Non-Compete Agreements *
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Although some state laws disfavor covenants not to compete in employment
agreements, an agreement that reasonably balances the interests of the
employee and the employer will be enforced, according to a recent decision by
the 11th U.S. Circuit Court of Appeals.

Vicki Morris worked for H&R Block Eastern Enterprises Inc. as a seasonal tax
preparer in College Park, Ga., from 2000 to 2005. Each year, she entered into
a separate agreement with H&R Block defining the terms of her employment
during the tax season. For the 2005 tax season, she entered into an agreement
that contained a covenant not to compete and a covenant not to solicit
customers of H&R Block.

Specifically, Morris agreed that she would not, for a period of two years
following the end of her employment, prepare tax returns, file tax returns
electronically or provide other services that she provided as an employee of
H&R Block to any clients of H&R Block with whom she had contact during the
term of the agreement within a 25-mile radius of the College Park office. She
also agreed not to solicit such clients for the purpose of providing such services
for two years. She completed her term for the 2005 tax season as she had in
previous years.

In November 2005, Morris returned for orientation for the 2006 tax season, but
she was told by an office manager that her returns were being subjected to an
internal audit and she was not welcome at the orientation. In December 2005,
Morris was informed that she was not eligible for rehire.
In January 2006, Morris started up a new business called Dreams Tax Service
Inc. in an office located approximately 13.3 miles from H&R Block’s office in
College Park. For the 2006 tax season, Morris’ new business prepared tax
returns for approximately 87 former clients of H&R Block, including 47 returns
that were prepared by Morris personally.

In June 2006, H&R Block filed a lawsuit against Morris in the U.S. District Court
for the Northern District of Georgia, alleging breach of the restrictive covenants
in her employment agreement. Morris counterclaimed, alleging wrongful
termination, interference with business relations, breach of an implied contract
for rehire, discrimination under Title VII of the Civil Rights Act and defamation.
The district court granted a preliminary injunction in favor of H&R Block to
preclude Morris from competing, but it ultimately found the restrictive covenants
to be unenforceable and dismissed H&R Block’s claims on summary judgment
in January 2009. The decision was primarily based on the fact that the
agreement prevented Morris from accepting unsolicited business from H&R
Block’s clients. The district court also dismissed all of Morris’ counterclaims.
Both parties appealed to the 11th Circuit.

The appeals court noted that, under Georgia law, a restrictive covenant
ancillary to an employment agreement is deemed to be in partial restraint of
trade and will be enforced only if it is reasonable, it is supported by
consideration, it is reasonably necessary to protect the employer’s interests
and it does not unduly prejudice the interests of the public. The court observed
that Georgia courts apply “strict scrutiny” to such covenants and insist on
reasonable limits in three areas—duration, geographic territory and scope of
activity. Georgia law does not permit courts to “blue pencil” or redact overbroad
provisions in order to render the covenant more reasonable and enforceable. If
any part of the noncompete or nonsolicitation covenant is found to be
overbroad, both restrictive covenants will be deemed unenforceable.

In its analysis of the lower court’s decision, the 11th Circuit noted that a
noncompete provision (as opposed to a nonsolicitation clause) is not
unenforceable merely because it precludes acceptance of business from
unsolicited clients. Instead, a covenant not to compete protects the employer’s
investment in the development of the employee’s skills without regard to any
particular clients with whom the employee worked.

The court applied the three-element test of duration, territorial coverage and
scope of activity to conclude that the noncompete provision was enforceable in
light of “the nature and extent of the business, the situation of the parties and
other relevant circumstances.” Specifically, the court found that two years was a
reasonable period of time and that a 25-mile radius was a reasonable territory
in light of evidence that Morris had actually served clients from communities
extending out that far. Further, the restricted activities were limited to functions
that Morris actually performed for H&R Block and for clients with whom she
actually had contact at H&R Block during the 2005 tax season. Accordingly, the
court concluded, “[t]he covenant appropriately balances Morris’ right to earn a
living with Block’s right to protect its customer relationships and Block’s
investment in developing Morris’ skills.” The court also found the nonsolicitation
clause to be enforceable in light of its reasonable limits. H&R Block Eastern
Enterprises Inc. v. Morris, 11th Cir., No. 09-11184 (May 17, 2010).

Professional Pointer: Georgia is one of the most difficult states in which to
enforce a noncompete clause in an employment agreement. However, even
where courts apply “strict scrutiny,” employers can protect their interests and
accomplish their business objectives in noncompete agreements by
incorporating reasonable limits and balancing their interests with those of their
employees.

Chris Arbery is an attorney at Hall, Arbery & Gilligan LLP in Atlanta.
Editor’s Note: This article should not be construed as legal advice

article referenced: by Chris Arbery       6-4-2010
SHRM website.