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Employment Law

Employment Disputes

Employee Bound By Terms of Covenant Not To Compete As Long As Employee Continues to Receive Deferred Compensation Benefits Jan-Feb-06

                        In the recent case of Scheffel & Company v. Fessler, a court held that an employer could enforce the terms of a covenant not to compete as long as the employee continued to receive deferred compensation benefits. 

                        Defendant, Kenneth Fessler (“Fessler”), a certified public accountant and also a shareholder and officer of Plaintiff, Scheffel & Company (the “Company”), sought to invalidate a covenant not to compete contained in a Preincorporation Agreement signed by Fessler.  The covenant provided that for a period of five years after the date:

 [Fessler] ceased to be a partner or shareholder, and, if he is receiving deferred compensation payments from the corporation . . . he will not directly or indirectly render public accounting services to any clients who were serviced by the Corporation during the two (2) years immediately prior to the date of his withdrawal or practice public accounting in any location within fifty (50) miles of any city in which the Corporation or any operating Corporation maintains an office on the date he ceased to become a shareholder. 

                        After a dispute arose between Fessler and the Company, Fessler was involuntarily retired by the Company in August 2001.  Fessler subsequently filed suit against the Company seeking a declaration that the covenant was invalid.  The court found that the covenant was enforceable against Fessler as long as he continued to receive deferred compensation benefits, and ordered that Fessler could not provide accounting services at any time in the future for any person or entity that was a client of the Company during the two-year period immediately before his involuntary retirement.  


                       In reaching its decision, the court found that the Company had presented evidence demonstrating that it spent a substantial amount of time and money to obtain and maintain its clients.  The court concluded that the restriction contained in the covenant was reasonable, and that Fessler was not precluded from practicing accounting in the private sector.  Given the consideration Fessler was receiving from the Company in the form of deferred compensation benefits, the court noted that the time restraint was reasonable to protect the Company’s legitimate business interests.

                        The Fessler case demonstrates the various factors courts will consider when determining whether to enforce a covenant not to compete.  If you need any assistance in drafting or analyzing the enforceability of a covenant not to compete, please contact a member of the firm.

Attorney to Contact

• Thomas W. Rieck
• Jerome F. Crotty
• Kevin P. Brown