Court Upholds Non-Compete Agreement for Connecticut Tax Preparation Firm Employee
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Ms. Nancy Henderson worked for Mr. John Hoffnagle as an accountant at the tax preparation business “Hoffnagle & Associates” in Bristol, CT from early 1995 to October 2001. The parties executed an employment agreement on January 27, 1996, that dictated the rights and obligations of the parties and contained a non-compete clause that would become effective upon Ms. Henderson’s termination.
Mr. Hoffnagle gave Ms. Henderson a significant, but temporary raise as consideration for the provisions of the agreement. The restrictive covenant prohibited Ms. Henderson from operating general bookkeeping, tax preparation, and tax filing business within five miles of the company’s office(s) for a period of five years. Additionally, the agreement prohibited her from disclosing or using Hoffnagle’s client lists or other confidential information of past or present clients.
The Case
In 1997, Hoffnagle opened a second office in Terryville, CT and appointed Ms. Henderson to be the branch’s manager. At this time, Mr. Hoffnagle began to prepare for retirement and officially separated the offices because they would be more lucrative to sell individually rather than as a two-office firm. He transferred ownership of the Terryville office to ConnTax Corporation, a Chapter S corporation controlled by members of Mr. Hoffnagle’s family.
From January 2001 until her termination, Ms. Henderson was technically an employee of ConnTax and received all compensation and benefits from that company. In October 2001, Mr. Hoffnagle sold the original Bristol office to an industry competitor. Ms. Henderson and Mr. Hoffnagle discussed her purchasing the Terryville office but the deal ultimately fell through when they could not agree on a final price. This prompted Ms. Henderson to terminate her employment and open her own business across the street from Hoffnagle’s Terryville location.
Mr. Hoffnagle sued Ms. Henderson and asked the court to enjoin her from continuing to operate her tax preparation business at its current location in clear violation of the non-compete agreement executed by the parties in 1997. Ms. Henderson, however, contended that the agreement lacked consideration and was therefore not binding upon the parties. She claimed that the temporary raise she received was not in connection with the restrictive covenant but was merely coincidental.
The Court’s Decision
The court rejected the assertion that the non-compete agreement and the raise were unrelated and concluded that the raise was indeed adequate consideration to make the agreement legally binding. The court also concluded that the duration and geographical limitations were reasonable. They were reasonable to protect Mr. Hoffnagle’s legitimate business interests and the limited scope of the geographical limitation did not unnecessarily restrict Ms. Henderson’s ability to make a living. The court also noted that the consuming public would not be denied access to the services provided by the parties by enforcing the provisions of the non-compete agreement.
Ms. Henderson raised an interesting point, however, when she inquired about whether the court’s holding and enforcement of the non-compete agreement included “personal clients” to whom she provided tax preparation services outside of her role as an employee of Hoffnagle & Associates and later ConnTax. The court concluded that she was not enjoined from continuing to service those “personal clients” because their inclusion on the list of prohibited clients would be unfair since those clients did not have an official relationship to any Hoffnagle business entity.
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