Federal 5th Circuit Underscores Need For Employers’ Careful Drafting And Implementation Of Non-Compete Agreements In Louisiana
By: Norman A. Mott, III
Non-compete agreements in Louisiana are strictly regulated by La. R.S. §23:921. Louisiana has a strong history of not favoring or enforcing non-compete agreements. The language of the statute prohibits all non-compete agreements on its face before providing a list of exceptions detailing acceptable circumstances for valid non-compete agreements.
A recent opinion from the Fifth Circuit Court of Appeals found a non-compete agreement entered into between a prospective employer and a job applicant, and thus prior to the start of an employer-employee relationship, was invalid because the “employment” relationship required by La. R.S. 23:921(C) did not exist at the time of the agreement.[1]
Non-compete agreements entered into after the termination of an employer-employee relationship are also invalid because the relationship did not exist at the time of the agreement. For instance, Louisiana’s Third Circuit Court of Appeal recently found that a non-compete agreement signed by an employee in order to receive a severance payment was invalid because the employer informed the employee nearly a month prior, during a lunch meeting, that his employment was terminated effective immediately.[2].
La. R.S. §23:921(C) provides that non-compete agreements entered into between independent contractors and businesses are valid if the following circumstances are met:
- the work is performed by the independent contractor pursuant to a written contract
- the non-compete agreement prohibits the independent contractor from engaging in a business similar to that of the other party to the agreement (as though the independent contractor were an employee)
- the non-compete agreement identifies by name the parishes or municipalities to which it applies
- the non-compete agreement does not exceed two years from the date of work last performed under the written contract
Judicial interpretation has determined that the non-compete agreement must narrowly and accurately define the type of business prohibited in order to be enforced.
Recently, the Fifth Circuit found that an independent contractor was not bound by a non-compete agreement she signed with a healthcare marketing company because it prohibited her from working for any business engaged to any extent in the business of the healthcare marketing company, “which includes, but is not limited to, the marketing of medical services for chiropractic clinics and physicians.” The Court found that the inclusion of the emphasized language, in addition to the broad definition of the company’s business, wrongly prohibited the independent contractor from engaging in other business that are not similar to that of the company.[3] The agreement additionally defined the geographic scope of the prohibition to include any parish in which the healthcare marketing company had a contract and/or an existing marketing relationship with a clinic, which the Court held was also overly broad. Id.
For any business looking to have employees sign a non-compete agreement, the existence of a clear employer-employee relationship is key to enforcing that agreement down the road. Non-compete agreements from before or after the relationship will likely not be found valid by Louisiana state or federal courts. There is an open question as to whether non-compete agreements signed by independent contractors prior to beginning work are required. Best practices however after Rouses’ suggests an employer should obtain consent after work has begun.
Additionally, when entering into a non-compete agreement with an independent contractor, be sure the work is covered by a written contract, the agreement doesn’t exceed two years from termination, and that the language of the non-compete agreement is narrow and accurate, both in describing your business and the parishes and/or municipalities in which you operate.
[1] Rouses Enters., L.L.C., v. Clapp, 2022 U.S. App. LEXIS 5980 (5th Cir. Mar. 8, 2022).
[2] Setpoint Integrated Sols., Inc. v. Kiteley, 21-322 (La. App. 3 Cir. 01/26/22); 2022 La. App. LEXIS 97.
[3] Advanced Med. Rehab, L.L.C. v. Manton, 21-315 (La. App. 5 Cir. 02/23/22); 2022 La. App. LEXIS 275.