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).

Webinar: Welcome to Lawyerland - How to Navigate the Court System

W E B I N A R

Welcome to Lawyerland: How to Navigate the Court System
Tuesday, October 22, 2009 at 3:00p.m. (EST)
With Annie Catmull with Walker, Wilcox and Matousek

When faced with the prospect of litigation, understanding the court system will help you control costs and improve the likelihood of a satisfactory resolution, so you can get back to business quickly.

One of the most difficult things to learn about the court system is how to navigate all of the filings and motions. The speaker will give you the basics of how to bring or defend a case.

Topics that will be covered in this one hour:
-Small claims, common pleas, and municipal courts. What are their differences?
-What to expect in Federal and State Courts and when to expect to be there.
-Going to court, whether you are allowed to represent yourself and when you are not.
-Different cases, advantages and disadvantages of litigation alternatives: mediation and arbitration.
-The minimum initial steps you should take as soon as you learn you or your company is being sued.
-Finding a reliable attorney, getting them the facts, and how to control costs – the growing trend of flat fee billing.

The presenter Annie Catmull is a lawyer with Walker, Wilcox and Matousek (located in Houston, TX and Chicago, IL). This firm focuses on complex commercial litigation, bankruptcy/recturing, and insurance coverage disputes. Her nationwide practice includes the representation of creditors ranging from large and small independent businesses to Fortune 500 companies. She was a speaker at the NLBMDA ProSales Industry Summit in 2008 on the subject of bankruptcy and the homebuilding industry.

This webinar provides you the opportunity to learn from one of the leaders in the industry without having to leave your business. No travel, no time away from the office. The price is just $139 per logged on computer. To get the most bang for your buck, gather all your managers around one computer and use a speaker phone.

The webinar is being hosted by Turnkey Programming. Prior to the webinar, you’ll be contacted by them with the webinar phone number and password, as well as instructions for logging onto the website to view the webinar live.

Click the pictures to enlarge, print and use.

Protecting Your Business

By Business and Legal Reports, Inc.

After a Georgia company reduced a vice-president’s bonus, he decided to open his own business. He discussed his departure with his supervisors and thought he had arrived at an amicable parting, only to be sued after he left the company.

What happened. “Fawkes” owned a share of an insurance company named Hamilton, Dorsey & Alston. Wachovia Insurance Services purchased Hamilton on May 1, 2001. Fawkes received cash and Wachovia Insurance stock and was given a four-year contract to work as a senior vice president in Wachovia’s employee benefits area.

In September 2004, Wachovia Insurance’s president asked Fawkes to sign a confidentiality and nonsolicitation agreement that would make Fawkes an at-will employee. Two years later, Wachovia reduced Fawkes’ bonus and commission structure. In April 2007, Fawkes decided to resign and open a competing business. He met with the company president and his supervisor to discuss the plan and to assure them that he intended to honor the nonsolicitation agreement. Fawkes’ supervisor formally informed the department that Fawkes was leaving to start his own firm.

On April 23, with his supervisor’s permission, Fawkes sent a letter to 90 of his business contacts informing them that he was starting his own business. On April 30, his employment with Wachovia Insurance ended. Two months later, Wachovia sued Fawkes and his new business for breach of the nonsolicitation agreement, misappropriation of trade secrets, and computer theft. Fawkes asked the court to dismiss the case.

What the court said. Wachovia alleged that Fawkes had breached his written agreement not to solicit clients. Fawkes countered that the covenant imposed an unreasonable restraint on his ability to do business because it forbade him to solicit clients that had already ended their relationships with Wachovia Insurance. The court agreed with Fawkes; the covenant defined a customer as “any individual or entity that has purchased an insurance contract through the Company,” which the court found to include too many customers that no longer had a relationship with Wachovia. It thus found the nonsolicitation agreement too broad to be enforceable.

Wachovia also complained that Fawkes had breached the agreement by hiring two of its employees for his new company. In fact the employees had approached Fawkes and he had not approached or solicited them, so the court found no breach.

Wachovia next argued that Fawkes had misappropriated trade secrets by using a Wachovia Insurance client list from password-protected company computers. To obtain relief under the Georgia Trade Secrets Act (GA Code Sec. 10-1-760), Wachovia needed to show that this information was not commonly known to the public. But Fawkes proved that all of the information was available on a public website (“freeERISA.com”), commonly used by employee benefits companies for prospecting for customers. The court ruled that Fawkes had not misappropriated Wachovia’s trade secrets.

Finally, Wachovia claimed that Fawkes had committed “computer theft” because Wachovia Insurance employees who moved to Fawkes’ new company used Wachovia’s client contact information on their Blackberry® devices in their new employment. GA Code Sec. 16-9-93(a) defines computer theft as “knowingly using a computer network without permission and with the intention of taking someone else’s property.”

But Fawkes’ employees were merely using Blackberry devices that contained information Wachovia Insurance also had; Wachovia could not prove that they were using its own computer network without permission and intending to steal Wachovia’s data. The court agreed that Wachovia had shown no evidence of computer theft. It dismissed all the claims against Fawkes.

Wachovia Insurance Services v. Fallon, Ga. Ct. App., No. A09A0140 (July 14, 2009).

Professional Pointer: This employer filed this lawsuit to send “a message to others,” to communicate to future employees that the company would not tolerate them taking its business. Before trying to send a similar message, make sure you have a solid case with real damages.

Contributed by BLR, Inc. Read plain-English analysis on Employment Contracts in Georgia.