Streiff v. American Family Mut. Ins. Co., 82-599
| Decision Date | 30 May 1984 |
| Docket Number | No. 82-599,82-599 |
| Citation | 348 N.W.2d 505,118 Wis.2d 602 |
| Parties | Dennis C. STREIFF, Plaintiff-Appellant-Petitioner, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a Wisconsin corporation, Defendant- Respondent. |
| Court | Wisconsin Supreme Court |
Charles J. Howden, New Glarus (argued), for plaintiff-appellant-petitioner; Waltz, Howden & Franken, New Glarus, on brief.
Charles R. Wellington, Monroe (argued), for defendant-respondent; Kittelsen, Barry, Ross & Wellington, Monroe, on brief.
This is a review of a published decision of the court of appeals, Streiff v. American Family Mutual Insurance Company, 114 Wis.2d 63, 337 N.W.2d 186 (Ct.App.1983), affirming the order of the circuit court for Green county, William C. Sachtjen, Reserve Circuit Judge, granting summary judgment to American Family Mutual Insurance Company on Dennis Streiff's claim for "extended earnings" under the standardized printed agency agreement in effect between American Family and Streiff.
The issue presented on review is a question of law, namely, the enforceability under sec. 103.465, Stats.1981-82, of the provisions of the agency agreement requiring that Streiff forfeit his extended earnings if after termination of the agreement he engages in certain competitive practices. 1 We conclude the restrictive provisions are unenforceable as an unreasonable restraint of trade and reverse the decision of the court of appeals.
The facts of the case--to the extent that they affect the issue before the court--are not disputed. From 1967 until March 31, 1980, Streiff worked as an agent for American Family Mutual Insurance Company under American Family's standard Career Agent's Agreement. Streiff's residence and place of business were located in the village of New Glarus, Green county, Wisconsin; he operated primarily in northern Green and southern Dane counties. The agent's agreement, which was terminated as of April 1, 1980, provided that upon its termination Streiff was entitled to "extended earnings" (which in this case amounted to $33,830.45), if he complied with all of the terms and conditions of the agreement.
Immediately after termination Streiff publicly announced that he would no longer be working for American Family, that he had made arrangements with other insurers, and that he would continue to do business as an insurance agent. Streiff also communicated with his clients who had insurance with American Family and encouraged them to buy insurance with another insurer through him.
At the time of termination, Streiff had approximately 1,264 clients who had at least one policy with American Family, most of whom lived in Green and Dane counties. After termination, Streiff obtained the business of approximately 300 of these persons; the others apparently continued to do business with American Family.
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. American Family wrote Streiff as follows: "Because you have solicited our policyholders and associated yourself in a sales capacity with another insurer, you have forfeited your rights to extended earnings." 2
American Family withheld payment of the extended earnings, apparently relying on two provisions of the agent's agreement: Section 5h and the fourth paragraph of section 5i, hereafter referred to as section 5i(4).
Section 5h of the agent's agreement prohibits the terminated agent from (1) soliciting and servicing American Family policyholders and (2) for a period of one year after termination and within a 50-mile radius of the agent's place of business, inducing, attempting to induce, or causing another to induce any policyholder to replace, lapse, or cancel any American Family policy. Section 5h provides as follows:
"After termination of this agreement, the agent shall refrain from further solicitation of policyholders for the company and from further servicing of policyholders of the company and for a period of one year after such termination anywhere within the radius of 50 miles from the location of the agent's place of business under this agreement on the date of such termination shall not induce or attempt to induce or cause another or others to induce or attempt to induce any policyholder to replace, lapse, or cancel any policy of insurance written by the company." 3
Section 5h is silent as to any penalty for its violation and does not refer to extended earnings. American Family and Streiff interpret section 5i, which is directly concerned with extended earnings, as providing that extended earnings will not be paid if the agent fails to comply with section 5h. The penalty for violation of section 5h is apparently set forth implicitly rather than explicitly in section 5i where the first paragraph states that if the agent's agreement is terminated, "provided ... the agent has complied with all the terms and conditions of this section and of this entire agreement, the company ... will pay the agent ... extended earnings...."
The second provision in the agent's agreement upon which American Family originally relied before litigation to deny Streiff his extended earnings was section 5i(4), which states that if the terminated agent associates himself or herself with or performs services for another insurer engaged in writing any of the kinds of insurance written by American Family, the terminated agent forfeits all rights to extended earnings. Section 5i(4) provides:
"If, while being paid extended earnings, the agent associates himself in any sales or sales management capacity with another insurer engaged in writing any of the kinds of insurance written by the company, and if the agent performs services in any such capacity for such other insurer within any of the States of the United States in which the company operates as a licensed insurer, the agent, from and after the date of such association, shall forfeit all his rights to extended earnings otherwise thereafter payable by the company."
When the matter came to court, American Family no longer relied on section 5i(4) as a justification for not paying Streiff extended earnings. American Family concedes that sec. 5i(4), which apparently restricts a terminated agent's employment opportunities in the insurance industry throughout this country, is overly broad and unreasonable as to the territory described, violates sec. 103.465, Stats.1981-82, and is unenforceable.
American Family now relies solely on section 5h as the justification for Streiff's forfeiting payment of extended earnings. American Family asserts that section 5h is a reasonable restraint and that sec. 103.465, Stats.1981-82, does not mandate that section 5h be held invalid merely because section 5i(4) is invalid.
Sec. 103.465 provides as follows:
Before the enactment of sec. 103.465, this court followed the so-called blue pencil rule: if the terms of a restraint were divisible the court struck the overly broad language of a restraint and enforced the valid restraints in the contract. See, e.g., General Bronze Corp. v. Schmeling, 208 Wis. 565, 243 N.W. 469 (1932) (). Under the blue pencil rule, if the terms of a restraint were indivisible, that is, the contract itself furnished no basis for dividing the restriction into reasonable and unreasonable portions, the whole covenant was void if any part of the restriction was unreasonable. See, e.g., Wisconsin Ice & Coal Co. v. Lueth, 213 Wis. 42, 47, 250 N.W. 819 (1933).
In Fullerton Lumber Co. v. Torberg, 270 Wis. 133, 70 N.W.2d 585 (1955), this court departed from the blue pencil rule and enforced an invalid indivisible covenant insofar as it was reasonable, holding that "where the terms of a restrictive covenant, not otherwise invalid, restrain an employee beyond either the area or the time within which an employer needs protection from competition by him, it is the excess of territory or time that is contrary to public policy and void." Id. at 147, 70 N.W.2d 585. In Fullerton Lumber the court concluded that the 10-year period prescribed in the restraint was unreasonable. The court concluded a restraint for three years was reasonable and enforced the covenant for this period. See also Fullerton Lumber Co. v. Torberg, 274 Wis. 478, 80 N.W.2d 461 (1957).
In 1957 after the second Fullerton Lumber case, the legislature adopted sec. 103.465 at the suggestion of a legislator who was critical of the Fullerton Lumber decision. The legislator wanted a restraint containing overly broad and invalid provisions to be struck down in its entirety; he apparently did not want the court to give effect to an unreasonable restraint to the extent it might be reasonable. The objection to the "Torberg" practice, as the legislator noted, is that it tends to encourage employers possessing bargaining power superior to that of the employees to insist upon unreasonable and excessive restrictions, secure in the knowledge that the promise will be upheld in part, if not in full. Macaulay, Supplementary Comments, in Danzig, The Capability Problem in Contract Law, 54, 61 (1977). 4
American Family apparently urges that sec. 103.465 be read to prohibit only the blue-penciling of indivisible contracts but not the...
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