H & R BLOCK TAX SERVICES v. Circle A Enter.

Decision Date04 March 2005
Docket NumberNo. S-03-750.,S-03-750.
Citation693 N.W.2d 548,269 Neb. 411
PartiesH & R BLOCK TAX SERVICES, INC., a Missouri corporation, appellant, v. CIRCLE A ENTERPRISES, INC., a Nebraska corporation, and T. Joan Kelsey, appellees.
CourtNebraska Supreme Court

Larry R. Baumann and Neleigh N. Smith, of Kelley, Scritsmier & Byrne, P.C., North Platte, for appellant.

George M. Zeilinger, Grant, for appellees.

HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

STEPHAN, J.

This is an appeal from a determination by the district court for Lincoln County that a covenant not to compete included in a franchise agreement between H & R Block Tax Services, Inc. (H & R Block), and Circle A Enterprises, Inc., was unenforceable as a matter of law.

BACKGROUND

On April 2, 1985, T. Joan Kelsey and H & R Block entered into a satellite franchise agreement authorizing Kelsey to operate an H & R Block tax preparation business in Ogallala, Nebraska. On May 19, 1986, Kelsey assigned the agreement to Circle A Enterprises, a corporation of which she was the president. On the same date, Kelsey gave written notice of the assignment to H & R Block, expressly acknowledging that she remained personally liable for the performance of all terms of the franchise agreement.

The franchise agreement provided in relevant part:

12. Limitations on Competition and Disclosure.
(a) Franchisee covenants that: (i) during the term hereof he will not compete, directly or indirectly whether as an owner, stockholder, partner, officer, director or employee, with Block or Block franchisees in the business of preparing tax returns or performing Related Services in or within 45 miles of the Franchise Territory; in the franchise territory granted to any other Block franchisee; or within 45 miles of any office operated by Block; (ii) for a period of one year after the termination of this Agreement or the Transfer or other disposition of this franchise, he will not directly or indirectly, whether as an owner, stockholder, partner, officer, director or employee, solicit by mail, phone or in person, or divert from Block or Block franchisees any person for whom Franchisee prepared a tax return or performed Related Services or Additional Services at any time during the term of this Agreement for the purpose of rendering of services in connection with the preparation of tax returns or performance of Related Services or Additional Services; and (iii) for a period of one year after the termination of this Agreement or the transfer or other disposition of this franchise, he will not compete directly or indirectly, whether as an owner, stockholder, partner, officer, director or employee, with Block or Block franchisees in the business of preparing tax returns or performing Related Services or Additional Services in or within 45 miles of the Franchise Territory.
(b) Franchisee further covenants that Franchisee will never (i) divulge to or use for the benefit of any person, association or corporation outside of the H & R Block organization, any information or knowledge concerning customers, the methods, promotion advertising or any other systems or methods of operation of Block's business or that of Block's franchisees which Franchisee may have acquired by virtue of his operations under this Agreement; (ii) use any materials regarding Additional Services without payment of the applicable royalty therefor and execution of an addendum regarding such Additional Services; or (iii) do any deliberate act prejudicial or injurious to the goodwill or name of Block. Information furnished to employees shall be reasonably limited to that which directly relates to such employee's duties and assists in the proper performance of such duties.
....
(g) Franchisee will cause each individual employed to prepare tax returns or to supervise the preparation of tax returns to execute an agreement, in the form prescribed by Block, containing substantially the same covenants against competition and disclosure as are set forth in subparagraphs (a) and (b)(i).

The franchise was terminated in the fall of 1999, and Kelsey relocated to North Platte, Nebraska, which is more than 45 miles distant from Ogallala. Kelsey subsequently operated a tax preparation business in North Platte, and in the year 2000, prepared tax returns for a number of clients for whom she had prepared returns while operating the H & R Block franchise. Kelsey testified that she did not solicit these former clients but that if they initiated contact with her, she prepared their returns. Her records indicate that over 85 percent of her receipts generated in 2000 came from former H & R Block clients.

On January 25, 2001, H & R Block filed this action in which it alleged that Circle A Enterprises and Kelsey breached the terms of the franchise agreement and prayed for damages and an accounting. In their joint answer and counterclaim, Circle A Enterprises and Kelsey alleged that the covenant not to compete set forth in the franchise agreement was "overbroad and unenforceable pursuant to the laws of the State of Nebraska." They denied any breach of the franchise agreement on their part and claimed damages for alleged breaches of the franchise agreement by H & R Block.

Following a bench trial, the district court issued a memorandum opinion and judgment on June 3, 2003. In its order, the court construed subparagraphs 12(a)(ii) and (iii) of the franchise agreement as one integrated covenant not to compete. Relying on Polly v. Ray D. Hilderman & Co., 225 Neb. 662, 407 N.W.2d 751 (1987), the court concluded that the portion of the covenant that restricted Kelsey from preparing tax returns for any client within a 45-mile radius of Ogallala was unreasonable and unenforceable as a matter of law because it was not limited to former H & R Block clients with whom Kelsey actually did business and had personal contact. The district court concluded that although the portion of the covenant that restricted Kelsey from soliciting former H & R Block customers for a period of 1 year was reasonable, the invalid portion of the covenant rendered the entire covenant not to compete invalid and unenforceable. Based upon this determination, the court found that Kelsey could not have violated the provision in subparagraph 12(g) of the franchise agreement requiring her to have all employees sign noncompetition agreements. The court further determined that H & R Block failed to prove an alleged breach of subparagraph 12(b) of the franchise agreement. The court found, however, that H & R Block did prove that Circle A Enterprises and Kelsey breached the agreement by failing to turn over certain documents upon termination of the franchise agreement. However, the court held that H & R Block failed to prove any damages caused by this breach. Finally, the court found against Circle A Enterprises and Kelsey on the counterclaim.

H & R Block filed this timely appeal, which we moved to our docket on our own motion pursuant to our statutory authority to regulate the dockets of the appellate courts of this state. See Neb.Rev.Stat. § 24-1106(3) (Reissue 1995).

ASSIGNMENTS OF ERROR

H & R Block assigns that the district court erred in (1) finding that the covenant not to compete was totally invalid and void and not severable into parts, (2) finding that the covenant not to compete could not extend to 45 miles in the tax preparation field for 1 year, and (3) determining that it was not a breach of the franchise agreement to fail to have employees sign a noncompetition agreement.

STANDARD OF REVIEW

The interpretation of a contract involves a question of law, in connection with which an appellate court has an obligation to reach its conclusions independent of the determinations made by the court below. Professional Bus. Servs. v. Rosno, 268 Neb. 99, 680 N.W.2d 176 (2004); Suburban Air Freight v. Aust, 262 Neb. 908, 636 N.W.2d 629 (2001).

ANALYSIS
SEVERABILITY

In its first assignment of error, H & R Block asserts that the district court erred in failing to sever any unenforceable covenant not to compete from the remaining enforceable covenants. The district court expressly held that the covenant which prohibited Kelsey from soliciting or diverting H & R Block clients was valid and enforceable for a period of 1 year after termination of the franchise. The court reasoned, however, that because the covenant prohibiting Kelsey from preparing tax returns within 45 miles of Ogallala for a period of 1 year was unenforceable, the valid covenant was rendered invalid as a matter of law.

This court has long held that it is not the function of the courts to reform a covenant not to compete in order to make it enforceable. CAE Vanguard, Inc. v. Newman, 246 Neb. 334, 518 N.W.2d 652 (1994); Brockley v. Lozier Corp., 241 Neb. 449, 488 N.W.2d 556 (1992); Vlasin v. Len Johnson & Co., 235 Neb. 450, 455 N.W.2d 772 (1990); Philip G. Johnson & Co. v. Salmen, 211 Neb. 123, 317 N.W.2d 900 (1982). For example, in CAE Vanguard, Inc. v. Newman, 246 Neb. at 336, 518 N.W.2d at 654, the terms of a noncompetition agreement signed in conjunction with the sale of stock provided:

"[Defendant] agrees and covenants that he will not, for a period of five (5) years after the date of this Covenant, and anywhere in the United States, the continent of North America, or anywhere else on earth, or such lesser period of time or geographical area restriction as a court of law might later determine to be the limits of enforceability of this covenant, (a) directly or indirectly solicit electrochemical metalizing business regarding railroad axles and/or mounted wheel sets...."

The district court reformed the agreement by employing the "blue-pencil" rule and striking the words "`or anywhere else on earth, or such lesser period of time or geographical area restriction as a court of law might later determine to be the limits of enforceability of this covenant.'" Id. at 337, 518 N.W.2d at 654. On appeal,...

To continue reading

Request your trial
28 cases
  • Adt Sec. Services v. A/C Sec. Systems, Inc.
    • United States
    • Nebraska Court of Appeals
    • July 3, 2007
    ...area, and then use the funds thus obtained to do the very thing the contract prohibits." H & R Block Tax Servs. v. Circle A Enters., 269 Neb. 411, 417-18, 693 N.W.2d 548, 554 (2005), quoting Swingle & Co. v. Reynolds, 140 Neb. 693, 1 N.W.2d 307 "The restraint of trade that is permissible in......
  • Softchoice Corp. v. Mackenzie
    • United States
    • U.S. District Court — District of Nebraska
    • July 2, 2009
    ...or accounts with whom the former employee actually did business and ha[d] personal contact.'" H & R Block Tax Servs., Inc. v. Circle A Ent., Inc., 269 Neb. 411, 693 N.W.2d 548, 554 (2005) (quoting Polly v. Ray D. Hilderman & Co., 225 Neb. 662, 407 N.W.2d 751, 756 (1987)). Thus, under Nebras......
  • Johnson v. US Fid. and Guar. Co., S-03-748.
    • United States
    • Nebraska Supreme Court
    • May 6, 2005
    ...has an obligation to reach its conclusions independently of the determinations made by the court below. H & R Block Tax Servs. v. Circle A Enters., 269 Neb. 411, 693 N.W.2d 548 (2005). Johnson argues that although he would not have gone to Denver but for Brown's request, once in Denver, Joh......
  • W. Point Auto & Truck Ctr., Inc. v. Klitz, 8:20CV194
    • United States
    • U.S. District Court — District of Nebraska
    • September 15, 2020
    ...of trade, like non-compete and non-solicitation agreements, are not automatically invalid. H&R Block Tax Servs., Inc. v. Circle A Enters., Inc. , 269 Neb. 411, 693 N.W.2d 548, 553-54 (2005) ; Chambers-Dobson, Inc. v. Squier , 238 Neb. 748, 472 N.W.2d 391, 401 (1991) ("A noncompetition coven......
  • Request a trial to view additional results
3 books & journal articles
  • Post-Termination Covenants Not To Compete
    • United States
    • ABA Antitrust Library Franchise and Dealership Termination Handbook
    • January 1, 2012
    ...16 Other courts, however, have analyzed the legality 10. Id . at 515. 11. Id. 12. See, e.g., H&R Block Tax Servs. v. Circle A Enters . , 693 N.W.2d 548, 556 (Neb. 2005) (finding franchise agreement analogous to sale of business for purposes of determining enforceability of post termination ......
  • Table of Cases
    • United States
    • ABA Antitrust Library Franchise and Dealership Termination Handbook
    • January 1, 2012
    ...224 F.3d 142 (2d Cir. 2000), 77 Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186 (1974), 181 H H&R Block Tax Servs. v. Circle A Enters., 693 N.W.2d 548 (Neb. 2005), 215, 223, 229 H&R Block v. Lovelace, 493 P.2d 205 (Kan. 1972), 216 H.L. Hayden Co. v. Siemens Med. Sys., 879 F.2d 1005 (2d Cir.......
  • Recruiting and Retaining a Qualified Labor Force in the Construction Industry: What to Strive for and Consider
    • United States
    • ABA General Library The Construction Lawyer No. 42-2, April 2022
    • April 1, 2022
    ...State Bank of Ham Lake, Inc . , 372 N.W.2d 85, 88 (Minn. Ct. App. 1985). 65 . H&R Block Tax Servs., Inc. v. Circle A Enters., Inc . , 693 N.W.2d 548, 553 (Neb. 2005). 66 . Mertz v. Pharmacists Mut. Ins. Co., 625 N.W.2d 197, 203–04 (Neb. 2001) (refusing to apply a choice of law provision des......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT