Doan Family Corp. v. Arnberger

• Decision Date: 30 December 2022
• Docket Number: 123,628
• Parties: DOAN FAMILY CORPORATION d/b/a/ H&R Block, Appellant, v. Shelly ARNBERGER, Appellee.
• Court: Kansas Court of Appeals

522 P.3d 364

DOAN FAMILY CORPORATION d/b/a/ H&R Block, Appellant,

v.Shelly ARNBERGER, Appellee.

No. 123,628

Court of Appeals of Kansas.

Opinion Filed December 30, 2022

John D. Beverlin II, of Stull, Beverlin, Nicolay & Haas, LLC, of Pratt, for appellant.

Thomas J. Berscheidt, of Berscheidt Law Office, of Great Bend, for appellee.

Before Malone, P.J., Atcheson and Warner, JJ.

Warner, J.:

The Doan Family Corporation appeals the district court's judgment against Shelly Arnberger, Doan's former employee, after Arnberger violated the restrictive covenants in her employment contract. Doan argues that the district court improperly reduced the duration of the contract's noncompete clause from two years to one year, resulting in a significantly reduced damages award. Doan also challenges various other aspects of the district court's decision relating to its measure of damages, costs, and attorney fees. After carefully reviewing the record and the parties' arguments, we agree that the district court erred when it reduced the duration of the noncompete clause. We therefore reverse the district court's decision and remand the case so the court may calculate Doan's damages using the two-year term in the employment contract.

FACTUAL AND PROCEDURAL BACKGROUND

Doan owns H&R Block franchises in Great Bend and Pratt. Under Doan's business model, employees conduct in-person client interviews to prepare and file tax returns and offer other products. Clients generally work with a specific employee, and employees call their clients at the beginning of each tax season to solicit their business. These practices help foster client relationships, resulting in clients returning to the franchise in future tax years.

Arnberger and Juanita Reimer were employed as tax preparers at Doan's Great Bend location. Arnberger had worked at Doan for 16 years—preparing taxes at the company every tax year from 2001 until 2016. At the beginning of each tax season, Arnberger would enter into an annual employment agreement with Doan. The issues in this case concern two provisions in the 2016 employment contract: the post-employment noncompetition clause (which we refer to as "the noncompete clause") and the remedies clause:

• The noncompete clause prohibits former employees from providing tax-return preparation or filing services for or soliciting company clients—persons for whom the former employee provided these services during their employment—for two years after their employment with Doan ends. The clause states that this two-year term will be tolled when the former employee is in violation of the noncompete clause and during litigation necessary to enforce the clause.

• Under the remedies clause, Doan is entitled to damages for a violation of the noncompete clause, and former employees must pay "all court costs, reasonable attorneys' fees, and expenses incurred" in enforcing the clause.

Arnberger and Reimer left Doan in 2016. Beginning in the 2017 tax season, they began preparing and filing tax returns at their own business. A significant portion of the returns they filed that year—at least 70% of the returns filed by Arnberger—were for Doan's former company clients.

In March 2017, Doan sought to enforce the noncompete clause against Arnberger and Reimer to prevent the continued violation of the agreement and seek damages for their breach. The district court granted a temporary injunction after the 2017 tax season but lifted it at the beginning of the 2018 season, allowing Arnberger and Reimer to prepare and file returns, as any breaches of the agreement could be addressed through a damages award. Doan later resolved its claim against Reimer outside of court, so we limit our discussion here to Arnberger.

In June 2018, Doan filed a motion for summary judgment, arguing that Arnberger violated the noncompete clause. The district court granted the motion in part:

• The court accepted as uncontroverted all the facts listed in Doan's motion and found that Arnberger had violated the agreement.

• The court found that the noncompete clause was the result of a freely negotiated contract.

• The court concluded that the clause protected a legitimate business interest, was not harmful to the public welfare, and was not unduly burdensome for the employees.

• The court found that any geographical limitations imposed by the clause were "minimal, if any."

Despite these conclusions, the court found that the duration of the noncompete clause—two years—was unreasonable. In reaching this conclusion, the court did not specifically analyze the two-year restriction. Instead, it discussed restrictive covenants generally, noting that some people go to a certain tax preparer, regardless of the employer, because they are the preparer's family or friends. The court observed that Great Bend is "a rural community where people have contact with others because of who they are and not necessarily who they work for."

The court thus ruled that the noncompete clause was enforceable in a general sense. But the court modified the duration of that clause from two years to one year "to begin immediately ... for one year from the date [of] this decision" (which was filed October 19, 2018). The court did not otherwise discuss the noncompete clause's tolling provision.

In August 2020, the court held a bench trial on the damages caused by Arnberger's violation of the noncompete clause. Jennifer and Eric Doan—who own and operate the company—both testified at trial and explained it generally takes two years to secure a long-term client; employees build client relationships the first year and encourage clients to return during the second year. The Doans also noted that for each prepared tax return, Doan earns 40% of the income, the employee earns a 30% commission, and the remaining 30% goes to H&R Block as a franchise fee. That franchise fee would apply to Doan's recovery. Basing its damages calculation on a three-year average, Doan sought past and future damages equal to the 70% of the income it would have earned had Arnberger not violated the noncompete clause. Following trial, Doan filed a motion requesting nearly $69,000 in attorney fees and approximately $3,500 in litigation expenses.

The district court found that Doan had suffered approximately $12,000 in actual damages. It reached this figure by limiting Doan's damages to the 2017 tax season—as it had modified the noncompete clause's duration to one year. In doing so, the court implicitly revised its previous summary-judgment ruling that the one-year time frame started from the date of that ruling and rejected Doan's arguments regarding the agreement's tolling provision. The court also limited Doan's recovery to 40% of the gross income, finding that it was not entitled to recover either the 30% franchise fee or the 30% commission. And the court awarded Doan $7,500 in attorney fees and about $1,400 in additional costs.

Doan appeals, challenging several aspects of the district court's judgment. Arnberger has not filed a cross-appeal.

DISCUSSION

The freedom to contract "is not to be interfered with lightly." Foltz v. Struxness , 168 Kan. 714, 721-22, 215 P.2d 133 (1950). People have "wide discretion" to determine the terms of their agreements, including in employment contracts. Weinzirl v. Wells Group, Inc. , 234 Kan. 1016, 1019, 677 P.2d 1004 (1984). Courts have a corresponding duty to honor and enforce employment contracts as they are written, as long as they are "not contrary to the law or unreasonable in [their] terms." 234 Kan. at 1019, 677 P.2d 1004 ; Wichita Clinic, P.A. v. Louis , 39 Kan. App. 2d 848, 852, 185 P.3d 946 (2008). Accord Liggatt v. Employers Mut. Cas. Co. , 273 Kan. 915, 923, 46 P.3d 1120 (2002) (When contract terms are unambiguous, " ‘the court may not make another contract for the parties’ " but rather must " ‘enforce the contract as made.’ ").

More than 70 years ago, the Kansas Supreme Court clarified that this same "paramount public policy" extends to restrictive covenants in employment contracts. Foltz , 168 Kan. at 721-22, 215 P.2d 133. Recognizing the discrepancy of bargaining power between employers and employees, courts strictly construe ambiguous contract terms limiting the scope of an employee's postemployment conduct against the employer. See Idbeis v. Wichita Surgical Specialists, P.A. , 279 Kan. 755, 762, 112 P.3d 81 (2005). But like other contracts, unambiguous restrictive covenants must be enforced as written if they are legal and reasonable. See Wichita Clinic , 39 Kan. App. 2d at 852, 185 P.3d 946. Put another way, noncompete agreements are "valid and enforceable if the restraint on competition is reasonable under the circumstances and not adverse to the public welfare." Weber v. Tillman , 259 Kan. 457, Syl. ¶ 2, 913 P.2d 84 (1996).

Doan's primary argument on appeal is that the district court erred when it reduced the term of the noncompete clause in Arnberger's employment contract to one year because the clause as written was reasonable and enforceable under Kansas law. We partially agree and find that the two-year term of the original agreement was reasonable. But we find no error in the district court's decision not to enforce the clause's tolling provision. We remand the case to the district court to reconsider its damages award and corresponding attorney-fees and expenses rulings in light of these principles.

1. The district court erred by reducing the duration of the noncompete clause to one year.

As we have indicated, Kansas courts have a duty to enforce noncompetition covenants when those agreements are reasonable and do not harm the public. Kansas courts evaluate these principles by considering four overlapping questions:

• "Does the covenant protect a legitimate business interest of the employer?"

• "Does the covenant create an undue burden on the employee?"

• "Is the covenant injurious to the public welfare?"

• "Are the time and territorial limitations contained in the covenant reasonable?" Weber , 259 Kan. 457,

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