2024 was a year in which there were significant developments with respect to restrictive covenants, particularly for employment noncompete agreements. As our readers are aware, the Federal Trade Commission (FTC) published a new rule that would have all but eliminated such agreements on a national basis — however, the rule was then found to be beyond the FTC’s jurisdiction, and the law returned to a state-by-state application.
More recently, the Wisconsin Court of Appeals held in December 2024 —for the first time — that Wisconsin law allows for disgorgement as a remedy in tortious interference claims involving interference with an employee noncompete agreement. For those who are unfamiliar with the term, tortious interference is a common law claim where a plaintiff, in this case the former employer, can sue a defendant, in this case the new employer, for damages for wrongfully interfering with the contract (covenant) between the former employer and its former employee.
In the case, Frey Construction & Home Improvement, LLC v. Hasheider Roofing & Siding, Ltd.,[1] an employee bound by a noncompetition agreement voluntarily resigned his employment for a job with a competitor. The new employer allegedly knew of the noncompete agreement when it hired the employee.The employee’s former employer filed suit against the employee for breach of the noncompetition agreement and against the new employer for tortious interference with the contract.
The case presented an issue of first impression for the Wisconsin Court of Appeals: “[W]hether disgorgement is a proper remedy for tortious interference with contract claims.”[2]
Disgorgement is a type of legal remedy whereby a party is ordered to give up profits that were unlawfully obtained. The court in Frey explained: “If ordered as a remedy, ‘disgorgement requires that the defendant give up those gains properly attributable to the defendant’s interference with the claimant’s legally protected rights.’”[3] Consequently, if disgorgement is used as a remedy against an employer found liable for tortious interference with a noncompete agreement, the plaintiff is entitled to any profits the employer obtained because of the protected employee’s hire.
The Frey court ultimately held that disgorgement could indeed be a proper remedy in some Wisconsin tortious interference cases involving employee noncompete agreements. As a case set for publication, it will have precedential weight in Wisconsin.
Although Frey’s holdingis not necessarily a surprise, there are two important takeaways for employers in Wisconsin:
- For employers considering whether to pursue a claim against a former employee and their new employer based on an alleged noncompete violation, Frey means that you may be able to recover damages even if you have not lost any revenue because of the breach. Rather, damages may now be measured by the amount of profit/revenue the hiring employer has realized.
- For companies that hire employees with noncompete agreements, Frey warns of the importance of pre-hiring due diligence. Before onboarding a new employee, it is critical to confirm the existence and enforceability of any restrictive covenants and to review whether they might be violated by the hiring. If a former employer files suit for an alleged breach, they may pursue claims against you, the new employer (for interfering with the restrictive covenant simply by employing the employee in a position that violates the agreement), and under Frey, they may seek all profits generated by hiring the new employee.
We will continue to monitor and report on developments in this highly dynamic area of law.
[1] No. 2023AP67, 2024 WL 5135180, at *2 (Wis. Ct. App. Dec. 17, 2024).
[2] Id. at *1
[3] Id. at *9 (quoting Kokesh v. SEC, 581 U.S. 455, 458–59 (2017))
