Academic journal article Journal of Accountancy

Court Invalidates Restrictive Employment Covenant

Academic journal article Journal of Accountancy

Court Invalidates Restrictive Employment Covenant

Article excerpt

The Court of Appeals of Georgia ruled that a CPA firm could not enforce an employment termination agreement against former firm members who had left and formed a competing firm. On April 19, 1991, Richard Greenwald, Richard Denzik and Charles Davis left Dougherty, McKinnon & Luby (DML) (formerly Dougherty, McKinnon & Greenwald) to form Greenwald, Denzik & Davis (GDD). A number of DML clients switched to the new firm.

DML subsequently sued GDD to enforce the employment agreement signed by its former members and to recover liquidated damages covered in the agreement.

The agreement said that if a shareholder or employee left DML for any reason other than death, retirement or permanent and total disability and performed services for DML clients within three years after leaving the firm, the shareholder or employee must pay damages equal to 125% of the amount billed to the former DML clients for the fiscal year immediately before the year of termination or the year the clients were taken, whichever was later. The trial court ruled in favor of GDD and refused to enforce the damages provision.

On appeal, DML argued the agreement did not constitute a covenant not-to-compete because it did not prohibit competition. The payment of liquidated damages was not a penalty for competition, the firm said, but rather a recognition that DML must repurchase the departing accountant's stock at a price that is difficult to calculate. …

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