Georgia Appellate Court Voids Restrictive Covenant in Employment Contract

10/5/2009
By Diane Cadrain

The Georgia Court of Appeals voided the noncompetition clause in an employment contract, finding that it was overbroad because it failed to properly limit the territory to which it applied.

Mary Squire worked as a tax professional at an H & R Block office in Gainesville, Georgia. Her job required her to prepare and file tax returns for individual Block clients. After four months of this work, Block hired her as the office manager for her office for the 2008 tax season. In her capacity as an office manager, Squire had access to Block's client database for the entire Gainesville District. Her employment contract for the office manager job contained certain post-employment restrictive covenants, including noncompetition and nonsolicitation clauses, which barred her from setting up or working for a competing business within 10 miles from Block's Gainesville district and soliciting Block clients.

In early December 2008, Squire resigned from Block, but worked for approximately two more weeks after giving her notice of her resignation.
During that time she continued to have access to the Block client database for the Gainesville District.

In early January 2009, Squire's former district manager at Block saw Squire pictured, together with other former Block employees, in an advertisement for Paramount. The ad referred to Paramount's "tax professionals, pictured above." Shortly thereafter, Paramount sent out a business-solicitation letter to almost 6,000 people, offering them $30 off on tax preparation services, and stating that many recipients of the letter may have used Paramount's professionals when they previously worked at "another company around the block." The letter then gave the names of Paramount's "Tax Preparers," each of whom was a former Block employee, and specified the Paramount location where each individual was working.

Block sued Squire and Paramount for breach of the contract covenants. A trial court ruled that the covenants were enforceable and that Squire had breached them. Squire and Paramount appealed.

The appellate court first addressed whether the restrictive covenants in Squire's employment contract were enforceable. Such covenants, the court stated, will be enforced only if they are reasonable as to: (1) duration;
(2) the capacity in which the employee is prohibited from competing against his former employer; and (3) the geographic territory in which the former employee is restricted from working.

Applying these principles, the appellate court found that the restrictive covenants were unenforceable because the noncompetition clause was overbroad in that it failed to properly limit the territory to which it applied.

To be enforceable, the court said, a non-competition clause must contain a territorial limitation sufficient to give the employee notice of what constitutes a violation by specifying the territory in which the employee's conduct is restricted.

Squire's contract barred her from working for any employer whose business included the preparation and electronic filing of income-tax returns, if that employer was located, conducted business, or solicited business in Block's Gainesville District or within 10 miles of its borders. But, the court said, the contract failed to limit the prohibited conduct to a specific geographic area. In fact, on its face, according to the court, the contract language would have prevented Squire from accepting employment anywhere in the United States, if her prospective employer engages in the preparation and electronic filing of tax returns and also either has an office or advertises in, or within ten miles of, Block's Gainesville District.

Significantly, the court stated, the restriction would apply even if Squire were not going to work at a location within ten miles of the district. It would bar Squire from accepting employment, for example, at the Atlanta, Savannah, Macon, or Columbus office of a statewide tax preparation or accounting firm, if that firm also had an office in or advertised within ten miles of the Gainesville District. Similarly, assuming that one or more of Block's national competitors has offices or advertises within ten miles of the Gainesville District, this language would prevent Squire from accepting a position with such an entity, even if she were relocating out-of-state.

In light of those provisions, the court found that the contract overprotected Block's business interest in the customer relationships Squire may have developed while at Block, and it did so at the expense of her right to earn a living and her ability to determine with certainty the area within which [her] post-employment actions are restricted.

Given its overbreadth, the noncompetition covenant contained in Squire's employment contract was unenforceable as a matter of law, the court concluded. And because the noncompetition clause was unenforceable, the nonsolicitation clause included in the agreement was likewise unenforceable.

The Court of Appeals reversed the lower court's findings.

About the author.

Diane Cadrain is an attorney who has been writing about employment law issues for more than 20 years. She is a member of the Human Resource Association of Central Connecticut.

Editor's Note: This article should not be construed as legal advice.



Paramount Tax & Accounting, LLC v. H & R Block Eastern Enterprises, Inc., Ga. Ct. App., No. A09A1542 (Aug. 6, 2009).