Enforcement of Non-Compete Agreements in LA Still an Uphill Battle

Under Louisiana law, “[e]very contact or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession trade, or business of any kind, except as [otherwise] provided [by law], shall be null and void.”  See La. R.S. 23:921(A)(1).  The Louisiana First Circuit’s recent decision in Envirozone, LLC v. The Tarp Depot, Inc., No. 2016 CA 0015, 2016 WL 7444091 (La. App. 1 Cir. 12/22/16), cert. denied, 17-0308 (La. 4/7/17); 218 So.3d 11, highlights the difficulty of enforcing non-compete agreements in Louisiana.  The court’s opinion is also a poignant reminder of the presumption against the enforceability of non-compete agreements in Louisiana.

Envirozone and Tarp Depot are competitors in the hazardous waste disposal business.  Envirozone is located in south Louisiana, while Tarp Depot is located in Houston, Texas.  Despite their competition, the two companies regularly purchased products from one another, particularly when one could produce the item at a lower cost.

Envirozone was concerned that public knowledge of its purchase of products from a competitor might erode its customer base in Texas.  In October 2007, Envirozone and Tarp Depot entered into reciprocal confidentiality agreements.  Thereafter, Envirozone began sharing detailed information on its sales volume and cost structure with Tarp Depot to further develop their business relationship.  Envirozone later discovered that Tarp Depot had disclosed to an Envirozone customer that Tarp Depot was manufacturing filter bags for Envirozone (although it is not clear whether this disclosure occurred before or after the parties entered their non-compete agreement).  As a condition of maintaining their relationship, Envirozone demanded that Tarp Depot enter into a separate, non-compete agreement.  In December 2007, the parties executed such an agreement prohibiting Tarp Depot from selling products to Envirozone customers in Texas.

In 2015, Tarp Depot sent a letter to Envirozone terminating both the confidentiality and non-compete agreements.  Tarp Depot then solicited Envirozone customers in Texas.  In response, Envirozone sued Tarp Depot in Louisiana state court for 1) a declaration that Tarp Depot had not properly terminated the agreements and 2) a preliminary injunction preventing Tarp Depot from selling products to Envirozone’s customers.

The trial court ruled against Envirozone on two separate grounds.  First, it ruled that Tarp Depot had validly terminated their agreements.  Second, it concluded that the non-compete agreement was invalid because Envirozone and Tarp Depot were not on “equal footing.”  As a result, the trial court denied Envirozone injunctive relief.

On appeal, the Louisiana First Circuit affirmed the trial court’s denial of injunctive relief to Envirozone.  Under Louisiana Revised Statute §23:921 any contract or agreement that restrains someone from exercising a lawful profession, trade, or business of any kind is presumed to be “null and void,” except where specifically provided by law.  Even where the law would allow two corporations to enter into such an agreement the companies must be on equal footing.

In La. Smoked Prod., Inc. v. Savoie’s Sausage & Food Prod., Inc., 696 So.2d 1373 (La. 1997), the Louisiana Supreme Court held the parties to a non-compete agreement are on equal footing when 1) both parties are equally bound to the contract, 2) the terms are fair to each party in all respects, 3) there is no disparity in the parties’ bargaining power, and 4) the prohibitions on competition are reasonable.  The First Circuit did not address the trial court’s ruling on this point, but concluded that Tarp Depot had effectively canceled the non-compete agreement pursuant to a clause in the agreement that allowed its termination when “‘in writing and signed by the party or parties affected.’”  Under Louisiana Civil Code article 2024, “[a] contract of unspecified duration may be terminated at the will of either party by giving notice, reasonable in time and form, to the other party.”  Because the non-compete agreement had no specific duration, the court reasoned that either party had the right to terminate the agreement by giving notice “reasonable in time and form.”  The court determined that Tarp Depot’s termination letter satisfied the reasonableness requirements of article 2024.

Regarding the confidentiality agreement, the court stated that under Louisiana jurisprudence an agreement not to use confidential information was enforceable only if the information used was, in fact, confidential.  In this case, Envirozone had failed to indicate what specific confidential information, if any, Tarp Depot had in its possession that would give Tarp Depot a competitive advantage.

Yet the court was not unanimous in its decision.  In a concise dissent, Chief Judge Vanessa Whipple suggested that the majority had overlooked obvious facts in favor of the injunctive relief requested by Envirozone.  For example, Judge Whipple found that the parties were on equal footing because although Tarp Depot was a new and relatively small company, its founder had over twenty-six years of experience that included the recent sale of another hazardous waste disposal company for three million dollars.  From that prior company Tarp Depot had a built-in customer base.  As such, Judge Whipple would have confirmed the validity of the non-compete agreement.

Judge Whipple also concluded that Tarp Depot had not validly terminated the non-compete agreement because the terms of the agreement required any cancellation to be signed by the party or “parties affected” (emphasis added).  Judge Whipple reasoned that “[c]ertainly, the termination of the non-compete agreement herein affects both parties . . . .  Accordingly, to terminate the agreement both parties had to sign, which undisputedly was not done.”  Judge Whipple further suggested that the majority’s rationale based on the notice requirements of article 2024 of the Civil Code was flawed.  Envirozone received Tarp Depot’s letter the day before the purported cancellation of the non-compete agreement.  “I am unable to find that this constitutes ‘reasonable advance notice,’” Judge Whipple stated.

Judge Whipple did not agree that Envirozone had failed to indicate what confidential information Tarp Depot had in its possession.  Both parties testified that the purpose of the confidentiality agreement was to ensure Envirozone’s customers would not learn that Envirozone was purchasing products from Tarp Depot.  Tarp Depot had acknowledged that it learned about Envirozone information that Tarp Depot would not have shared with a competitor without a confidentiality agreement.  This admission combined with the parties’ purpose for entering into the confidentiality agreement was sufficient to support Envirozone’s request for an injunction, Judge Whipple concluded.

The Envirozone case demonstrates the uphill battle in enforcing non-compete agreements in Louisiana even when facts supporting injunctive relief may be “readily apparent from the record.”  As Judge Whipple observed, “the rationale for the confidentiality agreement is readily apparent from the record.”  A company hoping to protect its customer base through a non-compete agreement must not only be concerned about its competitors, but must also be familiar with Louisiana’s non-compete laws.

For more information on enforcing a non-compete agreement or confidentially agreement in Louisiana, please contact Donna Currault or Micah Zeno.

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