Illinois Appellate Court Rules That Restrictive Covenant In Tax Preparer’s Employment Agreement With H&R Block Was Enforceable.

On July 17, 2012, the Illinois Appellate Court for the Fourth District issued its ruling in Zabaneh Franchises, LLC v. Walker upholding the validity of a restrictive covenant in the employment agreement of a former H&R Block tax preparer.  The defendant, Terri Walker, was a tax preparer who worked for H&R Block.  She signed an employment agreement that included a restrictive covenant barring her for two years from doing any tax preparation work for clients she had serviced while with H&R Block and barred her for one year from hiring any of H&R Block’s employees.  Plaintiff Zabaneh Franchises acquired the H&R Block franchise including the rights under the employment agreement.  Plaintiff alleged that within a few months of leaving the firm in April 2010, Ms. Walker started her own tax-preparation business, solicited clients, and hired employees of H&R Block in violation of the employment agreement.  The trial court dismissed the complaint, finding that the agreement was unenforceable.

The appellate court reversed the trial court and found that the restrictive covenant was enforceable.  Relying on the recent Illinois Supreme Court decision in Reliable Fire Equipment Co. v. Arrendondo, the appellate court found that the enforceability of a restrictive covenant should be determined under the “three-dimensional rule of reason”, which provides as follows:

“A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee, (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public.”

The appellate court found that Walker’s covenant was enforceable because it did not prohibit Walker from preparing taxes or providing tax services to the general public, or to plaintiff’s or H&R Block’s clients generally.  She was only prohibited from serving those clients that she herself serviced while employed by plaintiff and H&R Block.  Therefore, the limited restriction reasonably balanced Walker’s right to earn a living with the plaintiff’s right to protect its customer relationships and its investment in developing Walker’s skills.  The appellate court further held that the covenant was enforceable even though it did not contain any limitation in geographic scope because it only applied to a limited customer base.

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