Inc.

• Decision Date: 06 June 2016
• Docket Number: Case No. 15-C-1063
• Parties: Megan SCHETTER, Plaintiff, v. NEWCOMER FUNERAL SERVICE GROUP, INC., Defendant, v. Lyndahl Funeral Home, Inc., Third-Party Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

191 F.Supp.3d 959

Megan SCHETTER, Plaintiff,

v.NEWCOMER FUNERAL SERVICE GROUP, INC., Defendant,

v.Lyndahl Funeral Home, Inc., Third-Party Defendant.

Case No. 15-C-1063

United States District Court, E.D. Wisconsin.

Signed June 6, 2016

Michael D. Huitink, Kravit Hovel & Krawczyk SC, Michael S. Mather, Rebeca M. Lopez, Godfrey & Kahn SC, Milwaukee, WI, Amber C. Coisman, Godfrey & Kahn SC, Green Bay, WI, for Plaintiff/Third-Party Defendant.

Randall L. Gast, Hanaway Ross SC, Green Bay, WI, for Defendant.

DECISION AND ORDER

William C. Griesbach, Chief Judge, United States District Court

Plaintiff Megan Schetter brought this diversity action against Newcomer Funeral Home, her former employer, seeking a declaration that the employment agreement she entered into on May 21, 2014 is void under Wisconsin law as an impermissible restrictive covenant. Newcomer, a Kansas corporation with its principal place of business in Topeka, filed an answer, a counterclaim against Schetter, and a third-party complaint against Lyndahl Funeral Home, Schetter's current employer. Lyndahl and Schetter, both Wisconsin citizens, subsequently filed a motion to dismiss, and that motion is presently before me. For the reasons given below, the motion will be granted in part and denied in part.

Schetter was the managing funeral director at Newcomer's Green Bay location. On May 21, 2014, more than two years after she began working for Newcomer, she was asked to sign an agreement prohibiting her from working for a competitor, within "a radius of 25 miles of the funeral home in which Employee is employed or any other location owned or operated by any of the corporations first listed above." (ECF No. 1-1 at ¶ 7(a).) The preamble of the agreement listed Newcomer Funeral Service Group, Inc., as well as Heartland Management Company and Warren Family Funeral Homes. The non-compete clause was to be effective for two years following termination of the agreement. (Id. ) The agreement also contained a severability clause and a provision stating that the agreement would be governed by Kansas law. Schetter signed the agreement and received a thousand dollars.

I. Analysis

At the outset, a procedural point needs explanation. Although the motion is styled as a motion to dismiss the third-party complaint and the counterclaims, the brief asserts that the "entire case" should be "dismissed." (ECF No. 17 at 3, 13.) Coming from Schetter, the Plaintiff who brought the action in the first place, dismissal is an unusual request. Instead, I will construe the motion as one seeking judgment on the pleadings. In essence, Shetter and Lyndahl (collectively "the Movants") assert that Newcomer's defenses and claim for breach of contract are meritless because the underlying agreement is void—exactly the same basis for Schetter's claim seeking a declaratory judgment. Thus, if she wins her motion, it would be a declaratory judgment she receives, not merely dismissal of the action.¹

A. Choice of Law

The first question is whether Wisconsin or Kansas law applies. As noted above, the contract provides that the governing law comes from Kansas, but the Movants assert that Wisconsin courts will not honor such choice-of-law clauses if they are in violation of fundamental Wisconsin public policy or statute. "[S]tatutes or common law which make a particular type of contract enforceable, e.g., usury laws, or which make a particular contract provision unenforceable, e.g., laws prohibiting covenants not to compete, or that are designed to protect a weaker party against the unfair exercise of superior bargaining power by another party, are likely to embody an important state public policy." Bush v. Nat'l Sch. Studios, Inc., 139 Wis.2d 635, 643, 407 N.W.2d 883, 887 (1987). "Accordingly, if Wis. Stat. § 103.465 applies to this action public policy concerns would mandate overriding the parties' contractual choice of law stipulation." Cty. Materials Corp. v. Allan Block Corp., 431 F.Supp.2d 937, 950 (W.D.Wis.2006).

In Beilfuss v. Huffy Corp., the court refused to apply a foreign choice-of-law provision because Ohio's law governing covenants not to compete differed from Wisconsin's: " Wis. Stat. § 103.465 makes it the public policy of this state that ‘[a]ny ... restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant ... as would be a reasonable restraint.’ On the other hand, Ohio law permits selective enforcement or judicial modification of an unreasonable covenant not to compete so as to enforce the covenant deemed reasonable." 2004 WI App 118, ¶ 15, 274 Wis.2d 500, 508–09, 685 N.W.2d 373, 377 (Wis.Ct.App.2004). The same is true here: Kansas law allows courts to reform agreements to the extent they are unreasonable, while Wisconsin takes the "red pencil" approach and strikes the entire covenant. Puritan – Bennett Corp. v. Richter, 8 Kan.App.2d 311, 315–16, 657 P.2d 589, 593 (Kan.App.Ct.1983) ("if an agreement is unreasonable in scope but otherwise enforceable, the court may alter its terms to shape a remedy which affords the plaintiff the contemplated protection.") Accordingly, I conclude that applying Kansas law to this dispute would offend Wisconsin public policy. Wisconsin law therefore applies.²

B. Reasonableness of the Non-Compete Clause

It is well established that Wisconsin law disfavors employment covenants that restrict the ability of employees to engage in their chosen pursuit. Heyde Cos., Inc. v. Dove Healthcare, LLC, 2002 WI 131, ¶ 13, 258 Wis.2d 28, 654 N.W.2d 830 (2002) ("[T]he 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.’ " (citation omitted). To be enforceable, a covenant must:

(1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy.

Streiff v. Am. Family Mut. Ins. Co., 118 Wis.2d 602, 613, 348 N.W.2d 505, 511 (1984).

On the other hand, courts must accept that, in some cases, employees are perfectly rational actors entitled to reach agreements with their employers, even if they later regret them. Here, Newcomer asserts that the clause at issue is not a run-of-the-mill non-compete attempting to restrain trade for a wide range of employees; instead, it was an agreement with a key employee (the funeral director) tailored to the narrow and reasonable purpose of preventing Schetter from using confidential information she learned at Newcomer to later compete with her employer.

1. Geography

Schetter and Lyndahl first argues that Section 7(a) of the agreement is unreasonable because it imposes a restriction not just within 25 miles of Green Bay, but "any other location owned or operated by any of the corporations" listed in the preamble. (ECF No. 1-1 at ¶ 7(a).) Newcomer, in rather summary fashion, disputes this, arguing that the contract only limits the employee to working within 25 miles of the establishment at which she was actually employed. But the clear terms of the agreement provide a bar on working within "a radius of 25 miles of the funeral home in which Employee is employed or any other location owned or operated ..." (ECF No. 1-1 at ¶ 7(a).)

Newcomer also argues that the movants have not established the locations of any other funeral homes owned or operated by Newcomer-affiliated entities, and thus at the pleadings stage we do not know the actual scope of the clause. The Movants respond that it doesn't matter because the clause at issue is per se unreasonable. Relying on the unpublished case of Cottonwood Fin., Ltd. v. Reid , they assert that bans on working near locations merely owned by the employer—as opposed to the actual location the employee worked at—are necessarily unreasonable. 2008 WI App 83, ¶ 12, 312 Wis.2d 481, 751 N.W.2d 903 (Wis.Ct.App.2008). In that case, which dealt with an employee at a payday loan store, the clause applied to any store where the employee had worked, and by its plain terms that meant it applied even around stores where the employee had filled in only for a few days. Thus, although the employee's home store was in Green Bay, she was barred from working in or near Wausau, Hudson, and Sheboygan, merely because she had worked at those locations on a intermittent basis. The court of appeals found the clause overbroad. "It is absurd for Cottonwood to imply that after three days in Wausau or four days in Hudson, clients would be prepared to drive up to two hundred miles in one direction simply to follow Reid to Green Bay instead of continuing to do business at the local Cottonwood location." Id.

Cottonwood was a case about customer loyalty: "Cottonwood asserts that its covenant is necessary because customers build rapport with the individuals behind the counter, not the lending company." Id. Thus, the noncompete was alleged to be necessary to prevent an employee from building a rapport with a customer and then, presumably, luring that customer over to a new employer. (Possibly underlying the outcome is the questionable premise that customers at payday loan stores would develop meaningful relationships with store employees.) Here, however, Newcomer isn't asserting a customer loyalty kind of interest, at least at this stage. Instead, it asserts that as the director of its Green Bay funeral home, Schetter was privy to all sorts of confidential business information and proprietary practices, and it is reasonable for the company to try to prevent her from capitalizing on that inside knowledge. Ultimately, the desire to prevent her from using inside knowledge and practices logically extends not just to the location at which Schetter...