Noncompetition Agreements: New Trends and Old Dilemmas
From a litigation standpoint, it seems that noncompetition agreements have recently eclipsed almost every other type of contract executed in the employer-employee context. New judicial pronouncements and interpretations of the operative statute, La. R.S. 23:921, have become quite frequent.
By way of background, La. R.S. 23:921 was revised in 1989 to substantially read as follows with respect to the employer-employee relationship:
A. Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, except as provided in this Section, shall be null and void.
C. Any person, including a corporation and the individual shareholders of such corporation, who is employed as an agent, servant, or employee may agree with his employer to refrain from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment.
The 1989 amendment to La. R.S. 23:921 did not change Louisiana public policy against noncompetition agreements - they are still against public policy. Nonetheless, the legislature has created certain specific statutory exceptions to the general prohibition. In amending La. R.S. 23:921, the Louisiana Legislature expanded the use of noncompetition agreements and, subject to compliance with the exceptions, further recognized that employers have a right to protect their business investments. Although the trend in Louisiana jurisprudence has apparently changed during the past two to three years, traditionally any contract which did not fit exactly within one of the statutory exceptions would be declared null and void.
There are two significant issues that recently have been litigated in Louisiana appellate courts: (i) whether a noncompetition agreement must describe the employer's business operations in order to be valid and enforceable; and (ii) whether an otherwise invalid noncompetition agreement (because of excessive or inadequate geographic area descriptions) can be reformed or severed in order to make the agreement valid and enforceable.
Definition of the Employer's Business
Louisiana jurisprudence is divided on whether a noncompetition agreement must accurately define the business of the employer from which the employee will be prohibited from competing. A survey of the Louisiana appellate circuits with regard to this issue shows the following:
LaFourche Speech & Language Services, Inc. v. Juckett, 652 So.2d 679 (La. App. 1st Cir. 1995). The court held that, in order to be valid, a noncompetition agreement must specifically define the employer's business.
Moores Pump and Supply, Inc. v. Laneaux, 727 So.2d 695 (La. App. 3rd Cir. 1999). The court held that a specific description of an employer's business is not required by La. R.S. 23:921.
Henderson Implement Co., Inc. v. Langley, 707 So.2d 482 (La. App. 3rd Cir. 1998). The court found that La. R.S. 23:921 does not require that a noncompetition agreement include a definition of the employer's business.
Scariano Bros., Inc. v. Sullivan, 719 So.2d 131 (La. App. 4th Cir. 1998). The court found there is no statutory requirement to define the employer's business in the noncompetition agreement; provided, however, that any injunction issued which prohibited competition by the former employee must describe in reasonable detail the acts sought to be restrained.
Daquiri's III on Bourbon, Ltd. v. Wandfluh, 608 So.2d 222 (La. App. 5th Cir. 1992). The court found that, to comply with Louisiana law, the noncompetition agreement must specifically define the employer's business. The noncompetition agreement at issue was found invalid, in part, because it contained an overly broad definition of the employer's business.
Ultimately, in light of the difference of opinion in the various Louisiana appellate circuits, it will be up to the Louisiana Legislature or the Louisiana Supreme Court to determine whether a noncompetition agreement must properly define an employer's business in order to be valid and enforceable.
Can a Court Reform or Sever Objectionable Provisions in a Noncompetition Agreement in Order to Make It Valid and Enforceable?
The second and possibly more important issue which has been the subject of recent appellate decisions involves whether overly broad or objectionable provisions in noncompetition agreements can be reformed or severed by the courts in order to preserve the agreement's validity and enforceability.
Until quite recently, Louisiana courts did not permit an invalid or over broad noncompetition agreement to be reformed down, or its objectionable provisions to be severed, in order to permit the agreement to fall within the permissible scope of La. R.S. 23:921. An employer's inclusion of a "savings clause"-to the effect that if any provision in the contract was declared over broad said provision would be interpreted only to bind the employee to the maximum extent provided by law-has traditionally been found ineffective to save an invalid noncompetition agreement.
The traditional view was based on the fact that to allow reformation of an invalid noncompetition agreement (i) would run counter to the requirement of strict and narrow construction of the statute; (ii) would allow ambiguous noncompetition agreements and a degree of uncertainty as to the validity and scope of what an employee had agreed to; and (iii) would place courts in the business of either saving the contract or actually taking the responsibility of rewriting a contract that is not generally favored by Louisiana law.
During the last two to three years, however, Louisiana courts have increasingly permitted reformation and/or severance of contractual provisions in order to allow invalid noncompetition agreements to regain validity and enforceability. A summary of the cases which have initiated the new trend is as follows.
Amcom of Louisiana, Inc. v. Battson, 666 So.2d 1227 (La. App. 2nd Cir. 1996), rev'd, 670 So.2d 1223 (1996). The noncompetition agreement at issue described the prohibited geographic area as follows: "Shreveport or Bossier City, Louisiana, or in Caddo or Bossier Parishes, Louisiana, or within a seventy-five mile radius of Shreveport or Bossier City, Louisiana." The trial court found that, although the radius based element of the geographic area description was overly broad, this objectionable element could be stricken from the agreement, thereby leaving the noncompete to apply in the specified parishes (Caddo and Bossier). The Second Circuit rejected the trial court's reformation/severance of the objectionable geographic element and found the entire agreement unenforceable since it did not precisely comply with the geographic specificity required under the law. The Louisiana Supreme Court, without articulation of its reasons, reversed the Second Circuit decision and reinstated the trial court's ruling, thereby tacitly sanctioning the permissibility of reforming invalid noncompetition agreements and/or severing objectionable elements thereof.
Dixie Parking Service, Inc. v. Hargrove, 691 So.2d 1316 (La. App. 4th Cir. 1997). The court declared valid a noncompetition agreement which described the prohibited geographic area as "the Louisiana parishes set forth in a schedule attached to the Non-Competition Agreement, and within any parishes in which Dixie conducted business at the time of [the employee's] termination." The court deleted the nine parishes listed in the exhibit using the severability clause in the agreement and applied the agreement to Jefferson and Orleans parishes, which were the parishes where the employer operated its business at the time of the termination of the employee's employment.
Henderson Implement Co., Inc. v. Langley, 707 So.2d 482 (La. App. 3rd Cir. 1998). The court found that La. R.S. 23:921 permits reformation of a noncomplying provision contained in a noncompetition agreement. The court opined that such conclusion was supported even if the noncompetition agreement did not contain a savings or severability clause.
Moreno and Associates v. Black, 1999 La. App. LEXIS 1308 (La. App. 3rd Cir. 1999). The noncompetition agreement at issue listed the geographic territory as 24 specified parishes in Louisiana, two specified counties in Texas, and all oil and gas drilling or production platforms, rigs, or related entities located in the Gulf of Mexico outside of the boundaries of Louisiana and Texas. The court found this geographic area to contain some "unenforceable features," but held that the objectionable references could be severed (pursuant to the agreement's severability clause), leaving the balance of the contract enforceable.
It seems the trend to allow reformation and/or severance of objectionable provisions contained in noncompetition agreements is one that is here to stay. This development is of great benefit to employers who, prior to this judicial development, were only rarely finding their noncompetition agreements upheld by Louisiana appellate courts.
One thing is certain, the law - as it relates to noncompetition agreements in Louisiana - will continue to develop as each new appellate case is decided. Anyone interested in tracking the progress of this rapidly changing area of law will undoubtedly have a great deal to observe in the coming months.