Document:

exv10w1

Exhibit 10.1

	 	 	 
	 

	 	CONFIDENTIAL

SETTLEMENT AGREEMENT

     This SETTLEMENT AGREEMENT (the “Agreement”) is made and entered into by and between K-Swiss
Inc., a Delaware corporation, with its principal place of business at 31248 Oak Crest Drive,
Westlake Village, California 91361 (“K-Swiss”) and Payless ShocSource, Inc., a Missouri
corporation, with a place of business at 3231 S.E. 6th Avenue, Topeka, KS 66607, and Payless
ShoeSource, Inc., a Delaware corporation, with its principal place of business at 3231 S.E. 6th
Avenue, Topeka, KS 66607 (collectively “Payless”). K-Swiss and Payless are sometimes hereinafter
referred to, separately, as a “Party” or, collectively, as the “Parties”.

RECITALS

     WHEREAS, K-Swiss is the owner of several trademark registrations for its Five Stripe design
mark, alone or with other terms and/or designs, including, Registration Nos. 1,029,423 and
1,550,230 both of which are on the Principal Register of the United States Patent and Trademark
Office and are “incontestible” (such mark is herein referred to as the “Five Stripe Mark”). Copies
of U.S. Trademark Registration Nos. 1,029,423 and 1,550,230 are attached hereto as Collective
Exhibit 1;

     WHEREAS, K-Swiss is the owner of several trademark registrations for its Toe Box Design mark,
alone or with other terms and/or designs, including, Registration No. 1,821,414, which is on the
Principal Register of the United States Patent and Trademark Office and is “incontestible” (such
mark is herein referred to as the “Toe Box Mark”). A copy of U.S. Trademark Registration No.
1,821,414 is attached hereto as Exhibit 2;

     WHEREAS, K-Swiss is also the owner of U.S. Trademark Registration Nos. 1,843,012 and
1,817,977, which include both the Five Stripe Design and the Toe Box Design trademarks. Such
registrations are on the Principal register of the United States Patent & Trademark Office. True
and correct copies of these registrations are attached hereto as Collective Exhibit 3. Each of
these registrations have become “incontestible” under the provisions of the Trademark Act and are
conclusive proof of the exclusive rights of K-Swiss to the marks as shown in such registrations;

     WHEREAS, K-Swiss owns certain exclusive trademark, trade dress, and product configuration
rights in the visual design of its “Classic” and other shoes, as further described below;

     WHEREAS, K-Swiss has used the Five Stripe Mark and the Toe Box Mark, along with D-rings (or
visually similar rings, such as O-rings or triangle rings) and other distinguishing design
elements, on several styles of shoes including its original Classic shoe (the “Classic”) and its
“Classic Luxury Edition” shoe;

     WHEREAS, K-Swiss sells and has sold other shoes including, without limitation, The Nido,
Darwell, Thurstan, Celano, Afton, Morely, Thurman, Newstead and Nautical Classic, all of which are
derivative versions of the Classic shoe and members of the Classic family, employing the
combination of five parallel diagonal stripes, D-rings (or visually similar rings), and/or the Toe
Box Mark, along with other visual elements (collectively the “Classic Family”);

     WHEREAS, K-Swiss has sold a shoe called the Locarno which also displays trademarks derived
from the Classic shoe. The Locarno derivative design has been registered at the U.S. Patent and
Trademark Office under Registration No. 3,085,90I and includes, alone or in combination, the Five
Stripe Mark and the “Locarno Toe Design” (the “Locarno Mark”);

     WHEREAS, K-Swiss has sold several other styles of shoes which may use one or more elements of
the Five Stripe Mark, the Toe Box Mark, the Locarno Mark, D-rings (or visually similar rings),
and/or other distinguishing design elements (“Other K-Swiss Shoes”);

 

 

     WHEREAS, K-Swiss contends that Payless infringed K-Swiss’ trademarks and/or trade dress
previously, in 1985 and in 1992. In 1992, K-Swiss filed suit against Payless (K-Swiss Inc. v.
Payless ShoeSource, Inc. Action No. CV-92-4128-AWT (CTx) (the “1992 Litigation”)). Thereafter,
Payless and K-Swiss settled the 1992 Litigation and agreed to settlement terms, the specific terms
of which are set out in an agreement entitled the “1992 Settlement Agreement”;

     WHEREAS, in 2004, K-Swiss filed a second action against Payless in the United States District
Court for the Central District of California (Western Division), K-Swiss Inc. v. Payless, Inc.,
Action No, CV 04-779 RJK (RCx) (the “2004 Litigation”). In the 2004 Litigation, the Court made
various rulings, including rulings concerning the 1992 Settlement Agreement, which rulings the
Parties intend to be binding after the Effective Date as if incorporated into the binding judgment
had been entered by the Court;

     WHEREAS, in the 2004 Litigation, K-Swiss has accused Payless of infringing its rights in
thirty-two (32) lots of footwear, listed and photographed in Exhibit 4 (“Known Payless Shoes”);

     WHEREAS, Payless asserted in the 2004 Litigation a counterclaim for K-Swiss’ alleged breach of
the 1992 Settlement Agreement (“Counterclaims”);

     WHEREAS, the Parties have determined that it is in their mutual interests amicably to resolve,
once and for all, their differences on the terms set forth in this Agreement, without any admission
of liability;

     WHEREAS, K-Swiss claims that Payless’ advertising, promoting, distributing, offering for sale,
and selling of those certain styles of footwear has infringed K-Swiss’ trademarks and trade dress,
created a likelihood of consumer confusion, diluted K-Swiss’ brand, and disparaged K-Swiss goodwill
and reputation;

     WHEREAS, K-Swiss claims that Payless’ advertising and sale of footwear has caused it to lose
sales and to incur more than $58 Million in compensatory damages, including prejudgment interest
and damages for corrective advertising;

     WHEREAS, Payless disputes K-Swiss’ allegations and denies it is liable to K-Swiss for any of
the matters claimed;

     WHEREAS, the Parties intend that the releases in this Agreement cover all Payless shoes in
existence up to and including the Effective Date; and

     WHEREAS, the Parties have determined that it is in their mutual interests amicably to resolve,
once and for all, their differences on the terms set forth in this Agreement, without any admission
of liability.

     NOW, THEREFORE, the Parties hereto agree as follows:

     1. K-Swiss Classic Trade Dress. For purposes of this Agreement only and not any other purpose,
the K-Swiss “Classic Trade Dress” shall mean two or more of the following (whether used alone, or
in combination with other K-Swiss trademark, trade dress, or design features not described herein):

	 	(a)	 	Stripes. The visual design feature of two or more vertical
or diagonal stripes on either side of the shoe;
	 
	 	(b)	 	D-Rings. D-Rings (or visually similar rings) used
incidentally as a lacing system rather than eyelets, hooks, loops or other
holding mechanism;
	 
	 	(c)	 	Toe Box. The visual design on the toe of the shoe
consisting of a set of two substantially rectangular patterns formed by stitching
running from the front tip of the outsole back toward the lacing area of the
shoe.

 

 

     2. Agreement Not to Use. Except as permitted under this Agreement during the Sell-Off Period
(as defined below), Payless on behalf of itself and its affiliates, servants, agents, employees,
subsidiaries, divisions, officers, licensees, suppliers, successors and assigns, and all those
acting in concert or participation with them, agrees that it will not (except as expressly
permitted by the terms of this Agreement) sell, offer for sale, import, export, use, produce,
manufacture, order, design, promote or distribute (or assist others in selling, offering for sale,
importing, exporting, producing, manufacturing, ordering, designing, promoting or distributing)
anywhere in the world any footwear that is a colorable imitation of or is confusingly similar to
any shoes sold by K-Swiss as of the Effective Date that bear the K-Swiss trademarks, service marks,
or the Classic Trade Dress or derivatives thereof including, without limitation, the Known Payless
Shoes (collectively, the “Prohibited Shoes”). For purposes of this Agreement, Payless’ affiliates
shall include all entities controlled by, controlling, or under common control with Payless.
Without limiting the foregoing, Payless specifically represents and agrees, on behalf of itself and
those entities and persons listed in this Paragraph 2 above, that, except as permitted by this
Agreement during the Sell-Off Period, it has ceased and will forever desist and refrain from:

	 	(a)	 	Using in any manner any of the Five Stripe Mark, the Toe Box Mark,
the Locarno Mark, the Classic Trade Dress, or any confusingly similar marks or
trade dresses or any colorable imitations thereof, including, without limitation,
the Known Payless Shoes, on or in connection with the advertising, offering for
sale or sale of any product which is not manufactured, distributed or otherwise
authorized by or for K-Swiss;
	 
	 	(b)	 	Using in any manner any of the Five Stripe Mark, the Toe Box Mark,
the Locarno Mark, the Classic Trade Dress, or any confusingly similar marks or
trade dresses or any colorable imitations thereof, including, without limitation,
the Known Payless Shoes, on or in connection with the advertising, offering to
render or rendition or any service not approved by, sponsored by or otherwise
authorized by K-Swiss;
	 
	 	(c)	 	Attempting to or passing-off, inducing or enabling others to sell
or pass-off any product or service as a product or service affiliated with or
sponsored by K-Swiss, which product is not produced or service rendered under the
authorization, control and supervision of K-Swiss and approved by K-Swiss for
sale under and any of the Five Stripe Mark, the Toe Box Mark, the Locarno Mark,
the Classic Trade Dress, or any confusingly similar marks or trade dresses or any
colorable imitations thereof, including, without limitation, the Known Payless
Shoes;
	 
	 	(d)	 	Copying, making confusingly similar or colorable imitations of, or
modifying any of K-Swiss’ advertising or promotional materials for use in
connection with the advertising, promotion or sale of any of Payless’ goods;
	 
	 	(e)	 	Committing any acts calculated or intended to cause purchasers to
believe falsely that any of Payless’ products are associated with, sponsored by,
approved by, guaranteed by, connected with or produced under the control and
supervision or within the authority of K-Swiss;
	 
	 	(f)	 	Obtaining, possessing, shipping, delivering, distributing,
returning or otherwise disposing of, in any manner, advertising materials, goods
or inventory bearing any of the Five Stripe Mark, the Toe Box Mark, the Locarno
Mark, the Classic Trade Dress, or any confusingly similar marks or trade dresses
or any colorable imitations thereof, including, without limitation, the Known
Payless Shoes, which materials, goods or inventories were not manufactured by or
for K-Swiss or authorized by K-Swiss to be used, sold or offered for sale in
association with or bearing any of such marks or trade dresses;

     3. Permitted Sell-Off Period for Prohibited Shoes. Payless and its affiliates shall have from
the Effective Date to and including December 31, 2008 to sell-off any existing inventory of
Prohibited Shoes (the “Sell-Off Period”). For purposes of the Consent Decree and Permanent
Injunction pursuant to this Agreement, the sell-off shall be deemed authorized by K-Swiss. Within
ten (10) days of the expiration of the Sell-Off Period, Payless shall destroy any unsold inventory
of Prohibited Shoes and certify such certification to K-Swiss. The term “existing inventory” shall
include only completed shoes in inventory, in manufacturing process which can not be stopped, or in
transit to Payless, and nothing in this Paragraph 3 shall be construed as permitting any
further manufacture of Prohibited Shoes by Payless following the Effective Date of this Agreement.

 

 

     4. Future K-Swiss Registrations and Shoes. Payless agrees that the terms of the permanent
injunction executed and filed by the Parties pursuant to Paragraph 5 (Stipulation for Consent
Decree and Permanent Injunction), and the terms of Paragraph 2 (Agreement not to Use) above, shall
be construed to include: any rights claimed hereafter by K-Swiss that are known by Payless or have
been disclosed to Payless in writing, including writings filed with the Court, as of the Effective
Date, are publicly registered and owned by K-Swiss (including, without limitation, any federal or
state trademark, trade dress or service mark registrations sought or acquired by K-Swiss after the
Effective Date), or any shoes K-Swiss sells in the future embodying any such rights, to the extent
that the foregoing K-Swiss shoes bear the K-Swiss trademarks, service marks, or the Classic Trade
Dress or derivatives thereof. Payless acknowledges and agrees that any acquired distinctiveness or
non-functionality in such K-Swiss rights is deemed established without a requirement for any
further showing by K-Swiss.

     5. Consent Decree and Permanent Injunction. Within five (5) calendar days of the full
execution of this Agreement, K-Swiss and Payless shall jointly execute and file a Stipulation for a
Consent Decree and Permanent Injunction in the form attached hereto as Exhibit 5. A material
element of settlement hereunder is the retention by the Court of jurisdiction to enforce this
Agreement. Payless further agrees that, within ten (10) business days of the full execution of this
Agreement, it shall take all actions necessary to dismiss any pending oppositions it may have in
the United States Patent and Trademark Office against K-Swiss as of the Effective Date.

     6. Payments by Payless. Payless shall pay the sum of US$30,000,000.00 (Thirty Million
Dollars), by certified check or wire transfer, within five (5) business days of receiving a fully
executed counterpart of this Agreement. Such sum shall be in payment of the compensatory damages
claimed by K-Swiss from Payless’ advertising, promotion, and sale of allegedly confusing footwear.

     7. Hold Harmless.

	 	(a)	 	Payless shall be responsible for all liability for all defects in
the Known Payless Shoes and for any damages (whether personal injury, property
damage, advertising injuries, violation of intellectual property rights or
otherwise) caused by or resulting from the manufacture, sale, import, export,
promotion, distribution, or use of the Known Payless Shoes. Payless assumes
liability for, and hereby agrees to indemnify, protect, save and hold K-Swiss
harmless from any and all liabilities, obligations, losses, damages, penalties,
claims, actions, suits, costs, expenses, and disbursements (whether any of the
foregoing are founded, unfounded, or allegedly involve the active or passive
negligence of K-Swiss, and including legal and related professional fees and
costs for counsel of K-Swiss’ choice) of whatever kind or nature which may be
suffered by, imposed upon, incurred by, or asserted at any time against K-Swiss
and
which in any way relate to or arise out of the manufacture, sale, import,
export, promotion, use, or distribution of the Known Payless Shoes, whether
sold or distributed by Payless or by any purchaser, transferee or other person
or entity acquiring such shoes from Payless or its servants, agents, employees,
subsidiaries, divisions, officers, attorneys, suppliers, successors or assigns.
	 
	 	(b)	 	Payless shall be responsible for and shall indemnify, protect, save
and hold K-Swiss harmless (and shall reimburse all attorneys fees and costs
incurred by K-Swiss) from any and all liabilities, obligations, losses, damages,
penalties, claims, actions, suits, costs, expenses and
disbursements (whether any of the foregoing are founded, unfounded) brought
against K-Swiss by any of Payless’ insurers or by any third party claiming
through Payless resulting from, emanating from or involving the subject matter
of the 2004 Litigation or any claims or counterclaims brought therein
including, without limitation, intellectual property claims.

 

 

     8. Warranties and Representations.

	 	(a)	 	Payless represents and warrants that it and its affiliates have
cancelled all orders for any of the Known Payless Shoes not yet filled.
	 
	 	(b)	 	Payless represents and warrants that it has not assigned or in any
way conveyed, donated, transferred, or encumbered all or any portion of the
claims or causes of action covered by this Agreement, that it has all rights
required to enter into this Agreement and to grant the releases and covenants
made herein.
	 
	 	(c)	 	K-Swiss represents and warrants that is has not assigned or in any
way conveyed, donated, transferred, or encumbered all or any portion of the
claims or causes of action covered by this Agreement, that it has all rights
required to enter into this Agreement and to grant the releases and covenants
made herein.

     9. Disclosure by Payless. Within ten (10) calendar days following Payless’ receipt of an
executed copy of this Agreement, Payless shall disclose to K-Swiss or its counsel of record in
writing the following information and shall produce copies of the best available documentary
evidence establishing such information:

	 	(a)	 	The names and addresses of the agents, manufacturers, suppliers, or
factories, if known, which or who designed, ordered or made Lot No. 44980, or any
other lot number with a similar design.
	 
	 	(b)	 	The names and addresses of the agents, brokers, sellers or others
in the chain of distribution (other than shippers and carriers) used by Payless
in the purchase, sale and importation of Lot No. 44980, or any other lot number
with a similar design.

     10. Attorneys Fees and Expenses in Actions for Breach. In the event that either Party or its
affiliates breach this Agreement or the terms of the 1992 Settlement Agreement or violate the
Stipulation for Consent Decree and Permanent Injunction, the breaching Party shall pay all
reasonable attorneys fees and litigation expenses incurred by the non-breaching Party relating to
enforcement, whether arising out of this Agreement, the 1992 Agreement, or any claim of violation
of any federal or state laws relating to trademark, service mark, or trade dress infringement,
unfair competition, dilution, or any related claim. Each Party agrees that the remedies set forth
in this Agreement are in addition to any rights or remedies the other Party may have in the event
of breach or violation of this Agreement, the 1992 Agreement, or any other laws, whether or not
asserted in the 1992 Litigation or the 2004 Litigation, all of which rights are expressly reserved.

     11. Retention of K-Swiss’ Rights Under Intellectual Property Laws. It is understood and agreed
that, in addition to the rights and remedies provided for under this Agreement, K-Swiss retains all
of its rights and remedies that may exist now or in the future under any intellectual property
laws, all of which rights are expressly reserved. Nothing in this Paragraph 11 is intended to
affect any intellectual property rights of Payless or its affiliates.

     12. Validity and Enforceability of K-Swiss’ Registered and Unregistered Trademarks, Service
Marks, and Trade Dress. Payless acknowledges, accepts, and agrees never to contest the proprietary
or validity of the prior rulings by the Court in the 2004 Litigation regarding the 1992 Settlement
Agreement. Payless further acknowledges and agrees to the validity and enforceability of K-Swiss’
rights in its common law and registered trademarks, service marks, and trade dresses which now
exist or may exist in the future that bear or are derived from the common law or registered
trademarks, service marks, or the Classic Trade Dress (including, without limitation, the Five
Stripe Mark, the Toe Box Mark, and the Locarno Mark), and acknowledges and agrees that any acquired
distinctiveness or non-functionality in such rights is deemed established without a requirement for
any further showing by K-Swiss (collectively, for purposes of this Agreement only, the “K-Swiss
Rights”). Payless agrees never to challenge, directly or indirectly, or dispute in any Court or
administrative proceeding, regardless of the party bearing the burden of proof, anywhere in the
world, the validity or enforceability of any of the K-Swiss Rights including, without limitation,
disputes or challenges based on non-distinctiveness or functionality. Payless further agrees that
it will not, anywhere in the world, initiate, prosecute or in any way aid or cooperate with others
in the commencement or prosecution or defense of any suit, action, claim, defense, counterclaim,
cross-claim, affirmative defense,
administrative proceeding, or other proceeding whatsoever, at law or otherwise, to invalidate,
cancel or otherwise restrict or limit any of the K-Swiss Rights.

 

 

     13. Confidentiality. Except as otherwise provided herein, K-Swiss and Payless shall keep the
amount paid by Payless pursuant to this Agreement private and confidential. A Party may, however,
disclose the financial terms of this Agreement to a third party as follows:

	 	(a)	 	when reasonably necessary to carry out the terms of this Agreement;
	 
	 	(b)	 	to attorneys of the Parties;
	 
	 	(c)	 	to auditors and insurance representatives as necessary to carry out their respective
duties;
	 
	 	(d)	 	to employees and shareholders (other than as provided in
subparagraph (f)), past, present, or prospective lending institutions or
insurance companies, and potential acquisition, merger or similar candidates of
the Parties, where business considerations necessitate disclosure, and who agree,
in writing, to be bound by the terms of confidentiality contained herein.
	 
	 	(e)	 	to officers, directors, and accountants who agree to be bound by
the terms of confidentiality contained herein;
	 
	 	(f)	 	in litigation, whether pursuant to a document request, a subpoena,
or as part of an affirmative pleading of K-Swiss against Payless or any other
alleged infringer of any of K-Swiss’ rights provided that the disclosing party
request this Agreement be subject to a confidentiality protective order;
	 
	 	(g)	 	to anyone, the following words or substantially similar phrases:
“That a substantial payment was made by Payless in recognition of the claims of
K-Swiss, and that K-Swiss is pleased with, and is willing to accept as, full
satisfaction for its claims.”;
	 
	 	(h)	 	to the United States Patent and Trademark Office to the extent
deemed necessary by K-Swiss to obtain registration for any K-Swiss Rights, the
following: the First Amended Complaint for the 2004 Litigation, Paragraph 1
(K-Swiss Trade Dress) of this Agreement, Paragraph 2 (Agreement not to Use) of
this Agreement, Paragraph 13 (Validity and Enforceability) of this Agreement, and
the fact that the payment made pursuant to Paragraph 6 (Payment by Payless) of
this Agreement was in the range of millions of dollars;
	 
	 	(I)	 	to the extent required by applicable law.

     14. Mutual Release of Claims. On behalf of themselves, their affiliates, respective corporate
officers, directors, shareholders, agents, employees, personal representatives, assignees, and
attorneys, the Parties hereby release, acquit, and forever absolutely discharge one another and
their respective officers, directors, agents, servants, employees, stockholders, insurers, and
assignees, all predecessor and successor companies, and all parent, subsidiary and other related or
affiliated companies, their attorneys, and the partners, associates, employees, agents, insurers,
assignees and investigators of or for their attorneys, from any and all actions, causes of action,
claims, counterclaims, cross-claims, defenses, affirmative defenses, debts, liabilities, accounts,
damages, demands and causes, whether known or unknown, which were related to the subject matter of
the 2004 Litigation and were brought or could have been brought in the 2004 Litigation or which in
any way arise from or on account of the 2004 Litigation, or the marketing, advertising, promoting,
distributing, manufacturing, offers for sale and sale of any shoes of Payless or its affiliates
that were or are in existence up to and including the Effective Date.

 

 

     15. Reservation of Rights. Notwithstanding the mutual release in paragraph 14, Payless and
K-Swiss agree that:

	 	(a)	 	K-Swiss expressively reserves all of its rights under law to
enforce any rights against Payless that are not expressively released herein.
The terms of this Agreement shall not be deemed to
limit or restrict in any way K-Swiss intellectual property rights including,
without limitation, the K-Swiss Rights. It is expressly understood and agreed
that nothing in the course of the negotiations between the Parties shall be
construed as an estoppel against K-Swiss. All benefits, restrictions, and
prohibitions agreed to and relied upon by the Parties are expressly set forth
herein, and all other rights are expressly reserved. Nothing stated or implied
by either Party in the course of negotiations for settlement or of this
Agreement shall in any way alter, limit, waive or modify any rights K-Swiss may
have in law or equity.
	 
	 	(b)	 	K-Swiss expressly reserves any rights it may have in law or equity,
to assert claims again Payless arising out of future manufacture, distribution,
or sale of any shoe which infringes any of K-Swiss’ rights or that causes a
likelihood of confusion in the marketplace (whether or not such shoes are
expressly prohibited to be sold by the terms of this Agreement) or which violates
this Agreement.

     16. Complete Agreement. Each Party hereto acknowledges that no other Party or any agent or
attorney of any other Party, or any person, firm, corporation or any other entity has made any
promise, representation or warranty, whether express, implied or statutory, not contained or
referred to herein, concerning the subject matter hereof, to induce the execution of this
Agreement. Each signatory hereto acknowledges that he, she, or it has not executed this Agreement
in reliance on any promise, representation or warranty not contained or referred to herein.
Notwithstanding the foregoing, the Parties understand and agree that nothing in this Agreement
shall be construed as a cancellation, rescission, amendment, or modification of the 1992 Agreement
and that the 1992 Agreement shall remain in full force and effect following the execution of this
Agreement.

     17. Choice of Law and Forum. K-Swiss has its principal place of business in California and
Payless does business in California. In view thereof, this Agreement shall in all respects be
interpreted, enforced, and governed by and under the laws of the State of California without regard
to conflict of laws provisions except to the extent the issue arising under the Agreement is
governed by federal law, in which case federal law shall apply. Any action or claim arising out of
this Agreement or its breach shall be filed only in the United States District Court for the
Central District of California or if such court lacks subject matter jurisdiction, then in an
appropriately venued state court in California. The Parties consent and agree to in personam
jurisdiction in these Courts for purposes of enforcing tills Agreement or any breach thereof.

     18. No Waiver. The waiver of any breach of this Agreement by either Party shall not operate as
a waiver of any subsequent or prior breach thereof.

     19. Preparation of Agreement; Construction. This Agreement shall be construed without regard
to the Party responsible for its preparation, and shall be deemed as prepared jointly by the
Parties. Any ambiguity or uncertainty existing herein shall not be interpreted or construed against
any Party by virtue of who may have drafted such provision.

     20. Authority of Parties. K-Swiss and Payless represent and warrant to one another that they
have the full right and exclusive authority to enter into and execute this Agreement.

     21. Amendment to Agreement. This Agreement may not be altered, amended, modified, or otherwise
changed in any respect except by a writing executed by an authorized representative of each Party.

     22. Binding on Successors. This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the respective Parties.

     23. Notices. All notices, requests, demands, directions, and other communications provided for
hereunder shall be in writing and mailed or faxed or delivered to the applicable Party at the
address of such Party set for the below (or such other address duly provided in writing to the
other Party). Each such notice, request, demand, direction or other communication shall be
effective upon delivery.

 

 

If to K-Swiss:

K-Swiss Inc.

31248 Oak Crest Drive

Westlake Village, CA 91361

Attention: Mr. Steven B. Nichols

with a copy (for notification and not official service) to:

Neil D. Greenstein

TechMark

1917 Palomar Oaks Way, #300

Carlsbad, CA 92008

Fax: 408-280-2250

Email:
ndg@techmark.com

and a copy (for notification and not official service) to:

Lee D. Green, Company Counsel

K-Swiss Inc.

31248 Oak Crest Drive

Westlake Village, CA 91361

Email:
kslegal@k-swiss.com

If to Payless:

Collective Brands, Inc.

3231 S.E. 6th Avenue

Topeka, KS 66607-2207

Attn: Chief Executive Officer

with a copy to:

Collective Brands, Inc.

3231 S.E. 6th Avenue

Topeka, KS 66607-2207

Attn: General Counsel

Fax: (785) 368-7524

     24. Each Party to Bear its Own Costs. Except as expressly set out in this Agreement, each
Party shall bear its own expenses incurred up to and including the date of entry of the Judgment,
including, without limitation, costs and attorneys’ fees.

     25. Counterparts. This Agreement may be executed in counterparts and as so executed shall
constitute one agreement and shall be binding upon the Parties hereto, notwithstanding that all
Parties who are signatories do not appear on the same signature page.

     26. Headings and Defined Terms. All section headings are stated for convenience only and shall
not be considered in construing this Agreement. All defined terms are defined for purposes of this
Agreement only and are not intended to create any type of definition to be used in or compared to
any other agreement.

     27. Imaged Signatures. This Agreement may be delivered to each Party by facsimile or by email
(with the Agreement and signatures imaged in a standard format such as Acrobat or TIF) and such
delivery shall be effective and binding. The Parties acknowledge and agree that after execution and
delivery by facsimile or email, additional copies of this Agreement may be circulated for signature
so that each Party will ultimately retain a fully executed original. The circulation of the
additional copies for original signatures shall in no way diminish or affect the binding effect of
the Agreement previously signed in counterparts and delivered by facsimile or email.

 

 

     IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of this 24th
day of June, 2008 (the “Effective Date”).

	 	 	 	 	 	 	 
	 	 	K-SWISS INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Steven B. Nichols
 

Steven B. Nichols
	 	 
	 

	 	Title:
	 	President	 	 
	 
	 	 	 	 	 	 
	 	 	PAYLESS SHOESOURCE, INC., a
	 	 	Missouri Corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Matthew E. Rubel
 

	 	 
	 

	 	Name:
	 	Matthew E. Rubel	 	 
	 

	 	Title:
	 	CEO	 	 
	 
	 	 	 	 	 	 
	 	 	PAYLESS SHOESOURCE, INC., a
	 	 	Delaware Corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Matthew E. Rubel
 

	 	 
	 

	 	Name:
	 	Matthew E. Rubel	 	 
	 

	 	Title:
	 	CEOexv10w1

Exhibit 10.1

Execution Version

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into as of July 19, 2008, by and
between H&R Block Management, LLC, a Delaware limited liability company (the “Company”), and
Russell P. Smyth (“Executive”).

     WHEREAS, Executive is willing to serve the Company, and the Company is willing to
employ Executive, on the terms and conditions set forth below.

     NOW, THEREFORE, in consideration of the mutual promises contained herein and of other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
it is hereby agreed as follows:

ARTICLE ONE

EMPLOYMENT

     1.01 Agreement as to Employment; Title; Employment Period. The Company hereby
agrees to employ Executive to serve in the capacity of President and Chief Executive Officer
of H&R Block, Inc., a Missouri corporation (“Block”) and the indirect parent corporation of
the Company, and Executive hereby accepts such employment by the Company, subject to the terms
of this Agreement, for the period commencing on August 1, 2008 (the “Employment Commencement
Date”) and ending on July 31, 2011 (the “Employment Period”). After the expiration of the
Employment Period, and provided that this Agreement is not extended or superseded by the
mutual written consent of the parties, the provisions of Section 1.07 (relating to stock
ownership requirements) and Articles Two through Five of this Agreement shall survive the
expiration of the Employment Period and continue to be in effect to the extent applicable.

     1.02 Duties; Board Membership; Performance and Other Activities.

     (a) Duties. During the Employment Period, Executive will have the duties,
authorities and responsibilities commensurate with the duties, authorities and
responsibilities of chief executive officers in similarly sized companies, and such other
duties, authorities and responsibilities as the Board of Directors of Block (the “Block
Board”) designates from time to time that are not inconsistent with Executive’s position.
Executive will report directly to the Block Board.

     (b) Board Membership. The Block Board shall take such action as may be necessary
to appoint or elect Executive as a member of the Block Board as of the Employment Commencement
Date. Thereafter, during the Employment Period, the Block Board shall nominate Executive for
re-election as a member of the Block Board at the expiration of the then current term,
provided that the foregoing shall not be required to the extent prohibited by legal or
regulatory requirements. At no time while Executive is employed by the Company shall Executive
serve as Chairman of the Block Board.

     (c) Performance and Other Activities. So long as Executive is employed under this
Agreement, Executive agrees to devote Executive’s full business time and efforts exclusively
on behalf of the Company and to competently and diligently discharge Executive’s duties

 

 

hereunder, provided that the foregoing shall not prevent Executive from (i) serving on the boards
of directors of non-profit organizations and, with the prior written approval of the Block Board,
one for profit public company, (ii) participating in charitable, civic, educational, professional,
community or industry affairs, although any speaking engagements must be on behalf of Block and
Executive may not receive any remuneration for such speaking engagements and (iii) managing his and
his family’s passive personal investments, so long as such activities in the aggregate do not
interfere or conflict with Executive’s full-time employment hereunder and do not violate the other
provisions of this Agreement or the H&R Block, Inc. Code of Business Ethics & Conduct, which
Executive acknowledges having read and understood. Executive will comply fully with all reasonable
policies of the Company as are from time to time in effect and applicable to Executive’s position.
Notwithstanding anything to the contrary in this Section 1.02(c), service on the two non-public,
for profit boards of directors disclosed by Executive to the Company on which he is serving as of
the date of this Agreement are hereby approved, except that it is agreed that Executive will use
his best efforts to resign from one of those boards of directors by the first anniversary of the
Employment Commencement Date.

     1.03 Compensation.

     (a) Base Salary. During the Employment Period, the Company will pay to Executive a
gross salary at an annual rate of $950,000 (“Base Salary”), payable semimonthly or at any other pay
periods as the Company may use for its other executive-level employees. The Base Salary will be
reviewed for potential increase, no less often than annually during the Employment Period, and may
only be decreased as part of an across-the-board salary reduction that applies in the same manner
to all executive-level employees. The Base Salary, as it may be adjusted from time to time, shall
constitute the “Base Salary” for purposes of this Agreement.

     (b) Short-Term Incentive Compensation. Executive shall participate in Block’s
short-term incentive program (which for certain highly compensated executives may include the H&R
Block, Inc. Executive Performance Plan) (the “Program”) as applicable to executives of the Company
for its fiscal year 2009 (which ends April 30, 2009) and fiscal years thereafter. Under such
Program, Executive shall have an aggregate target incentive award equal to 110% of Base Salary and
an opportunity to earn a bonus at a maximum of 220% of Base Salary (prorated as described below).
Notwithstanding the foregoing, under the Program for fiscal year 2009, Executive shall receive a
minimum guaranteed short-term incentive compensation award equal to at least 110% of Base Salary,
prorated based upon Executive’s actual Base Salary paid for the fiscal year (the “Minimum
Guarantee”). Other than the payment of the Minimum Guarantee, the payment of any award under the
Program shall be based upon the achievement of one or more pre-established performance goals which
shall be determined by the Compensation Committee of the Block Board, provided that Executive must
remain employed through the end of the applicable fiscal year to receive any payments under the
Program. Such incentive compensation, including the Minimum Guarantee, shall be paid to Executive
following the completion of the fiscal year when the short-term incentive compensation is paid to
other executive-level employees of the Company, which in any event shall be no later than two and
one-half months after the end of the fiscal year to which it relates (or as soon thereafter as it
can be properly determined).

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     (c) Initial Stock Option Grant. The Compensation Committee of the Block Board
shall grant Executive a nonqualified stock option (the “Option”) to purchase 900,000 shares of
Block’s common stock, without par value (the “Block Common Stock”) on or as soon as practicable,
but in no event later than 30 days, following the Employment Commencement Date. The Option shall be
granted pursuant to, and shall be subject to, the terms and conditions of Block’s 2003 Long-Term
Executive Compensation Plan, as amended (the “2003 Plan”), and the Company’s standard stock option
agreement, with the following terms:

          (i) Exercise Price. The Option shall be exercisable at the following prices:

	 	 	 	 
	   # of Shares Subject to Option    	 		Exercise Price
	500,000

	 		The closing price for Block Common Stock
on the New York Stock 

Exchange on the
date of grant (the “FMV”)
	 
	 		 
	100,000

	 		FMV plus $3 (but in no event less than $25)
	 
	 		 
	100,000

	 		FMV plus $6 (but in no event less than $28)
	 
	 		 
	100,000

	 		FMV plus $9 (but in no event less than $31)
	 
	 		 
	100,000

	 		FMV plus $12 (but in no event less than $34)

          (ii) Vesting Schedule. Subject to accelerated vesting as set forth in this
Agreement, the Option will vest and become exercisable as to one-third of the shares subject
to each exercise price on each anniversary of the grant date (rounded down to the nearest
whole number of shares for each vesting date, except that the amount vesting on the final
vesting date shall be such that 100% of the aggregate number of shares of Block Common Stock
subject to the Option shall be cumulatively vested as of the final vesting date), provided
that Executive remains continuously employed by the Company through each vesting date.

          (iii) Option Term. The Option is for a term of 10 years from the date of grant,
subject to earlier termination as provided in the 2003 Plan and the underlying stock option
agreement and in this Agreement.

     (d) Ongoing Equity Grants. In addition to the Option contemplated under this
Section 1.03, when annual equity awards are granted to executives of Block generally, Executive
shall be awarded additional grants of compensatory equity awards at a level commensurate with his
position and performance, as determined by the Compensation Committee of the Block Board.

     1.04 Relocation.

     (a) Relocation Benefits. Executive shall promptly relocate to the vicinity of
Block’s principal U.S. headquarters. In accordance with Block’s Executive Relocation Program, the
Company shall provide Executive with a relocation package commensurate with his position and will
pay or reimburse Executive for the reasonable moving and relocation expenses and costs actually
incurred by Executive in relocating to the Greater Kansas City Area, subject to the limitations and
procedures set forth in Block’s Executive Relocation Program. During the period prior to his
relocation (but in no event for more than three months following the Employment

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Commencement Date), the Company shall provide suitable temporary housing for Executive’s use when
he is at Block’s principal U.S. headquarters. In addition, the Company shall reimburse Executive
for the reasonable cost of two house hunting trips (to the extent not otherwise covered by Block’s
Executive Relocation Program) for Executive and his family not to exceed $10,000 in the aggregate.
All amounts payable under this Section 1.04(a) shall be subject to Executive’s presentment to the
Company of appropriate documentation. To the extent that Executive incurs taxable income related to
any relocation benefits paid or provided pursuant to this Section 1.04(a) of this Agreement, the
Company will pay to Executive such additional amount as is necessary to “gross up” such benefits
and cover the anticipated income tax liability resulting from such taxable income.

     (b) Cash Relocation Payment. The Company shall pay Executive a lump-sum cash
relocation payment of $200,000 on the Employment Commencement Date to cover expenses not otherwise
covered by Block’s Executive Relocation Program.

     1.05 Business Expenses. Upon presentment to the Company of appropriate documentation,
the Company will promptly pay directly, or reimburse Executive for, all business expenses, to the
extent such expenses are paid or incurred by Executive during the Employment Period in accordance
with the Company’s policy in effect from time to time and to the extent such expenses are
reasonable and necessary to the conduct by Executive of the Company’s business. Upon presentation
to the Company of appropriate documentation, the Company shall also pay directly, or reimburse
Executive for, the reasonable legal fees actually incurred in connection with the negotiation and
documentation of this Agreement, up to a maximum of $30,000.

     1.06 Employee Benefits. During the Employment Period, and subject to the discretionary
authority given to the applicable benefit plan administrators, the Company will make available to
Executive insurance, sick leave, deferred compensation, vacation and other like benefits no less
favorable than as approved and provided from time to time to the other executive-level employees of
the Company. Coverage and eligibility for any such benefits are subject to the terms of the various
plans as they may be amended from time to time pursuant to their respective terms. Executive will
not have access to the company aircraft for personal use.

     1.07 Stock Ownership Requirements. While employed by the Company, Executive shall not
sell shares of Block Common Stock until Executive is holding shares of Block Common Stock
(determined in accordance with the forms of ownership recognized under Block’s stock ownership
guidelines for executive-level employees of the Company as in effect from time to time) with a
value equal to at least five times Executive’s Base Salary (although there is no specific timetable
for reaching such share retention threshold). In addition, after Executive has accumulated the
required amount of shares of Block Common Stock, while employed by the Company, Executive must also
hold 100% of the shares of Block Common Stock subsequently acquired (net of taxes and, if
applicable, exercise price) pursuant to any compensatory equity award for a minimum of one year
from the date of acquisition (whether through exercise of stock options or vesting of any other
stock-based award, as applicable).

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ARTICLE TWO

TERMINATION OF EMPLOYMENT

     2.01 Termination of Employment.

     (a) No Reason Required. The Company or Executive may terminate Executive’s employment
and the Employment Period at any time for any reason, or for no reason, subject to compliance with
Section 2.01 (c).

     (b) Related Definitions.

     (i) “Cause” means any of the following unless, if capable of cure, such events
are fully corrected in all material respects by Executive within 10 days after the Company
gives a Termination Notice:

     (A) Executive’s misconduct that materially interferes with or materially
prejudices the proper conduct of the business of Block, the Company and/or any
direct or indirect subsidiary of Block (each such other subsidiary an “Affiliate”)
or which may reasonably result in harm to the reputation of Block, the Company
and/or any Affiliate; or

     (B) Executive’s commission of an act materially and demonstrably detrimental to
the good will of Block, the Company and/or any Affiliate, which act constitutes
gross negligence or willful misconduct by Executive in the performance of
Executive’s material duties to Block, the Company and/or such Affiliate; or

     (C) Executive’s commission of any act of dishonesty or breach of trust
resulting or intending to result in material personal gain or enrichment of
Executive at the expense of Block, the Company and/or any Affiliate; or

     (D) Executive’s violation of Article Three or Section 4.02, 4.03, 4.05 or 4.06
of this Agreement; or

     (E) Executive’s conviction of, or plea of nolo contendere to, a
misdemeanor involving an act of moral turpitude or a felony.

     If the Company does not give Executive a Termination Notice (as described in Section 2.01(c))
within 60 days after the Block Board or the Chairman of the Block Board has knowledge that an event
constituting Cause has occurred, the event will no longer constitute Cause. The Company may place
Executive on unpaid leave for up to 30 consecutive days while it is determining whether there is a
basis to terminate Executive’s employment for Cause. This leave will not constitute Good Reason.

     For purposes of this definition, (1) no act or omission by Executive will be “willful” unless
it is made by Executive in bad faith or without a reasonable belief that Executive’s act or
omission furthered the interests of the Company, Block and/or the Affiliates and (b) any act or

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omission by Executive based on authority given pursuant to a resolution duly adopted by the Block
Board will be deemed made in good faith and in the best interests of the Company, Block and/or the
Affiliates.

     (ii) “Change in Control” means:

     (A) the acquisition, other than from Block, by any individual, entity or group
(within the meaning of Section 13(d) (3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the then
outstanding voting securities of Block entitled to vote generally in the election of
directors, but excluding, for this purpose, (i) any such acquisition by Block or any
of its subsidiaries, or any employee benefit plan (or related trust) of Block or its
subsidiaries, (ii) any corporation with respect to which, following such
acquisition, more than 50% of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
shareholders who were the beneficial owners of the voting securities of Block
immediately prior to such acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the then outstanding voting
securities of Block entitled to vote generally in the election of directors,
(iii) pursuant to any acquisition by Executive or any group of persons including
Executive, or (iv) by any underwriter temporarily holding securities pursuant to
an offering of such securities; or

     (B) during any 12-month period, individuals who, as of the date hereof,
constitute the Block Board (the “Incumbent Board”) cease for any reason to
constitute at least a majority of the Block Board, provided that any individual or
individuals becoming a director subsequent to the date hereof, whose election, or
nomination for election by Block’s shareholders, was approved by a vote of at least
two-thirds of the Block Board (or nominating committee of the Block Board) will be
considered as though such individual were a member or members of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial assumption
of office is in connection with an actual or threatened election contest relating to
the election of the directors of Block (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act); or

     (C) the completion of a reorganization, merger or consolidation of Block, in
each case, unless following such reorganization, merger or consolidation, the
shareholders who were the beneficial owners of the voting securities of Block
immediately prior to such reorganization, merger or consolidation continue to
beneficially own, directly or indirectly, more than 50% of the then outstanding
voting securities entitled to vote generally in the election of directors of the
corporation resulting from such reorganization, merger or consolidation in
substantially the same proportion as their ownership, immediately prior to such
reorganization, merger or consolidation, of the voting securities of Block entitled
to vote generally in the election of directors; or

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     (D) a complete liquidation or dissolution of Block or the consummation of
a sale or other disposition of all or substantially all of the assets of Block to an
entity that is not an affiliate of Block.

     (iii) “Disability” means Executive’s absence from Executive’s responsibilities
with the Company on a full-time basis for 130 business days in any consecutive 12 months as
a result of incapacity due to mental or physical illness or injury. If the Company
determines in good faith that Executive’s Disability has occurred, it may give Executive a
Termination Notice. If within 30 days of the Termination Notice Executive does not return to
full-time performance of Executive’s responsibilities, Executive’s employment will
terminate. If Executive does return to full-time performance in that 30-day period, the
Termination Notice will be cancelled for all purposes of this Agreement. Except as provided
in this Section 2.01(b)(iii), Executive’s incapacity due to mental or physical illness or
injury will not affect the Company’s obligations under this Agreement (including that such
illness or injury will not constitute a basis for Cause).

     (iv) “Good Reason” means any of the following events, without the express written
consent of Executive, unless such events are fully corrected in all material respects by the
Company within 30 days after Executive gives a Termination Notice:

     (A) A material diminution in Executive’s base compensation;

     (B) A material diminution in Executive’s authority, duties, or responsibilities
as President and Chief Executive Officer of Block, reporting directly to the Block
Board (but, if Block becomes a subsidiary of another entity, “Block Board” shall be
deemed to refer to the board of directors (or other governing body) of the ultimate
parent entity of Block); or

     (C) A material change in the geographic location at which Executive must
perform the services; or

     (D) Any other action or inaction that constitutes a material breach by the
Company of this Agreement.

     If Executive does not give a Termination Notice within 60 days after Executive has
knowledge that an event constituting Good Reason has occurred, the event will no longer
constitute Good Reason.

     (c) Advance Notice Generally Required.

     (i) To terminate Executive’s employment, either Executive or the Company must
provide a Termination Notice to the other. A “Termination Notice” is a written notice that
states the specific provision of this Agreement on which termination is based, including, if
applicable, the specific clause of the definition of Cause or Good Reason and a reasonably
detailed description of the facts that permit termination under that clause; provided that
the failure to include any fact in a Termination Notice that contributes to a showing of
Cause or Good Reason does not preclude either party from asserting that fact in enforcing
its rights under this Agreement.

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     (ii) Executive and the Company agree to provide the Termination Notice at least
60 days in advance of any termination, unless (A) Executive’s employment is terminated by
the Company for Cause or because of Executive’s death, in which case the termination may be
effective immediately, or (b) Executive’s employment is terminated because of Executive’s
Disability, in which case the provisions of Section 2.01(b)(iii) shall apply. If Executive
dies or becomes Disabled after Executive provides a valid Termination Notice with Good
Reason or the Company provides Termination Notice without Cause, Executive’s termination
will be treated as a termination with Good Reason, effective as of the date of Executive’s
death or Disability. If Executive provides a Termination Notice, the Company may, in its
sole discretion, relieve Executive of his duties, responsibilities and title during the
period prior to Executive’s termination date; provided, however, that during such period
Executive shall remain an employee of the Company with the same compensation and benefit
arrangements as in place immediately prior to Executive’s delivery of the Termination
Notice.

     2.02 Obligations of the Company upon Termination.

     (a) Other than For Cause; For Good Reason. If, at any time on or before July 31,
2014 (the “Protected Period”), the Company shall terminate Executive’s employment other than for
Cause or Disability, or Executive shall terminate employment for Good Reason, the Company shall
have no further obligations to Executive other than:

     (i) A lump sum cash payment equal to $1.5 million;

     (ii) All outstanding equity awards (other than performance shares) that would have
vested during the 12-month period following the date of termination (if any) will
immediately vest and any vested stock options (whether vested prior to the date of
termination or pursuant to this Section 2.02(a)(ii)) will remain exercisable for 12 months
after the end of Executive’s employment (or, if earlier, until they would have expired but
for Executive’s termination);

     (iii) A pro-rata award of any performance shares outstanding on the date of
termination based on the achievement of the performance goals at the end of the applicable
performance period and paid promptly after the end of the applicable performance period,
which in any event shall be no later than two and one-half months after the end of the last
fiscal year of the performance period to which it relates (or as soon thereafter as it can
be properly determined) (a “Pro-Rata Performance Share Award”);

     (iv) Subject to Executive’s timely election of continuation coverage under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) and Executive’s
continued co-payment of premiums at the same level and cost to Executive as if he were an
employee of the Company (excluding, for purposes of calculating cost, an employee’s ability
to pay premiums with pre-tax dollars), continued participation in the Company’s group health
plan for Executive and Executive’s eligible dependents covered by such plan as of the date
of termination for a period of 12 months, provided that Executive remains eligible for COBRA
continuation coverage and provided, further,

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that if Executive obtains group health benefits through subsequent employment, such
continuation of coverage by the Company under this Section 2.02(a)(iv) shall immediately
cease (the “Continuation Coverage”); and

     (v) to the extent not theretofore paid or provided, the Company shall timely pay
or provide to Executive (A) any unpaid Base Salary through the date of termination, (B) any
accrued but unused vacation in accordance with company policy, (C) reimbursement for any
unreimbursed business expenses incurred through the date of termination, and (D) any other
amounts or benefits required to be paid or provided or which Executive is eligible to
receive under any plan, program, policy or practice or other contract or agreement of Block,
the Company and/or the Affiliates through the date of termination (such other amounts and
benefits shall be hereinafter referred to as the “Other Benefits”).

     (b) Other than For Cause or For Good Reason Following a Change in Control. If
(x) a Change in Control occurs during the Protected Period and (y) during the two-year period
commencing on the date of a Change in Control (but in no event beyond the end of the Protected
Period), the Company shall terminate Executive’s employment other than for Cause or Disability, or
Executive shall terminate employment for Good Reason, in lieu of the payments and benefits provided
under Section 2.02(a), the Company shall have no further obligations to Executive other than:

     (i) A lump sum cash payment equal to two times the sum of Executive’s Base Salary
and target short-term incentive compensation for the year in which the date of termination
occurs;

     (ii) All outstanding equity awards (other than performance shares) will
immediately vest and any vested stock options (whether vested prior to the date of
termination or pursuant to this Section 2.02(b)(ii)) will remain exercisable for 12 months
after the end of Executive’s employment (or, if earlier, until they would have expired but
for Executive’s termination);

     (iii) A Pro-Rata Performance Share Award;

     (iv) Continuation Coverage; and

     (v) Other Benefits.

     (c) Death; Disability; For Cause; Other than for Good Reason. If, during the Protected
Period, Executive’s employment shall terminate on account of death or Disability or if the Company
shall terminate Executive’s employment for Cause or Executive terminates his employment without
Good Reason, the Company shall have no further obligations to Executive other than to provide
Executive (or, in the event of his death, his estate) the Other Benefits.

     (d) Timing of Benefits. The payments and benefits provided in this Section 2.02 will
be paid or provided at the end of Executive’s employment, and any cash payments owed Executive
under Section 2.02(a)(i) or 2.02(b)(i) will be paid on the 30th day following the date
of termination.

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     2.03 Condition. The Company will not be required to make the payments and provide the
benefits stated in Section 2.02 (other than the Other Benefits) unless Executive executes and
delivers to the Company (and does not revoke) a general release of claims in favor of Block, the
Company and the Affiliates and their respective past or present officers, directors, employees or
agents. This agreement will be in such form as reasonably requested by the Company.

     2.04 Resignations. Upon any termination of Executive’s employment with the Company for
any reason, Executive agrees to promptly resign as a director of Block and from any other offices,
directorships, trusteeships, committee memberships and fiduciary capacities held with, or on behalf
of, Block, the Company and/or any Affiliate. Executive shall promptly execute any further
documentation thereof as requested by the Company and, if Executive is to receive any payments from
the Company (including, without limitation, those set forth in Section 2.02 above), execution of
such further documentation shall be a condition thereof (other than the Other Benefits).

     2.05 No Duplication of Benefits. Any termination payments made and benefits
provided under this Agreement to Executive shall be in lieu of any termination or severance
payments or benefits for which Executive may be eligible under any of the plans, policies or
programs of Block, the Company and/or any Affiliate or under the Worker Adjustment Retraining
Notification Act of 1988 or any similar state statute or regulation.

ARTICLE THREE

CONFIDENTIALITY

     3.01 Background and Relationship of Parties. The parties hereto acknowledge (for
all purposes including, without limitation, Articles Three and Four of this Agreement) that Block,
the Company and/or the Affiliates have been and will be engaged in a continuous program of
acquisition and development respecting their businesses, present and future, and that, in
connection with Executive’s employment by the Company, Executive will be expected to have access to
all information of value to Block, the Company and/or the Affiliates and that Executive’s
employment creates a relationship of confidence and trust between Executive and Block, the Company
and the Affiliates with respect to any information applicable to the businesses of Block, the
Company and/or the Affiliates. Executive will possess or have unfettered access to information that
has been created, developed, or acquired by Block, the Company and/or the Affiliates or otherwise
become known to Block, the Company and/or the Affiliates and which has commercial value in the
businesses in which Block, the Company and/or the Affiliates have been and will be engaged and has
not been publicly disclosed by Block, the Company and/or the Affiliates. All information described
above is hereinafter called “Proprietary Information.” By way of illustration, but not limitation,
Proprietary Information includes trade secrets, customer lists and information, employee lists and
information, developments, systems, designs, software, databases, know-how, marketing plans,
product information, business and financial information and plans, strategies, forecasts, new
products and services, financial statements, budgets, projections, prices, and acquisition and
disposition plans. Proprietary Information does not include any portions of such information which
are now or hereafter made public by third parties in a lawful manner or made public by parties
hereto without violation of this Agreement.

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     3.02 Proprietary Information is Property of Block.

     (a) All Proprietary Information is the sole property of Block, the Company and/or the
applicable Affiliate and its assigns, and Block, the Company and/or the applicable Affiliate is the
sole owner of all patents, copyrights, trademarks, names, and other rights in connection therewith
and without regard to whether Block, the Company and/or any Affiliate is at any particular time
developing or marketing the same. Executive hereby assigns to Block, the Company and/or the
Affiliate any rights Executive may have or may acquire in such Proprietary Information. At all
times during and after Executive’s employment with the Company, Executive will keep in strictest
confidence and trust all Proprietary Information and Executive will not use or disclose any
Proprietary Information without the written consent of Block, except as may be necessary in the
ordinary course of performing duties as an employee of the Company or as may be required by law or
the order of any court or governmental authority (provided that Executive provides Block, the
Company and/or the Affiliate with prior written notice of the contemplated disclosure and
cooperates with Block, the Company and/or the Affiliate in seeking a protective order or other
appropriate protection of such information).

     (b) In the event of any termination of Executive’s employment hereunder (or at any time prior
thereto at the Company’s request), Executive will promptly deliver to the Company all copies of all
documents, notes, drawings, programs, software, specifications, documentation, data, Proprietary
Information, and other materials and property of any nature belonging to Block, the Company and/or
any Affiliate and obtained during the course of Executive’s employment with the Company. In
addition, upon such termination, Executive will not remove from the premises of Block, the Company
and/or any Affiliate any of the foregoing or any reproduction of any of the foregoing or any
Proprietary Information that is embodied in a tangible medium of expression.

ARTICLE FOUR

RESTRICTIVE COVENANTS

     4.01 General. The parties hereto acknowledge that, during the course of
Executive’s employment by the Company, Executive will have access to information valuable to the
Company, Block and the Affiliates concerning the employees of Block, the Company and the Affiliates
(“Block Employees”) and, in addition to Executive’s access to such information, Executive may,
during (and in the course of) Executive’s employment by the Company, develop relationships with
such Block Employees whereby information valuable to Block, the Company and the Affiliates
concerning Block Employees was acquired by Executive. Such information includes, without
limitation: the identity, skills, and performance levels of Block Employees, as well as
compensation and benefits paid by Block, the Company and/or the Affiliates to such Block Employees.
Executive agrees and understands that it is important to protect Block, the Company and the
Affiliates and their employees, agents, directors, and clients from the unauthorized use and
appropriation of Block Employee information, Proprietary Information, and trade secret business
information developed, held, or used by Block, the Company and/or the Affiliates, and to protect
Block, the Company and the Affiliates and their employees, agents, directors, and customers
Executive agrees to the covenants described in this Article Four.

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     4.02 Non-Solicitation of Employees. During the period of Executive’s employment and for
a period of two years after Executive’s date of termination, Executive may not directly or
indirectly recruit, solicit, or hire any Block Employee or otherwise induce any Block Employee to
leave the employment of Block, the Company or the applicable Affiliate to become an employee of or
otherwise be associated with any other party or with Executive or any company or business with
which Executive is or may become associated. The running of the two-year period will be suspended
during any period of violation and/or any period of time required to enforce this covenant by
litigation or threat of litigation.

     4.03 Non-Solicitation of Customers. During the period of Executive’s employment and for
two years after Executive’s date of termination, Executive may not directly or indirectly solicit
or enter into any arrangement with any person or entity which is, at the time of the solicitation,
a significant customer of Block, the Company or an Affiliate for the purpose of engaging in any
business transaction of the nature performed by Block, the Company or such Affiliate, or
contemplated to be performed by Block, the Company or such Affiliate, for such customer, provided
that this Section 4.03 will only apply to customers for whom Executive personally provided services
while employed by the Company or customers about whom or which Executive acquired material
information while employed by the Company. The running of the two-year period will be suspended
during any period of violation and/or any period of time required to enforce this covenant by
litigation or threat of litigation.

     4.04 No Conflicts. Executive represents in good faith that, to the best of Executive’s
knowledge, the performance by Executive of all the terms of this Agreement will not breach any
agreement to which Executive is or was a party and which requires Executive to keep any information
in confidence or in trust. Executive has not brought and will not bring to the Company or Block nor
will Executive use in the performance of employment responsibilities at the Company any proprietary
materials or documents of a former employer that are not generally available to the public, unless
Executive has obtained express written authorization from such former employer for their possession
and use. Executive has not and will not breach any obligation of confidentiality that Executive may
have to former employers and Executive will fulfill all such obligations during Executive’s
employment with the Company.

     4.05 Non-Competition. During the period of Executive’s employment hereunder and for two
years after Executive’s date of termination, Executive may not engage in, or own or control any
interest in (except as a passive investor in less than one percent of the outstanding securities of
publicly held companies), or act as an officer, director or employee of, or consultant or advisor
to, any firm, corporation, partnership, limited liability company, institution, business,
government agency, or entity that engages in any line of business that is competitive with any Line
of Business of Block (as defined below). The definition of “Line of Business of Block” shall be
determined as of the date of Executive’s termination of employment with the Company (or, if
earlier, the date of determination) and shall mean any line of business (including lines of
business under substantial evaluation or substantial development) of the Company as of such date,
as well as any one or more lines of business (including lines of business under substantial
evaluation or substantial development) of any Affiliate as of such date, if Executive was employed
during the two-year period preceding the date of termination by such Affiliate, provided that,
“Line of Business of Block” will in all events include, but not be limited to, the income tax
return preparation business, and provided further that if Executive’s employment

12

 

was, as of the date of termination or during the two-year period immediately prior to the date of
termination, with the Company or any successor entity thereto, “Line of Business of Block” means
any line of business (including lines of business under substantial evaluation or substantial
development) of Block and all of the Affiliates as of the date of Executive’s termination. The
running of the two-year period will be suspended during any period of violation and/or any period
of time required to enforce this covenant by litigation or threat of litigation.

     4.06 Non-Disparagement. Executive, for himself and for his heirs, dependents, assigns,
agents, executors, administrators, trustees and legal representatives agrees that he will not (and
will use his best efforts to cause such affiliates to not), during the period of Executive’s
employment and for two years after Executive’s date of termination, engage in any form of conduct,
or make any statements or representations, that disparage or otherwise impair the reputation,
goodwill, or commercial interests of Block, the Company or any Affiliate or any of their agents,
officers, directors, employees and/or stockholders. The foregoing shall not be violated by truthful
statements in response to legal process or required governmental testimony or filings.

     4.07 Cooperation. During the period of Executive’s employment hereunder and thereafter,
Executive agrees to reasonably assist and cooperate with Block, the Company and/or any Affiliate
(and their outside counsel) in connection with the defense or prosecution of any claim that may be
made or threatened against or by Block, the Company or any Affiliate, or in connection with any
ongoing or future investigation or dispute or claim of any kind involving Block, the Company or any
Affiliate, including any proceeding before any arbitral, administrative, judicial, legislative, or
other body or agency, including preparing for and testifying in any proceeding to the extent such
claims, investigations or proceedings relate to services performed or required to be performed by
Executive, pertinent knowledge possessed by Executive, or any act or omission by Executive.
Executive will perform all acts and execute and deliver any documents that may be reasonably
necessary to carry out the provisions of this Section 4.07. Upon presentment to the Company of
appropriate documentation, the Company will pay directly or reimburse Executive for the reasonable
out-of pocket expenses incurred as a result of such cooperation.

     4.08 Reasonableness of Restrictions. Executive and the Company acknowledge that the
restrictions contained in this Agreement are reasonable, but should any provisions of any Article
of this Agreement be determined to be invalid, illegal, or otherwise unenforceable or unreasonable
in scope by any court of competent jurisdiction, the validity, legality, and enforceability of the
other provisions of this Agreement will not be affected thereby and the provision found invalid,
illegal, or otherwise unenforceable or unreasonable will be considered by the Company and Executive
to be amended as to scope of protection, time, or geographic area (or any one of them, as the case
may be) in whatever manner is considered reasonable by that court and, as so amended, will be
enforced.

     4.09 Clawback. If (x) Block is required to restate any of its financial statements
filed with the Securities and Exchange Commission, other than restatements due solely to factors
external to Block and its Affiliates such as a change in accounting principles or a change in
securities laws or regulations with retroactive effect; or (y) Executive violates the provisions of

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Article Three or Sections 4.02, 4.03 or 4.05, then the Block Board may seek to recover or require
reimbursement of short-term incentive compensation, equity compensation awards (including profits
from the sale of Block Common Stock acquired pursuant to such awards) and/or severance payments
made to Executive; provided, however, that:

     (a) absent egregious or extraordinary circumstances, any recovery or reimbursement based upon
sub-section (x) above shall be limited to short-term incentive compensation or equity compensation
paid or awarded to Executive for the period(s) covered by the restated financial statements that is
in excess of what would have been paid or awarded to Executive for such period(s) if the short-term
incentive compensation, equity compensation or severance payments had been based upon the restated
financial statements; and

     (b) in exercising its discretion to seek to recover or require reimbursement of any amounts as
a result of any restatement pursuant to sub-section (x) above, the Block Board will give reasonable
and due consideration to, among other relevant factors, the level of Executive’s responsibility or
influence, as well as the level of others’ responsibility or influence, over the judgments or
actions that gave rise to the restatement.

     4.10 Survival. The obligations contained in this Article Four shall survive the
termination or expiration of the Employment Period and Executive’s employment by the Company and
shall be fully enforceable thereafter, provided, that the provisions of Sections 4.02, 4.03 and
4.05 shall not apply if the Company shall terminate Executive’s employment other than for Cause or
Disability after July 31, 2014.

ARTICLE FIVE

MISCELLANEOUS

     5.01 Third-Party Beneficiary. The parties hereto agree that Block is a third-party
beneficiary as to the obligations imposed upon Executive under this Agreement and as to the rights
and privileges to which the Company is entitled pursuant to this Agreement, and that Block is
entitled to all of the rights and privileges associated with such third-party-beneficiary status.

     5.02 Block Guaranty. Block and the Company hereby agree to be jointly and severally
liable for the performance of all obligations and duties of the entities hereunder, and the payment
of all amounts and provision of all benefits due to Executive under this Agreement.

     5.03 Entire Agreement. This Agreement supersedes all previous term sheets and
employment agreements, whether written or oral between Executive and the Company and constitutes
the entire agreement and understanding between the Company and Executive concerning the subject
matter hereof. No modification, amendment, termination, or waiver of this Agreement will be binding
unless in writing and signed by Executive and a duly authorized officer of the Company. Failure of
the Company, Block, or Executive to insist upon strict compliance with any of the terms, covenants,
or conditions hereof will not be deemed a waiver of such terms, covenants, and conditions. If, and
to the extent that, any other written or oral

14

 

agreement between Executive and Company or Block is inconsistent with or contradictory to the terms
of this Agreement, the terms of this Agreement shall apply.

     5.04 Specific Performance. The parties hereto acknowledge that money damages alone will
not adequately compensate the Company or Block or Executive for breach of any of the covenants and
agreements set forth in Articles Three and Four herein and, therefore, in the event of the breach
or threatened breach of any such covenant or agreement by either party, in addition to all other
remedies available at law, in equity or otherwise, a wronged party will be entitled to injunctive
relief compelling specific performance of (or other compliance with) the terms hereof, without
posting any bond.

     5.05 Successors and Assigns. This Agreement is binding upon Executive and the heirs,
executors, assigns and administrators of Executive or Executive’s estate and property. This
Agreement will be binding upon and inure to the benefit of the Company and Block and their
respective successors (whether direct or indirect, by purchase, merger, consolidation or otherwise)
and assigns. Executive may not assign or transfer to others the obligation to perform Executive’s
duties hereunder. The Company may assign this Agreement to an Affiliate with the consent of
Executive, in which case, after such assignment, the “Company” means the Affiliate to which this
Agreement has been assigned. In the event of Executive’s death, any severance payment due and
payable hereunder based on a termination of Executive’s employment prior to such date of death
shall be paid or provided to Executive’s surviving spouse, or if there is no surviving spouse, to
his estate.

     5.06 Withholding Taxes. From any payments due hereunder to Executive from the Company,
there will be withheld amounts reasonably believed by the Company to be sufficient to satisfy
liabilities for federal, state, and local taxes and other charges and customary withholdings.
Executive remains primarily liable to such authorities for such taxes and charges to the extent not
actually paid by the Company.

     5.07 Indemnification. To the fullest extent permitted by law and Block’s Amended and
Restated Bylaws, the Company hereby indemnifies during and after the period of Executive’s
employment hereunder Executive from and against all loss, costs, damages, and expenses including,
without limitation, legal expenses of counsel selected by the Company to represent the interests of
Executive (which expenses the Company will, to the extent so permitted, advance to executive as the
same are incurred) arising out of or in connection with the fact that Executive is or was a
director, officer, attorney, employee, or agent of the Company or Block or serving in such capacity
for another corporation at the request of the Company or Block. Notwithstanding the foregoing, the
indemnification provided in this Section 5.07 will not apply to any loss, costs, damages, and
expenses arising out of or relating in any way to any employment of Executive by any former
employer or the termination of any such employment.

     5.08 D&O Insurance. The Company shall cover Executive under directors and officers
liability insurance both during and, while potential liability exists, after the term of this
Agreement in the same amount and to the same extent as the Company covers its other officers and
directors.

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     5.09 Right to Offset. To the extent not prohibited by applicable law and in addition to
any other remedy, the Company has the right but not the obligation to offset any amount that
Executive owes the Company under this Agreement against any amounts due Executive by Block, the
Company or the Affiliates.

     5.10 Notices. All notices required or desired to be given hereunder must be in writing
and will be deemed served and delivered if delivered in person, by certified or registered mail
(return receipt requested), or by a nationally recognized overnight courier to Executive at the
address then on file with the Company’s payroll department; and to the Company, One H&R Block Way,
Kansas City, Missouri 64105, Attn: Corporate Secretary; or to such other address and/or person
designated by either party in writing to the other party. Any notice given by mail or by nationally
recognized overnight courier will be deemed given as of the date it is so mailed and postmarked or
received by a nationally recognized overnight courier for delivery.

     5.11 Counterparts. This Agreement may be signed in counterparts and delivered by
facsimile transmission confirmed promptly thereafter by actual delivery of executed counterparts.

     5.12 Section 409A. The Company and Executive agree that this Agreement is intended to
comply with the requirements of Section 409A (“Section 409A”) of the Internal Revenue Code of
1986, as amended, and the regulations and other guidance promulgated thereunder (the “Code”) or an
exemption from Section 409A and, accordingly, this Agreement shall be interpreted to be consistent
therewith. Notwithstanding anything in this Agreement to the contrary, if Executive is a “specified
employee” (as described in Section 409A) on the date of termination, any amount to which Executive
would otherwise be entitled during the first six months following a separation of service that
constitutes nonqualified deferred compensation within the meaning of Section 409A and that is
therefore not exempt from Section 409A as involuntary separation pay or a short-term deferral will
be accumulated and paid in a single lump sum cash payment (without interest) on the earlier of (i)
the first business day of the seventh month following the date of such “separation from service”
(as defined under Section 409A) or (ii) the date of Executive’s death, and any remaining payments
and benefits due under this Agreement shall be paid or provided in accordance with the normal
payment dates specified for them herein. For purposes of this Agreement, each amount to be paid or
benefit to be provided hereunder shall be construed as a separate identified payment for purposes
of Section 409A.

     5.13 Excise Tax.

     (a) Contingent Cutback. To the extent that any payment or distribution to or for
the benefit of Executive pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any Affiliate, any person whose actions result in a change of ownership
or effective control covered by Section 280G(b)(2) of the Code or any person affiliated with the
Company or such person, whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise (the “Payments”) would be subject to the excise tax (the
“Excise Tax”) imposed by Section 4999 of the Code, then the Company shall pay or provide to
Executive the greatest of the following, whichever gives Executive the highest net after-tax amount
(after taking into account federal, state, local and social security taxes at the maximum marginal
rates): (1) the Payments or (2) one dollar less than

16

 

the amount of the Payments that would subject Executive to the Excise Tax (the “Safe Harbor Cap”).
Unless Executive shall have given prior written notice specifying a different order to the Company
to effectuate the Safe Harbor Cap, the Payments to be reduced hereunder will be determined in a
manner which has the least economic cost to Executive and, to the extent the economic cost is
equivalent, will be reduced in the inverse order of when the Payment would have been made to
Executive until the reduction specified herein is achieved. Executive’s right to specify the order
of reduction of the Payments shall apply only to the extent that it does not directly or indirectly
alter the time or method of payment of any amount that is deferred compensation subject to (and not
exempt from) Section 409A.

     (b) Determinations. All determinations required to be made under this Section
5.13, including whether and when the Safe Harbor Cap is required and the amount of the reduction of
the Payments pursuant to the Safe Harbor Cap and the assumptions to be utilized in arriving at such
determination, shall be made by a certified public accounting firm or executive compensation
consulting firm, in either case of national standing (a “Qualified Firm”) as mutually agreed to by
the Company and Executive (or, if the Company and Executive cannot reach such mutual agreement,
each shall select a Qualified Firm and such Qualified Firms shall mutually select a third Qualified
Firm) and such selected Qualified Firm shall provide detailed supporting calculations both to the
Company and Executive within 15 business days of the receipt of notice from Executive that there
has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of
the Qualified Firm selected by the Company (and the third Qualified Firm if one is required to be
selected) shall be borne solely by the Company. Any determination by the Qualified Firm shall be
binding upon the Company and Executive. Executive shall cooperate, to the extent his reasonable
out-of pocket expenses are reimbursed by the Company, with any reasonable requests by the Company
in connection with any contests or disputes with the Internal Revenue Service in connection with
the Excise Tax.

     5.14 Arbitration. The parties hereto may attempt to resolve any dispute hereunder
informally via mediation or other means. Otherwise, any controversy or claim arising out of or
relating to this Agreement, or any breach thereof, will, except as provided in Section 5.04, be
adjusted only by arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect. However, the rules will be modified in the following ways:
(a) the arbitration will be conducted before a panel of three arbitrators, one selected by
Executive within 10 days of the commencement of arbitration, one selected by the Company in the
same period and the third selected jointly by these arbitrators (or, if they are unable to agree on
an arbitrator within 30 days of the commencement of arbitration, the third arbitrator will be
appointed by the American Arbitration Association; provided that the arbitrator shall be a partner
or former partner at a nationally recognized law firm); (b) each arbitrator will agree to treat as
confidential evidence and other information presented to them; (c) a decision must be rendered
within 10 business days of the parties’ closing statements or submission of post-hearing briefs;
(d) the decision of the arbitrators must not be a compromise but must be the adoption of the
submission by one of the parties; (e) there will be no authority to award punitive damages (and
Executive and the Company agree not to request any such award); and (f) there will be no authority
to amend or modify the terms of this Agreement except as provided in Section 5.03 (and Executive
and the Company agree not to request any such amendment or modification). Judgment upon such award
rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration
will be held in Kansas City, Missouri, or such other

17

 

place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) will,
in their award, allocate between the parties the costs of arbitration, which will include
reasonable attorneys’ fees of the parties, as well as the arbitrator’s fees and expenses, in such
proportions as the arbitrator deems just.

(Signature Page Follows)

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     5.15 Choice of Law. This Agreement shall be governed by, construed and enforced in
accordance with the Laws of the State of Missouri, excluding any conflicts of law, rule or
principle that might otherwise refer to the substantive law of another jurisdiction.

     IN WITNESS WHEREOF, the parties hereto, through their duly authorized officers, as applicable,
have executed this Agreement as of the dates set forth below.

	 	 	 	 	 
	 	EXECUTIVE:

 	 
	Dated: July 19, 2008 	/s/ Russell P. Smyth
 	 
	 	Russell P. Smyth 	 
	 	 	 
	 

H&R Block Management, LLC, 

a Delaware
limited liability company

	 	 	 	 	 
	 	 	 
	 	By:  	/s/ Bret G. Wilson
 	 
	 	 	Name:  	 Bret G. Wilson	 
	 	 	Title:  	Vice President	 
	 

Dated: July 19, 2008

H&R Block, Inc.,

a Missouri corporation

(solely with respect to Sections 1.02(b),

1.03(c), 4.09, 5.01 and 5.02)

	 	 	 	 	 
	 	 	 
	 	By:  	/s/ Bret G. Wilson
 	 
	 	 	Name:  	Bret G. Wilson	 
	 	 	Title:  	Vice President & Secretary	 
	 

Dated: July 19, 2008

19

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