The Louisiana Legislature s Response to SWAT 24 Shreveport Bossier, Inc. v. Bond: The Noncompete Pendulum Swings Toward Debt Peonage. Will the Judiciary s Answer Achieve the Fragile Employer-Employee Balance?

• Author: Daniel S. Terrell
• Pages: 700-733

Page 700

I am deeply grateful to Professor Glenn G. Morris, Professor William R. Corbett, Alexandra G. White, and Alex J. Peragine for the encouragement and informed critiques they provided during this endeavor. I would also like to thank my family members and friends for their constant support and tolerance, especially my wife Chrysta.

Introduction

The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.^{1 2}

Noncompetition agreements, also referred to as covenants not to compete, are employer mechanisms that prevent or restrict employee competition upon termination or voluntary separation. Noncompetition agreements are widely used within a variety of industries and provide employers with an ability to protect valuable interests through injunctive remedies against competing former employees.³ The decision to enforce a noncompete agreement and, thus, to curtail individual freedom, is weighty. A valid noncompete agreement limits an individual's right to pursue a livelihood. Thus, the standards by which noncompete agreements are enforced must carefully balance employer interests and individual autonomy.

Louisiana, like the majority of other states,⁴ has a strong public policy disfavoring covenants that restrain individuals from competing with their former employers.⁵ Louisiana Revised Statutes 23:921 (the Page 701 "Statute")⁶ reflects this policy by providing that all noncompetition agreements are null and void except those that comply with the Statute.⁷ Section C of the Statute ("Section C") sanctions certain covenants not to compete between employers and employees.⁸ That section provides that an employee may agree with his employer to be restrained "from carrying on or engaging in a business similar to that 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."⁹

In SWAT 24 Shreveport Bossier, Inc. v. Bond,¹⁰ the Louisiana Supreme Court resolved a split in the circuit courts of appeal by interpreting Section C's phrase, "carrying on or engaging in a business[,]" to denote that a former employee could be restrained only from opening a competing business.¹¹ Thus, the court invalidated covenants not to compete that serve to restrict an individual from securing employment with a competitor of his former employer.¹²Two years later, the Louisiana legislature responded to this portion of the supreme court's decision in SWAT 24 by enacting an amendment Page 702 to the Statute (the "Amendment").¹³ The Amendment provides that a person who becomes employed by a competing business "may be deemed to be carrying on or engaging in a business" similar to that of his former employer.¹⁴

The Amendment's application is uncertain and potentially troublesome. Without question, SWAT 24 severely restricted the ability of Louisiana employers to enforce noncompete agreements; the Amendment reflects the legislature's intention to correct the perceived imbalance effected by that decision.¹⁵ However, the Amendment, rather than achieving equilibrium, has simply reversed the imbalance. By its terms, the Amendment allows employers to prevent former employees from accepting all employment positions with competitors, although, in many situations, no legitimate business interest justifying such restraint can be identified. Thus, in the wake of the most recent addition to Louisiana's ongoing employer/employee power struggle, unfinished business remains.

This comment seeks to equip Louisiana courts with a framework for equalizing the competing tensions associated with former employee competition. The approach offered is currently followed by the majority of other jurisdictions,¹⁶ and provides a tried and true method for achieving the necessary balance. Because noncompetition agreements exist to shield employers from the disadvantages arising from the possibility that employees will appropriate valuable trade information and customer relationships upon termination or voluntary separation, enforcement should be conditioned on the presence of a legitimate business interest in need of protection. An overwhelming number of states subscribe to that qualification,¹⁷ and Louisiana courts should mandate the same when applying the Amendment. Such restrictive enforcement is consistent with the just legislative intent underlying its passage, and rectifies the Amendment's potential for inequitable application.

Part I provides a historical review of Louisiana law on noncompete agreements, presents the appellate decisions abrogated by the SWAT 24 court, and examines the SWAT 24 decision. This section traces the volatile evolution of the law concerning noncompetition agreements so that the Amendment may be understood in its proper context. Against this backdrop, the Page 703 Amendment and its implications are set forth in Part II. During this discussion, particular focus is devoted to the broad discretion that the Amendment vests in the judiciary, and the divergent applications that the Amendment may receive in light of the legislature's failure to provide clear standards for its application. Part III identifies two possible judicial responses to the challenges posed by the Amendment. Because the two approaches offered in this section are, for the most part, mutually exclusive, they are best understood as an either/or proposal: Either revive and reinvigorate the pre-SWAT 24 decisions that sought to balance the competing interests at stake, or integrate the legitimate business interest requirement as a means of avoiding an inequitable or absurd result. Although the pre-SWAT 24 appellate decisions interpreting "carrying on or engaging in a business"¹⁸ could be revived, unlike the legitimate business interest requirement, they fail to both satisfactorily protect employers' justifiable concerns and implement the legislature's equitable intentions underlying the Amendment. Hence, it is submitted that Louisiana courts should endeavor to balance the competing tensions produced by former employee competition with reference to the universally accepted latter approach. Where legitimate business interests that have historically been protected by a noncompete agreement are at stake, logic and equity demand enforcement. Yet where no such interest may be ascertained or justified, individual autonomy and considerations of sound public policy tip the scales in favor of employee freedom.

I Background: Louisiana's Employment Power Struggles

The evolution of Louisiana's noncompetition law demonstrates not only a clash between the competing interests of individuals and businesses, but also a clash of public policies and interpretive philosophies. The following sections address the highlights in the development of the law regarding noncompete agreements in order to better understand the legislature's most recent addition to the power struggle.

A Historical Summary of Louisiana Statutory Law on Noncompetition Agreements

In 1934 the Louisiana legislature first articulated the state's policy as it related to noncompete agreements.¹⁹ Act No. 133 of 1934 Page 704 nullified "contracts [where employees agree] not to engage in any competing business for themselves or as the employee of another upon the termination of their contract with such employer."²⁰ Yet in 1962, and again in 1989, the legislature significantly altered Louisiana law by amending the pertinent statute to permit noncompetition agreements under certain conditions. As one commentator has suggested, it is likely that these alterations resulted from market pressures and successful lobbying by businesses.²¹

1. The 1962 Amendment and Its Judicial Gloss

The 1962 amendment generally prohibited noncompetition agreements, providing that contracts where "the employee agrees not to engage in any competing business for himself, or as the employee of another" are null and void.²² However, as an exception to this rule, the law in 1962 also provided that a noncompete agreement prohibiting an employee from "enter[ing] into the same business that [the] employer is engaged over the same route or in the same territory for a period of two (2) years" was valid and enforceable if the employer had incurred advertising or employee training expenses.²³Thus, Louisiana law sought to protect employers who expended advertising and training dollars by enforcing noncompetition agreements for this limited purpose.²⁴

Twelve years later the Louisiana Supreme Court abrogated the limited protections afforded to employers under the 1962 amendment. In Orkin Exterminating Company v. Foti,²⁵ the court narrowly interpreted the statute to hold that advertising or employee training expenses must be substantial in order for noncompete agreements...