Two-year, Non-solicitation Activity Covenant Upheld in Illinois for Seasonal Tax Employee

An Illinois appellate court recently upheld a two-year, non-solicitation activity covenant and one-year anti-raiding covenant between a tax preparation service and its employee, despite the employee’s seasonal employment of just three months. Zabaneh Franchises, LLC v. Walker, 972 N.E. 2d 344 (Ill. App. 2012).

In July of 2010, Zabaneh Franchises, LLC, an income tax preparation service based in Quincy, Ill., purchased an existing H&R Block, Inc. franchise. The sale included an assignment of employment agreements with H&R Block’s employees, including that with Terri Walker. Walker had signed an employment agreement in November 2009, as she did annually beginning in 2003. Pursuant to this agreement, Walker agreed to work during the 2010 “tax season,” from January 2 through April 15, 2010. Walker completed this tax season employment without incident.

In February 2011, Zabaneh filed suit against Walker alleging that within a few months of leaving Zabaneh in April 2010, Walker started her own tax preparation business, solicited clients, and hired employees of H&R Block in violation of her employment agreement. Zabaneh’s complaint sought a temporary restraining order against Walker to bar her from engaging further in such activities. The trial court found Walker’s employment agreement to constitute a “contract of adhesion” (a “take it or leave it” imbalanced agreement favoring one party) and denied Zabaneh’s request for a temporary restraining order. The case was subsequently dismissed with prejudice.

On appeal, the appellate court was asked to consider whether Walker’s employment agreement was reasonable and enforceable. In doing so, the court noted that the Illinois Supreme Court had recently addressed the proper standard for analyzing the enforceability of restricted covenants in an employment agreement in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2012).

In Arredondo, the supreme court held:

“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, (2) does not impose an undue hardship on the employee-promisor and, (3) is not injurious to the public.” 965 N.E.2d at 396.

The court further explained that these factors are analyzed pursuant to a totality of the circumstances test and that no factor carries any more weight than any other, but rather each factor’s importance will depend on the facts and circumstances of the specific case.

In examining Walker’s restricted activity covenant, the court took note of the competing interests of the unfair restraint to Walker’s trade and Zabaneh’s interests in protecting proprietary information. For two years after cessation of employment, Walker’s restrictive activity covenant prohibited her from preparing any tax returns for any individuals she had prepared tax returns for during her employment with Zabaneh. The covenant did not prohibit Walker from preparing taxes or providing related services to the general public or to Zabaneh’s or H&R Block’s clients generally. It only prohibited her from serving the clients Walker had serviced while employed by Zabaneh. The court reasoned this limited restriction reasonably balanced Walker’s right to earn a living with Zabaneh’s right to protect its customer relationships and its investment in developing Walker’s skills.

Accordingly, the court found the restrictive activity covenant to be reasonable, reversed the trial court’s dismissal, and remanded the case back to the trial court for further proceedings. In this case, the court stated the most important factor was the limited nature of the type of restrictions. The restrictive activity covenant:  (1) was no greater than was required to protect Zabaneh’s legitimate business interest, (2) did not impose an undue hardship on Walker, and (3) was not injurious to the public.

For employers, the Zabaneh decision emphasizes the importance of drafting restrictive activity covenants only as broad as necessary to protect their specific and legitimate business interests.

For employees, this decision continues to emphasize the importance of reviewing the terms and covenants of their employment agreement. Duration of employment may be considered in analyzing the reasonableness of a restrictive activity covenant; however, limited employment duration will not prevent an employer from enforcing a much longer restrictive covenant against an employee.