Hunton Employment & Labor Perspectives

A recent Eleventh Circuit Court of Appeals decision upheld the validity of noncompetition and nonsolicitation covenants in an employment agreement governed by Georgia law.  In H&R Block Eastern Enterprises, Inc. v. Morris, the Eleventh Circuit reversed the United States District Court and ruled that provisions in H&R Block’s employment agreement with its former employee, Vicki D. Morris, were valid and enforceable restrictive covenants under Georgia law.  This decision provides additional guidance to employers attempting to draft enforceable employment agreements to protect legitimate business interests.  It also highlights why the Georgia General Assembly recently passed legislation attempting to offer clarity in this area of the law.

Facts Of The Case

H&R Block provides tax preparation and related services.  Between 2000 and 2005, H&R Block employed Morris as a seasonal tax preparer in Georgia.  In November 2004, Morris entered into an employment agreement with H&R Block that covered the 2005 tax season.  The agreement contained restrictive covenants, including noncompetition and nonsolicitation covenants.

The noncompetition covenant extended for a two-year period following the expiration of Morris’s agreement or her resignation or termination.  It provided that “Associate shall not, directly or indirectly, provide any of the following services to any of the Company’s clients:  (i) prepare tax returns, (ii) file tax returns electronically, or (iii) provide any alternative or additional service or product that Associate provided or offered as an employee of the Company … The restrictions … are limited to (i) Associate’s district of employment, and (ii) a twenty-five (25) mile radius as measured from the office to which Associate is assigned.”

The nonsolicitation covenant extended for the same duration as the noncompetition provision and stated:  “Associate shall not, directly or indirectly, solicit or attempt to solicit any of the Company’s clients for the purpose of providing (i) tax return preparation, (ii) electronic filing of tax returns, or (iii) any alternative or additional service or product that Associate provided or offered as an employee of Company.”  The agreement defined Company clients to include people or entities with whom Morris had contact by providing services as an H&R Block employee.

Morris received a form letter from H&R Block on or about October 31, 2005 that welcomed her back to H&R Block and invited her to attend orientation for the 2006 tax season.  Morris attempted to attend the orientation, but alleged that she was prevented from doing so by one of H&R Block’s office managers.  The next day, the H&R Block manager in charge of the district where Morris worked informed her that H&R Block was performing an internal audit of the tax returns she prepared.  Morris later received a letter from H&R Block that she was ineligible for hire until the audit process was completed.  Eventually, in December 2005, H&R Block informed Morris that she was ineligible for hire.

In January 2006, Morris opened her own tax preparation business with offices 13.3 miles from the H&R Block office where she worked.  During the 2006 tax season, Morris’s new company prepared tax returns for 87 former H&R Block clients.  Morris personally prepared 47 of these returns.  Morris claimed she did not solicit the business of H&R Block’s clients directly or indirectly.

H&R Block filed suit against Morris on June 2, 2006, alleging that Morris violated the terms of her employment agreement by (1) soliciting H&R Block’s clients for the purpose of providing tax-preparation services, (2) providing tax preparation services for former H&R Block clients, and (3) soliciting and hiring H&R Block’s employees.  Ultimately, the United States District Court ruled in favor of Morris, finding that the noncompetition covenant was unenforceable because it prevented Morris from accepting unsolicited business from former clients.  The District Court also invalidated the nonsolicitation covenant.  The case was appealed to the Eleventh Circuit.

The Eleventh Circuit’s Decision and Reasoning

Under Georgia law, restrictive covenants in employment agreements are subject to strict scrutiny and will be enforced only if they are reasonable as to the duration, territorial coverage, and scope of activity of the covenant.

The Eleventh Circuit determined that the District Court applied the wrong standard when reviewing the reasonableness of the noncompetition provision because it used a ruling involving a nonsolicitation covenant and not a noncompetition covenant.  After applying the correct standard, the Eleventh Circuit determined that the noncompetition covenant in Morris’s agreement was enforceable because it applied only to the district in which Morris worked and a 25-mile radius from the H&R Block office where she worked.  The Court opined that Morris had notice of the restriction because H&R Block disclosed and identified the territorial coverage of the covenant when it included a map illustrating the restricted geographic area in the agreement.

Moreover, the Court determined the noncompetition covenant was enforceable because other courts had found that a two-year duration was reasonable.  In addition, the covenant was deemed sufficiently narrow because it only prohibited Morris from taking clients she serviced while employed by H&R Block in 2005.  Morris was not prohibited from preparing taxes or providing related services to the general public, or even to all H&R Block clients.

The Eleventh Circuit also determined that the nonsolicitation covenant was enforceable.  Specifically, the Court determined the covenant was reasonable in duration and activity restricted because Georgia courts have found a two-year duration to be reasonable and the covenant applied only to H&R Block clients who Morris served during the 2005 tax year.  Moreover, the covenant only prohibited Morris from initiating contact with H&R Block clients for the purpose of providing the services she previously provided for H&R Block.  The covenant did not prohibit Morris from accepting unsolicited business.

After finding that the noncompetition provision was enforceable, the Court determined that Morris violated the covenant because she prepared tax returns for 47 of H&R Block’s clients at a location that was less than 25 miles from the H&R Block office where Morris worked.  Accordingly, the Eleventh Circuit reversed the District Court’s decision denying H&R Block summary judgment.

What The Decision Means For Employers

Historically, restrictive covenants in employment agreements have been difficult for employers to enforce under Georgia law.  This decision offers more guidance on how to prepare noncompetition and nonsolicitation covenants that will be upheld in Georgia.  Any employer with a need for restrictive covenants to protect its business also must consider Georgia’s recently passed HB 173, codified at O.C.G.A. §§ 13-8-2.1 and 13-8-50 - 59.  Importantly, because Georgia’s Constitution prohibits contracts “in restraint of trade,” these statutory changes will not become effective unless the Constitution is amended in the upcoming general election in November 2010.  This area of Georgia law is dynamic, and companies that do not periodically review restrictive covenants within their operating and employment agreements increase the risk of unfair competition from departing employees.