Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Louisiana
The Louisiana statute that governs non-competition agreements provides that, in general, any contract or agreement that restrains anyone from exercising a lawful profession, trade or business of any kind is prohibited. The statute then specifically defines exceptions when the agreed upon restrictions are limited to specific geographic areas and last no longer than two years from the termination of employment. A 2006 amendment to the law, however, specifically prohibits automobile dealerships from restricting former salespeople from selling automobiles.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Louisiana courts have determined that the offer of initial or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that the terms do not comply with the statutory limitations of a two year maximum time limit and specifically identifiable parishes, municipalities or parts thereof where the employer carries on a like business.
Examples of non-compete agreements that Louisiana courts have found to be reasonable include:
- A 2-year restriction against a class action litigation assistance service agent where the court modified the 23 parishes listed in the covenant to the three parishes in which the employer actually did business.
- A 2-year, 9-parish restriction against a parking lot manager where the employer only sought enforcement in the two parishes where it operated when the employment terminated.
- A 2-year, 4-parish restriction against a former cellular telephone salesperson from “engaging in a radio-telephone services business similar to that of” the former employer.
The courts have found the following restrictive covenants unreasonable:
- A 2-year, 7-parish restriction against a former pipe testing and inspection business employee where the employer only did business in two of the named parishes.
- A 2-year, 5-parish restriction against a speech therapist from “carrying on or engaging in a business similar to that of” the employer because that language did not specifically define the employer’s business.
- A 1-year restriction against an ophthalmologist from competing within 10 miles of any office of the employer in the “greater New Orleans Area” because the specific territory covered was not sufficiently defined.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.