Judges differ in non-compete agreement case

In a legal dispute regarding a non-compete agreement, the Indiana Court of Appeals judges disagreed as to whether the agreement could be enforced if the former employee's clients voluntarily left and contacted him to continue to be their accountant.

At issue in Craig P. Coffman and Coffman Proactive CPA Services, LLC v. Olson & Co., P.C., No. 53A04-0804-CV-190, is whether Olson & Co. had a protectable interest that could be enforced by a non-compete provision in an employment agreement and whether the trial court erred by voiding the liquidated damages provision in the agreement and calculating the damages award.

Craig Coffman worked as CPA for Olson & Co. and signed a confidential non-disclosure and client proprietary agreement that said upon termination of his employment with the company he couldn't contact or work with Olson clients for 24 months. If he did so, he would liable to Olson for two times the client's most recent 12-months billings with Olson if he informed the company of the violation of the agreement; if Coffman failed to inform Olson, he would be liable for three times the amount.

Coffman left the company to form his own. After he left, he was contacted by his former clients at Olson who wanted to retain him as their accountant. Coffman didn't notify or compensate Olson.

Olson filed suit against Coffman in which the trial court concluded Olson established a legitimate interest that may be protected by a covenant not to compete – the names and addresses of Olson's clients to which Coffman gained an advantage by representing them while at Olson. The trial court found the liquidated damage clause to be a penalty and unenforceable and awarded Olson nearly $80,000 based on fees Olson received from its former clients that now worked with Coffman.

The majority concluded the agreement wasn't unreasonable because Coffman had gained an advantage through representative contact with Olson's clients. Olson structured its business in a way that clients only dealt with their accountant and the agreement protected Olson's goodwill, business reputation, and client contacts against potential vulnerability if an accountant left, wrote Judge James Kirsch. The majority didn't find Coffman's argument persuasive that the agreement didn't apply to his situation because the clients had already left Olson and some even hired other accountants before contacting him.

The majority affirmed the trial court's award to be within the scope of the evidence and a reasonable determination of the damages award.

Judge Terry Crone disagreed, believing once a client voluntarily ceased doing business with Olson, any goodwill the company enjoyed with respect to those clients ceased to exist, as did any protectable interest. Absent a legitimate protectable interest, the agreement is unenforceable, he wrote, and absent actual damages, there's no basis for awarding liquidated damages.