Everything You Need to Know (And Probably Don’t) About Covenants Not to Compete - Louisiana

Non-Compete Agreement Series

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The next state in our series exploring non-compete agreements is Texas’ neighbor to the east, Louisiana. As I like to say, when you travel east and cross the Sabine River from Texas to Louisiana all the words change but the concepts usually remain the same. This is partially true in Louisiana’s approach to covenants not to compete. For this chapter, we are joined by my partner Rob Ford who is licensed in Louisiana, the country’s only civil law jurisdiction. Like myself, Rob has handled a number of matters in this arena in Louisiana, and his insight is valuable.

Louisiana’s approach is similar to that of Texas in concept. Non-compete agreements are null and void in Louisiana and deemed to be against public policy,[1] unless the non-compete clause or agreement fits within one of the statutorily recognized exceptions. Like the safe harbor rules in Texas, a statutory exception exists for most employer-employee relationships,[2] allowing an employer to prevent a former employee from “carrying on or engaging in business similar to that of the employer” or from soliciting an employer’s customers.[3] However, under this exception, an employer-employee non-compete agreement is enforceable only if it:

  1. Expressly identifies the territory consisting of a parish or parishes, or municipality or municipalities, or parts thereof, in which the employer is operating, and
  2. Cannot exceed a period of two years from termination of employment.

These rules are more confining than Texas but give more clarity on how to draft these provisions. Also, non-compete agreements are strictly construed in favor of the employee and against the party attempting enforcement.

Statutory Authority

Louisiana’s Non-Compete Statute can be found at Louisiana Revised Statutes § 23:921.

Consideration

In Louisiana, continued employment constitutes sufficient consideration to support a non-compete or non-solicitation agreement.[4]

Geographic Limitations

The geographical limitation of a non-compete agreement under Louisiana law has two requirements: (1) The parishes or municipalities where competition is restrained must be specified within the agreement itself, and (2) enforcement is limited to parishes or municipalities where the first employer actually conducts business.[5] Regarding the specificity requirement, what is important is that the geographic limitation be express and clearly discernable.[6] A covenant not to compete that generally references parishes or municipalities is unenforceable.[7] Courts also require that the specified locations must be where the employer actually has a location or customers.[8] Below are some specific examples from Louisiana case law:  

  • Insurance agent for brokerage - Contract with language stating “whatever parishes, counties and municipalities the Company...conducted business” was unenforceable because it lacked specificity as to which parishes were included and where employer did business.[9]
  • Sales representative for HVAC company - Employee’s covenant not to compete failed to identify any geographic boundaries, rendering it unenforceable.[10]
  • General manager for debt collector - Employee’s covenant not to compete was rendered unenforceable because the language “to all parishes or counties [employer] covers on a like business in said parishes or counties” lacked specificity.[11]
  • President of water utility company - Non-compete agreement that contained a blank space where the territorial limits were to be included did not meet statutory requirement for covenant not to solicit customers of former employer and was thus invalid.[12]
  • Physician - Geographical limitation in covenant not to compete that prohibited a physician from practicing in two specifically listed counties was enforceable.[13]

Restricted Period

The statute limits enforcement of a non-compete agreement to a period up to two years from termination of employment.[14] Courts in Louisiana have strictly enforced the statutory limitation, invalidating non-compete agreements for a period of longer than two years.[15]

Restricted Scope of Activity

A non-compete agreement can only restrict an employee from “carrying on or engaging in a business similar to that of the employer.”[16] Louisiana courts have taken care to emphasize that “the law does not require a specific definition of the employer’s business.”[17] Still, non-compete clauses that contain overly broad definitions of the employer's business are null and void under Louisiana law.[18]

Here are a few examples of non-compete agreements found to contain overly broad definitions of the employer’s business:

  • Non-compete clause prohibiting speech therapist “from engaging or carrying on a business similar to that of [employer]” did not adequately define the employer’s business and was unenforceable.[19]
  • Non-compete clause prohibiting a doctor from the “practice of medicine,” instead of specifying pain management, was overbroad and void.[20]
  • Non-compete clause prohibiting the “practice of public accounting or tax preparation in any fashion” was overbroad because not only did it prohibit employee from starting her own accounting practice but it was also a prohibition on all public accounting.[21]

In contrast, here are a few examples of non-compete agreements whose definition of the employer’s business was sufficiently narrow:

  • Non-compete agreement defining hazardous waste cleanup company’s business as including “waste transportation and disposal,” and further clarifying that the business was limited to “oil and hazardous spill containment,” was sufficiently narrow — particularly given that the departing employees testified that they were aware of the nature of their employer’s business.[22]
  • Non-compete agreement was not overbroad where it defined employer’s business as “including, but not limited to, ‘the buying, selling, trading, exchanging, repairing and/or servicing of new and used mainframe computer systems, flat panel displays, industrial displays, mini-systems or personal computer systems inclusive of all components, the selling of computer-related training classes accessed via the internet, the selling of technical services related to the implementation, repairing or servicing of computer hardware, and the selling of consulting services related to the development of software, whether created to meet specific criteria of a specialized application or simply modifications of existing software rendered to address customer preferences or needs.’”[23]

Exempt Professions – Automobile Salespersons

Section 23:921(I) of the statute prohibits enforcement of non-complete agreements against automobile salespersons.[24] Automobile salespersons are the only category of exempt professionals referenced in the statute that cannot be restrained by their employers from selling automobiles.[25] Louisiana courts have upheld this prohibition even in situations where a salesperson is performing managerial duties instead of sales.[26]

Reformation/Blue Penciling

Louisiana courts will reform a non-compete clause in limited circumstances. A non-compete clause that fails specify any valid geographical area or wholly fails under the statute cannot be reformed.[27] Without any specified geographic area, the non-compete clause cannot stand on its own and cannot be reformed.[28] However, if the non-compete clause contains an overbroad catch-all statement in addition to a valid geographic limitation, the court will remove the overbroad catch-all statement and enforce the remainder of the valid non-compete clause.[29] Further, an agreement containing an invalid non-compete clause can be severed and enforced as long as the agreement contains a severability clause.[30] Because courts in Louisiana are reluctant to reform and sever non-compete agreements, the safest practice for employers would be to draft non-compete clauses that strictly comply with the statute.

Remedies in Action to Enforce Covenant Not to Compete

  • Damages and Injunctive Relief - A court may award an employer damages for loss of profit and injunctive relief under a covenant not to compete.[31] An employer is not required to prove irreparable injury to obtain injunctive relief under the statute and must simply establish the employee’s breach to obtain an injunction.[32]
  • Attorneys’ Fees - Generally, an employer may not recover its attorneys’ fees in an action to enforce a covenant not to compete. The statute provides only for the recovery of loss profit and injunctive relief. However, attorneys’ fees may be recoverable if contractually agreed upon by the parties.[33]

Statute of Limitations

For breach of contract, the limitations period — called “prescription” in Louisiana — is ten (10) years.[34] However, keep in mind that, in the case of older, more longstanding non-competes that predate the current statute’s 2003 enactment, such agreements will be construed under prior and somewhat more restrictive Louisiana law. This is because Louisiana courts have refused to apply the state’s non-compete statute retroactively.[35]

Interplay Between Non-Compete Agreements and Other Restrictive Covenants

Non-Solicitation Agreements - Although a non-solicitation agreement is separate and apart from a non-compete agreement, the requirements of Louisiana Revised Statutes § 23:921(C) apply to both.[36] To be valid, a non-solicitation agreement must also meet the requirements of statutory requirements for non-competition agreements.[37] Non-solicitation agreements are strictly construed under Louisiana law and generally disfavored.[38] Courts will uphold non-solicitation agreements if 1) they expressly identify territory consisting of a parish or parishes, or municipality or municipalities, or parts thereof, in which the employer is operating, and 2) the restriction cannot exceed a period of two years from termination of employment.[39] Since non-solicitation clauses are often coupled with non-compete clauses, requiring they meet the same standards simplifies the enforcement of both types of clauses.

We encourage our readers to download our Louisiana Non-Compete Checklist.  This handy resource will help you navigate the nuances of covenants not to compete in Louisiana. You can also find a Texas Non-Compete Checklist at this site. For any question that arises, please contact Jim Collura.

 

Footnotes

[1] “This policy is based on the state’s desire to prevent an individual from contractually depriving himself of the ability to support himself and consequently becoming a public burden.”  SWAT 24 Shreveport Bossier, Inc. v. Bond, 00-1695 (La. 6/29/01), 808 So.2d 294, 299.

[2] Interestingly, the Louisiana non-compete statute provides for one additional employer-employee exception that permits employers to contractually prohibit its employees, “for a period not to exceed two years from the date of the termination of employment,” from “engaging in any work or activity to design, write, modify, or implement any computer program that directly competes with any confidential computer program, owned, licensed, or marketed by the employer, and to which the employee had direct access during the term of his employment or services.” LA R.S. 23:921G(1). Moreover, this computer-related exception applies to a far broader category of covered “employee,” which the statute defines to “mean any individual, corporation, partnership, or any other entity which contracts or agrees with an employer to perform, provide, or furnish any services to, for, or on behalf of such employer.” Id. § LA R.S. 23:921G(4).

[3] LA R.S. 23:921C.

[4] Cellular One, Inc. v. Boyd, 653 So. 2d 30, 34 (La. Ct. App. 1995).

[5] Waguespack v. Medtronic, Inc., 185 F. Supp. 3d 916, 929 (M.D. La. 2016); La. R.S. 23:921(C).

[6] Id.

[7] Causin, LLC v. Pace Safety Consultants, LLC, 2018-0706 (La. App. 4 Cir. 1/30/19), writ denied, 2019-0466 (La. 5/20/19), 271 So. 3d 203.

[8] Aon Risk Servs. of Louisiana, Inc. v. Ryan, 2001-0614 (La. App. 4 Cir. 1/23/02), 807 So. 2d 1058, 1062.

[9] Id.

[10] Johnson Controls, Inc. v. Guidry, 724 F.Supp.2d 612, 622 (W.D.La. July 12, 2010).

[11] Action Revenue Recovery, L.L.C. v. eBusiness Grp., L.L.C., 44,607 (La. App. 2 Cir. 8/19/09), 17 So. 3d 999, 1001.

[12] Water Processing Technologies, Inc. v. Ridgeway, App. 4 Cir.1993, 618 So.2d 533.

[13] Regional Urology, L.L.C. v. Price, App. 2 Cir.2007, 966 So.2d 1087, 42,789 (La.App. 2 Cir. 9/26/07).

[14] La. R.S. 23:921(C).

[15] Envtl. Safety & Health Consulting Servs., Inc. v. Fowler, 2019-0813 (La. App. 4 Cir. 3/11/20) (upholding non-compete agreement limited to two years after termination); USI Ins. Services, LLC v. Tappel, 09-149 (La.App. 5 Cir. 11/10/09) 28 So.3d 419 (holding covenant preventing employee from competing with employer's business or soliciting employer's clients for term of five years violated statute governing such agreements, and thus, was unenforceable).

[16] La. R.S. 23:921(C).

[17] Envt’l Safety & Health Consulting Servs., Inc. v. Fowler, 2019-0813 (La. App. 4 Cir. 3/11/20), --So.3d--, 2020 WL 1173587 at *7 (citing Baton Rouge Computer Sales, Inc. v. Miller-Conrad, 1999-1200, p. 3 (La. App. 1 Cir. 5/23/00), 767 So.2d 763, 764); Ticheli v. John H. Carter Co., Inc., 43,551 (La. App. 2 Cir. 9/17/08), 996 So.2d 437, 440; Moores Pump and Supply, Inc. v. Laneaux, 98-1049 (La. App. 3 Cir. 2/3/99), 727 So.2d 695, 698.

[18] Paradigm Health System, LLC v. Faust, 2016-1276 (La. App. 1 Cir. 4/12/17), 218 So. 3d 1068, 1071.

[19] Id.

[20] See Paradigm Health System, LLC, 218 So.3d at 1071.

[21] McCord v. West, 07-958 (La. App. 5 Cir. 3/25/08), 983 So. 2d 133, 140.

[22] Envt’l Safety & Health Consulting Servs., Inc. v. Fowler, 2019-0813 (La. App. 4 Cir. 3/11/20), --So.3d--, 2020 WL 1173587 at *7.

[23] Vartech Sys., Inc. v. Hayden, 2005-2499 (La. App. 1 Cir. 12/20/06), 951 So.2d 247, 259.

[24] La. R.S. 23:921(I).

[25] Id.

[26] Navarre Chevrolet, Inc. v. Begnaud, 2016-465 (La. App. 3 Cir. 11/2/16), 205 So. 3d 973, 976, writ denied, 2016-2122 (La. 1/13/17), 215 So. 3d 248.

[27] Id.; See Paradigm Health System, LLC, 218 So.3d at 1071 (non-compete agreement, which was invalid and unenforceable due to its overly broad language, could not be reformed because, once the offending portions were stricken, there was no language in the agreement that could be construed to prohibit the conduct of which employer complained).

[28] Total Safety U.S., Inc. v. Code Red Safety & Rental, LLC, 423 F. Supp. 3d 309, 315 (E.D. La. 2019).

[29] Brock Servs., L.L.C. v. Rogillio, 936 F.3d 290, 293 (5th Cir. 2019).

[30]Buckeye Garment Rental Co. v. Jones, 276 F. Supp. 560, 562 (E.D. La. 1967).

[31] La. R.S. 23:921(H). La. R.S. 23:921(I).

[32] La. R.S. 23:921(H); Wechem, Inc. v. Evans, 18-743 (La. App. 5 Cir. 5/30/19), 274 So. 3d 877, 887.

[33] Newport Ltd. v. Sears, Roebuck & Co., No. CIV. A. 86-2319, 1995 WL 688799, at *2 (E.D. La. Nov. 21, 1995) (as a general rule under Louisiana law, attorneys' fees are recoverable only where authorized by statute or contract).

[34]  La. C.C.Aart. 3499.

[35] See, e.g., Sola Comm’ns, Inc. v. Bailey, 2003-905 (La.App. 3 Cir. 12/10/03), 861 So.2d 822, 828; Causin, LLC v. Pace Safety Consultants, LLC, 2018-0706 (La. App. 4 Cir. 1/30/19),---So.3d---, 2019 WL 385206 at *5, writ denied 271 So.3d 203, 2019-0466 (La. 5/20/19).

[36] La. R.S. 23:921(C).

[37] Wechem, Inc. v. Evans, 18-743 (La. App. 5 Cir. 5/30/19), 274 So. 3d 877, 885, writ denied, 2019-01176 (La. 10/15/19), 280 So. 3d 600.

[38] Id.

[39] La. R.S. 23:921(C).