H & R Block Tax Servs. v. Circle A Enters - 269 Neb. 411, 693 N.W.2d 548 (2005)

Rule:

Regardless of the context, a partial restraint of trade such as a covenant not to compete must meet three general requirements to be valid. First, the restriction must be reasonable in the sense that it is not injurious to the public. Second, the restriction must be reasonable in the sense that it is no greater than reasonably necessary to protect the employer in some legitimate business interest. Third, the restriction must be reasonable in the sense that it is not unduly harsh and oppressive on the party against whom it is asserted.

Facts:

The parties entered into a satellite franchise agreement authorizing the franchisee to operate a tax preparation business. When the franchise was terminated, the franchisee relocated to another town and prepared tax returns for a number of clients for whom she had prepared returns while operating the franchise. The district court ruled that a covenant not to compete included in the franchise agreement was unenforceable as a matter of law. The franchiser appealed.

Issue:

Did the district court err in finding the covenant not to compete contained in the franchise agreement was unenforceable as a matter of law?

Answer:

Yes.

Conclusion:

The court found that the district court erred in finding the covenant not to compete contained in the franchise agreement was unenforceable as a matter of law. Although the district court conducted a full evidentiary hearing, its final judgment was based entirely on its determination of unenforceability. It therefore made no factual findings as to whether the covenant was violated based on the evidence presented. In view of the appellate court's independent determination that the covenant was enforceable, it became necessary to determine whether the franchisee's actions violated the covenant and, if so, the consequences of the violation. Also, it had to be determined whether the franchisee violated the franchise agreement by failing to obtain noncompete agreements from her employees. The district court had to make these factual determinations.