Court Report

Noncompete agreement valid if reasonable and balanced; court rejects pay plan that artifi cially lowered overtime; more.

Aug 1, 2010
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August coverNoncompete Valid if Reasonable and Balanced

H&R Block Eastern Enterprises Inc. v. Morris, 11th Cir., No. 09-11184 (May 17, 2010).

Although some states 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 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.

Professional Pointer: Even where courts apply “strict scrutiny,” employers can protect their interests and accomplish their objectives in noncompete agreements by incorporating reasonable limits and balancing their interests with those of their employees.


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 agreed not to solicit such clients for the purpose of providing such services for two 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 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.

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.

On appeal, the 11th Circuit observed that Georgia courts apply "strict scrutiny" to restrictive 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 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.

The 11th Circuit noted that a noncompete provision is not unenforceable merely because it precludes acceptance of business from unsolicited clients. 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 performed for H&R Block and for clients with whom she 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 found the nonsolicitation clause to be enforceable in light of its reasonable limits.

By Chris Arbery, an attorney at Hall, Arbery & Gilligan LLP in Atlanta.


Court Rejects Pay Plan that Artificially Lowered Overtime

Gagnon v. United Technisource Inc., 5th Cir., No. 09-20098 (May 27, 2010).

As addressed by the 5th U.S. Circuit Court of Appeals, compensation plans that have the effect of reducing overtime liability will be subject to close scrutiny. Such plans that are not well-founded will be rejected despite efforts to make them appear legitimate.

Timothy Gagnon was a skilled craftsman with extensive experience in prepping and painting aircraft. When hired by United Technisource Inc., he signed an employment contract that paid him $5.50 per hour for straight time and $20 per hour for overtime. In addition, his employer agreed to pay Gagnon a "per diem" rate of $12.50 per hour, up to $500 per week. Interestingly, with this cap, the per diem rate covered up to the first 40 hours of work per week.

Professional Pointer: Even relatively small errors in overtime calculations can, with awards of attorneys’ fees to prevailing plaintiffs, become very costly.


Gagnon subsequently sued United Technisource, alleging, among other things, a violation of the Fair Labor Standards Act. Gagnon asserted that he was not paid overtime compensation lawfully due to him.

United Technisource argued that Gagnon’s overtime rate of pay was more than three times greater than his straight time pay. Therefore, the employer concluded, the overtime premium required by the act was satisfied.

The court of appeals sided with Gagnon and held that the per diem allowance was required to be included in the regular rate of pay for purposes of calculating overtime. Noting prior cases where an employer sought to artificially lower the base rate to lower overtime liability, the court expressed its suspicion about the pay structure designed by United Technisource. It questioned why Gagnon would accept base pay close to minimum wage when the prevailing wage for similarly skilled craftsmen at the time was three times greater and, indeed, was equivalent to Gagnon’s base pay plus per diem rate. It also noted that per diem rates are generally not capped at an hourly mark.

According to the U.S. Department of Labor, per diem rates must be included in the regular rate calculation when the per diem amount varies based on the number of hours worked in the week. In that United Technisource paid Gagnon an hourly per diem rate, the company was required to include the per diem in the regular rate for purposes of calculating overtime compensation. The employer was ordered to pay Gagnon approximately $9,500 in unpaid overtime compensation and liquidated damages as well as more than $55,000 for his attorneys’ fees.

By Scott M. Wich, an attorney with Clifton Budd & DeMaria LLP in New York.


Company Pays Judgment for Sexual Harassment of Teenagers

EEOC v. Everdry Mktg. & Mgmt. Inc., W.D.N.Y., No. 01-cv-6329, judgment satisfied (May 5, 2010).

An Ohio-based company paid more than a half-million dollars for sexual harassment claims made by the U.S. Equal Employment Opportunity Commission on behalf of teenage employees.

Professional Pointer: Sexual harassment training is extremely important, especially if a company has related entities in other locations for which it ultimately may be held responsible.


The commission announced on May 5 that Ohio-based Everdry Marketing and Management Inc. has paid more than $500,000 in damages and interest to satisfy a judgment against that company stemming from a 2006 jury trial. The original claims were filed by 13 women, mostly teenagers at the time of the incidents, who worked at the company’s Rochester, N.Y., location as telemarketers.

The complaint included claims that male managers and co-workers at the Rochester franchise of Everdry verbally and physically harassed the young women from 1998 to 2002, making numerous sexual remarks and jokes and on one occasion promising a raise in return for sexual acts.

A jury originally awarded $585,000 in damages to the 13 plaintiffs; that amount ultimately was reduced to $471,096. The jury concluded that the Rochester affiliate was part of an "integrated enterprise" and that Everdry therefore violated Title VII of the Civil Rights Act of 1964 by allowing the harassment.

Everdry appealed the verdict on the basis that as a franchise, the Rochester affiliate was not part of the Everdry company. The 2nd U.S. Circuit Court of Appeals rejected that argument and affirmed the jury verdict, specifically affirming the award of punitive damages. 

By Maria Greco Danaher, an attorney with Ogletree Deakins in Pittsburgh.

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