Real Rights of Noncompetition: Louisiana Public Policy and the Civil Tradition

• Author: Alex Hotard
• Position: J.D./D.C.L., 2017, Paul M. Hebert Law Center, Louisiana State University.
• Pages: 1209-1248

Real Rights of Noncompetition: Louisiana Public Policy and the Civil Tradition INTRODUCTION In 1985, James and Catherine Olinde, co-owners of a ten-acre tract of land, decided to open a restaurant. 1 They set aside four acres for their new enterprise, Ralph & Kacoo’s Restaurant, and planned to sell the remainder. 2 The Olindes understood, however, that when any business sells land there is a risk that it will fall into a competitor’s hands. 3 The couple protected themselves from this risk by including a noncompetition clause in their act of sale: the land was sold to Anthony Diez on the condition that it could not be used for the operation of a seafood restaurant until 60 months after the sale. 4 Shortly after the sale, Mr. Diez leased his new land to a third party who promptly opened a seafood restaurant, and the Olindes brought suit. 5 This seemingly simple contract dispute belies a labyrinth of jurisprudence, doctrine, and law, all surrounding Louisiana’s real rights of noncompetition. States universally recognize and regulate noncompetition agreements to balance the needs of business with the needs of the public. 6 The arrangements can take a direct approach by restraining a person from participating in commerce 7 or an indirect approach by restraining the commercial use of a particular property. 8 The latter approach often arises in lease agreements or sales of land. 9 In many states, the breach of these land-restricting agreements will give rise to action against not only the owner who made the agreement, but also any lessees or subsequent Copyright 2017, by ALEX HOTARD. 1. R & K Bluebonnet, Inc. v. Patout’s of Baton Rouge, Inc., 521 So. 2d 634, 635 (La. Ct. App. 1988). 2. Id. 3. Id. 4. Id. 5. Id. 6. E.g., LA. REV. STAT. § 23:921 (2017); MONT. CODE ANN. § 28-2-703 (2017); TEX. BUS. & COM. CODE ANN. § 15.50 (West 2015). 7. LA. REV. STAT. § 23:921 (permitting such agreements within certain constraints). 8. Mark S. Dennison, Lessee’s Enforcement of Covenant Prohibiting Lessor’s Use or Lease of Other Premises for Use in Competition With Lessee's Business, in 95 AM. JUR. PROOF OF FACTS 467, 476 (2007). 9. Id. 1210 LOUISIANA LAW REVIEW [Vol. 77 purchasers of the affected property. 10 In Louisiana, however, it is not so easy to enforce these land-restricting noncompetition agreements against third parties. 11 This difference is due to Louisiana’s division of rights and their corresponding obligations into two categories: real and personal. 12 Only real rights, such as the right of ownership, 13 follow property and can be enforced against all third parties. 14 Personal rights, such as the right to collect payment, follow persons and can only be enforced against third parties who have explicitly agreed to assume the obligation. 15 The distinction between real and personal rights is important for businesses seeking to limit the use of property because it is far more effective to bind everyone who might ever be associated with the property than to bind only the current owner of the property. 16 Savvy businesses, such as Ralph & Kacoo’s Restaurant, 17 will therefore attempt to create “real rights of noncompetition” 18 in their land-use-restricting contracts. 10. See Winn-Dixie Stores, Inc. v. Dolgencorp, LLC, 746 F.3d 1008, 1026 (11th Cir. 2014) (finding lease agreements between the plaintiff and various lessors in Florida that limited the space other tenants could use for the sale of groceries created rights that were enforceable against co-tenants). 11. See, e.g., id. Winn Dixie sued to enforce lease agreements prohibiting competition across several states. Id. Winn Dixie’s contracts were enforceable against its fellow lessors in Florida, but they were not enforceable against third parties in Louisiana because of Louisiana’s distinction between real and personal obligations. Id. at 1031. 12. See LA. CIV. CODE art. 1763 cmt. b (2017) (stating that a real right is a right enforceable against the whole world rather than against a single person); id. art. 1763 (defining real obligations as those incidental to real rights). The terms “personal right” and “personal obligation” are not defined explicitly in the Code, but they refer to those civil rights and obligations that are not “real rights” or “real obligations.” See, e.g., id. art. 734 cmt. b; id. art. 1764 (establishing that personal obligations are transferred only by explicit assumption of the personal obligation by an obligor’s successor). 13. Id. art. 476 cmt. b. 14. Id. art. 1763 cmt. b (stating that a real right is a right enforceable against the whole world rather than against a single person); id. art. 1764 (establishing that real rights are transferred by transfer of an associated property). 15. See id. arts. 1764, 18211823; id. art. 1764 cmt. d. 16. This Louisiana quirk has already caused problems for at least one unwary business. See Winn-Dixie, 746 F.3d at 1031. 17. R & K Bluebonnet, Inc. v. Patout’s of Baton Rouge, Inc., 521 So. 2d 634, 635 (La. Ct. App. 1988). See also Meadowcrest Ctr. v. Tenet Health Sys. Hosps., Inc., 902 So. 2d 512, 514 (La. Ct. App. 2005). 18. Because Louisiana calls any rights that run with property and affect third parties “real rights,” see LA. CIV. CODE art. 1763 cmt. b; id. art. 1764, the term 2017] COMMENT 1211 The Louisiana Supreme Court has affirmed that land-restricting noncompetition agreements can create personal rights and obligations, 19 but the Court has yet to address whether parties can create real rights of noncompetition. 20 Other Louisiana courts have generally upheld real rights of noncompetition in the form of predial servitudes, 21 but these decisions rest on cursory legal analyses that gloss over the essential elements of predial servitudes. 22 Predial servitudes that restrict trade can provide protection to businesses and encourage the sale of property, but there are two major obstacles to court enforcement of these servitudes. First, most predial servitudes of noncompetition are theoretically unsound under the Louisiana Civil Code and civil law doctrine. 23 Second, these arrangements can permanently remove property from trade, 24 even to the point that businesses might purchase their own regional monopolies given enough wealth. 25 If the Louisiana legislature approves of real rights of noncompetition, there must be legislation to authorize and regulate them. 26 “real right of noncompetition” is a fitting description for the rights and obligations discussed in this Comment. For reasons established in Part I of this Comment, this term is interchangeable with “predial servitude of noncompetition.” See infra Part I. 19. See, e.g., Leonard v. Lavigne, 162 So. 2d 341, 343 (La. 1964). 20. A. N. YIANNOPOULOS, PREDIAL SERVITUDES § 6:5, in 4 LOUISIANA CIVIL LAW TREATISE 357 (4th ed. 2013). 21. E.g., Richard v. Broussard, 378 So. 2d 959, 968 (La. Ct. App. 1979); R & K Bluebonnet, 521 So. 2d at 635. 22. See infra Parts II.B.1., III.B. 23. See infra Part III.A. 24. See infra Part III.B; see also Meadowcrest Ctr. v. Tenet Health Sys. Hosps., Inc., 902 So. 2d 512, 514 (La. Ct. App. 2005). 25. See LA. CIV. CODE art. 697 (2017) (establishing that parties can contract to create predial servitudes upon their land or to benefit their land). Unless specifically excluded, things, including incorporeal property rights, may be bought and sold in Louisiana through contracts of sale. Id. art. 2448. Money, sometimes called wealth, can be used to purchase things in a contract of sale. Money, BLACK’S LAW DICTIONARY 1096 (9th ed. 2009); LA. CIV. CODE arts. 2448, 2464. No language in article 697 or any other code article prohibits parties from granting predial servitudes on their property in exchange for money in a contract of sale. It follows that persons with sufficient wealth could purchase a large number of servitudes that restrict competition. A glut of servitudes precluding trade, all located within an area and benefitting the same estate, would make the owner of the dominant estate the only person who could operate a particular business in that area. 26. See infra Part IV. 1212 LOUISIANA LAW REVIEW [Vol. 77 This Comment explores the enforceability of real rights of noncompetition in Louisiana. Part I provides background on Louisiana real rights and personal obligations. Part II examines how Louisiana courts have embraced certain real rights of noncompetition. Part III argues that Louisiana’s enthusiastic acceptance of these rights oversimplifies the law of real rights and ignores important public policy concerns. Part IV proposes a legislative solution to these problems and attempts to reconcile legitimate business interests with the best interests of the state. I. LOUISIANA RIGHTS: REAL AND PERSONAL Louisiana divides obligations and rights into two categories: real and personal. 27 A real right attaches to a piece of property and grants direct authority over the thing; 28 this authority can be enforced or asserted against any and all persons in the world. 29 Because the real right is attached to property, it is automatically transferred to a successor in interest to the property. 30 In contrast, a personal obligation conveys authority over one or more persons, the obligors, 31 and the obligation may only ever be enforced or asserted against the obligors themselves. 32 The transferability 27. See LA. CIV. CODE art. 1763 (defining real obligations as those incidental to real rights); id. art. 1763 cmt. b (stating that a real right is a right enforceable against the whole world rather than against a single person); id. art. 1764 (establishing that real rights are transferred by transfer of an associated property where personal obligations are transferred only by assumption of the personal obligation by a successor). 28. Id. art. 1764; id. art. 476 cmt. b. 29. Id. art. 1763 cmt. b. 30. Id. art. 1764. 31. Id. art. 1756. See also id. art. 476 cmt. b. The law distinguishes between real rights that attach to property directly and...