Court Opinion

ID: 9853918
Source: CourtListenerOpinion
Date Created: 2023-09-24 05:57:23.322229+00
Date Added: 2024-06-11T09:20:15.788116
License: Public Domain

Wright, J.,
dissenting.
I respectfully dissent from the majority opinion which concludes that the covenant not to compete should be treated as if it were part of a contract for the sale of a business and that the district court erred in finding the covenant to be unenforceable.
We have previously addressed covenants not to compete in both contracts for the sale of a business and employment contracts. Nebraska courts are generally more willing to uphold promises to refrain from competition made in the context of the sale of goodwill as a business asset than they are to honor those promises made in contracts of employment. See Presto-X-Company v. Beller, 253 Neb. 55, 568 N.W.2d 235 (1997). The rationale is that a seller who obtains money from a buyer as consideration for a covenant not to compete should not be permitted to use that money to compete with the buyer. However, a covenant not to compete ancillary to the sale of a business must be reasonable in both space and time so that it will be no greater than reasonably necessary to achieve its legitimate purpose. Id. The purpose of the restriction is to protect the buyer in the enjoyment of the goodwill which he has purchased in the sale of the business.
In the case of an employer-employee relationship, a covenant not to compete will be enforced only if it restricts a former employee from working for or soliciting the former employer’s clients or accounts with whom the employee actually did business and had personal contact. See Polly v. Ray D. Hilderman & Co., 225 Neb. 662, 407 N.W.2d 751 (1987).
Here, the covenant not to compete was contained within a franchise agreement. Neb. Rev. Stat. § 87-402(l)(a) (Reissue 1999) of the Franchise Practices Act defines a franchise as
a written arrangement for a definite or indefinite period, in which a person grants to another person for a franchise fee a license to use a trade name, trademark, service mark, or related characteristics and in which there is a community of *424interest in the marketing of goods or services at wholesale or retail or by lease, agreement, or otherwise.
The franchise agreement at issue authorized Kelsey to offer tax preparation services under H & R Block’s trade name. H & R Block, however, retained considerable control, including the right to determine office hours and fees and the right to dictate which forms would be used. Upon termination of the agreement, Kelsey was required to return all client lists and copies of client tax returns to H & R Block. Kelsey paid H & R Block for the use of its trade name, but such payment did not carry with it any expectation of ownership that would accompany the sale of a business. See, McDonald’s Corp. v. Markim, Inc., 209 Neb. 49, 306 N.W.2d 158 (1981); Midlands Transp. Co. v. Apple Lines, Inc., 188 Neb. 435, 197 N.W.2d 646 (1972).
The district court determined that the covenant not to compete which prohibited Kelsey from preparing tax returns within a 45-mile radius of Ogallala, Nebraska, was unreasonable, ineffective, unenforceable, and therefore void. The rationale for the court’s determination was that a covenant not to compete must not be greáter than is reasonably necessary to protect an employer against a former employee’s improper and unfair competition, and cannot restrict the former employee from engaging in ordinary competition with his previous employer. See, Vlasin v. Len Johnson & Co., 235 Neb. 450, 455 N.W.2d 772 (1990); Polly v. Ray D. Hilderman & Co., supra. The evidence established that there were a significant number of bookkeepers and tax return preparers in competition with H & R Block within a 45-mile radius of Ogallala. Under these circumstances, the court concluded that enforcing the covenant would result in restricting Kelsey from engaging in ordinary competition with H & R Block.
■The question presented is whether the covenant not to compete in the franchise agreement between Kelsey and H & R Block is more similar to a covenant not to compete concerning the sale of a business or one entered into in the context of an employer-employee relationship.
When a business is sold, the sales agreement may contain a covenant not to compete if goodwill is a business asset purchased by the buyer. In that situation, the seller agrees not to compete with the buyer and the restraint of trade can be no greater than is *425reasonably necessary to obtain the desired result of making goodwill a transferable asset. The restriction upon the seller is only that which is reasonably necessary to protect the buyer’s enjoyment of the goodwill purchased. See Presto-X-Company v. Beller, 253 Neb. 55, 568 N.W.2d 235 (1997).
When a covenant not to compete is part of a franchise agreement, the situation is quite different. The franchisor may require the franchisee to pay for use of a trade name, and the franchisor may retain considerable control over operation of the business. Upon termination of the franchise, the franchisee is in most instances left with nothing while the franchisor retains the goodwill, the name of the business, and all records and client lists.
A case which illustrates the difference is H & R Block, Inc. v. Lovelace, 208 Kan. 538, 493 P.2d 205 (1972). H & R Block sought to restrain the defendant from violating a covenant not to compete upon the termination of a franchise agreement. The court made a distinction between covenants contained in employer-employee contracts and covenants relating to the sale of a business. It pointed out that the agreement at issue was neither a contract of employment nor one for the sale of a business, but, instead, was what has now come to be known as a franchise. The court concluded that under the facts presented, the contract was more like an employment agreement than a contract for the sale of a business.
In concluding that the franchise agreement at issue should be considered analogous to the sale of a business for the purpose of determining enforceability of the covenant not to compete, the majority relies upon Jiffy Lube Intern., Inc. v. Weiss Bros., Inc., 834 F. Supp. 683 (D.N.J. 1993), and McCart v. H & R Block, Inc., 470 N.E.2d 756 (Ind. App. 1984). In Jiffy Lube Intern., Inc., the court reasoned that upon termination of the franchise, the goodwill was in some sense returned to the franchisor and that, therefore, a reasonably crafted restrictive covenant was necessary to protect the goodwill after its return. I agree that the goodwill is returned, but that does not permit a covenant which will restrict ordinary competition or one that is greater than reasonably necessary. In McCart, the court compared customer affiliation associated with H & R Block’s service mark to the goodwill inherent in the sale of a business. H & R Block’s protectable interest *426was the customer recognition of its service mark and the year-to-year affiliation those customers developed with a particular H & R Block office. The court concluded that H & R Block had a protectable interest in its customer affiliation but that it had no right to restrict competition beyond the limits of its protectable interest.
In my opinion, a franchise agreement is akin to an employment contract. The franchisor retains the goodwill and the name of the business. At the end of the agreement, the franchisee, like the employee in an employer-employee relationship, has nothing remaining. Unlike the seller of a business, the franchisor is not paid for a covenant not to compete. The franchisor exercises control and dictates business policies, which is like the role of an employer in an employer-employee relationship. In such an arrangement, a covenant aimed at preventing the unfair appropriation of customer goodwill can be no greater than reasonably necessary to protect the franchisor. It can restrict the franchisee only from working for or soliciting the franchisor’s customers or accounts with whom the franchisee actually did business and had personal contact.
Here, the covenant prohibits Kelsey from engaging in ordinary competition with H & R Block within 45 miles of its Ogallala office for a period of 1 year. In my opinion, the district court correctly determined that the covenant was unenforceable as a matter of law because it was not limited to former H & R Block clients with whom Kelsey actually did business and had personal contact.
For these reasons, I would affirm the district court’s judgment finding that the covenant not to compete was overly broad and therefore unenforceable.
Connolly, J., joins in this dissent.