Many recent decisions concerning the enforceability of a covenant not to compete in a strictly employment context (as contrasted with a covenant arising out of the sale of a business, which is a very different situation) seem to focus on the following three principles: (a) ascertain the permissible scope set out in all relevant legislative enactments; (b) assign to the ex-employer the burden of producing evidence that the covenant fits within the statutory limits and is no broader than necessary to protect the ex-employer’s legitimate business interests; and (c) if the ex-employer meets its burden, assign to the former employee the burden of persuading the trier of fact that enforcement would be oppressive. These principles are not always applied. Even when they are present, they sometimes lurk beneath the surface and are not always easy to discern in or from court rulings. Moreover, judicial precedents within a given jurisdiction – to say nothing of those from diverse locales – often appear irreconcilable. As a result, lawyers must be very cautious in providing advice and predictions to an employer, particularly one with operations in several states, regarding the enforceability of covenants.
Judicial interpretations of state statutes run the gamut from highly protective of ex-employers to virtually stripping covenants of any effectiveness. (The American Law Institute’s current project drafting Restatement (Third) of Employment Law could perform a real service by trying to bring order out of this chaos.)
Louisiana is a state that has “a strong public policy disfavoring non-competition agreements between employers and employees.” Vartech Systems, Inc. v. Hayden, 951 So.2d 247 (La. App. 2006). Yet, a recent Louisiana appellate court decision, Ticheli v. John H. Carter Co., Case No. 43,551-CA (La. Ct. of Appeals, Sept. 17, 2008), provided protection to an ex-employer under surprising circumstances. In Ticheli, the Court of Appeals reversed a trial court and upheld the enforceability of a non-compete clause in an employment agreement even though (a) the clause contained a very broad geographical and subject-matter scope, (b) the non-competition requirement was to last for two years, (c) the employee was terminated by the employer seeking to enforce the clause, and (d) the issue of enforceability was not raised in the trial court.
Brian Ticheli went to work for John H. Carter Co. (“Carter Co.”) in February 2006 in the company’s West Monroe, Louisiana branch. Carter Co. sold and repaired valves, pump regulators, filtration equipment and related instrumentation for industrial uses. Ticheli’s job title was “Valve Repair Coordinator.” Although his duties were not described in the reported decision, one might surmise from the job title that he was not at the top of the managerial totem pole. He signed an employment agreement containing a clause which stated, in relevant part, the following:
While employed by the Employer, and for a period of two years from … the termination of Employee’s employment with Employer … with cause, Employee shall not : (a)(1) carry on or engage in a business similar to Employer’s Business within the Territory, (2) engage or participate, directly or indirectly, whether as proprietor, partner, joint venturer, employer, employee, consultant, office or agency … of any corporation that carries on or engages in a business similar to Employer’s business within the Territory, or (b) solicit or cause to be solicited any customers or clients of Employer.
The phrase the “Territory” was defined in the agreement by naming each and every parish in the state of Louisiana and certain counties in Arkansas, Mississippi, Alabama and Florida. There was no elaboration of the phrases “with cause” or “business similar to Employer’s Business.”
In June 2007, Ticheli sent an offensive e-mail to several co-workers. The e-mail violated Carter Co.’s “Sexual Harassment Policy,” and the employment agreement lists “Offensive Behavior” as a reason for termination. He was discharged, and shortly thereafter he went to work for BC Industrial Sales, LLC (“BC”), a company that sells, maintains and repairs valves and related instruments throughout Louisiana and in parts of nearby states. From time to time, BC and Carter Co. have purchased products from each other as needed in order to complete a sale and have visited the same customers seeking business, and the two companies once discussed merging.
Ticheli sued Carter Co., asserting that he was terminated without cause and that, therefore, the covenant was invalid. Carter Co. responded that his termination was for cause and sought an injunction against his employment by BC. After conducting a trial, the lower court agreed with Carter Co. that Ticheli’s conduct was cause for termination and enjoined him from violating the covenant. However, holding that BC and Carter Co. were not competitors, the court declined to preclude Ticheli from working for BC. Carter Co. appealed.
The Court of Appeals first addressed the issue of whether BC was engaged “in a business similar to [Carter’s] Business within the Territory.” The trial court’s narrow interpretation of Carter Co.’s business, and emasculation of the requested injunction for that reason, was rejected since both companies sell valves and instrumentation within Louisiana.
Ticheli’s second contention, that the trial court erred in finding that he was not terminated for cause, was given short shrift. Next, the appellate court held that the applicable Louisiana statute permits a non-compete clause like the one at issue in this case. Louisiana R.S. 23:921 expressly authorizes employment agreements restraining an employee “from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified [geographical area] so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment.” Prior Louisiana cases held that each parish where competition is to be prohibited must be identified in the covenant, hence Carter Co.’s inclusion in the agreement of the name of every parish in the state. Although the words “similar” and “like” business as used in the statute are not defined, the appellate court reasoned that since both companies sell diverse types of industrial valves and instrumentation, they are engaged in “similar” and “like” businesses. The result, naturally, was that the trial court’s decree was modified to the extent that the entire requested injunction was issued.
What is most confusing about this opinion is the appellate court claim that the validity of the non-compete cause was not raised at the trial level, when in fact that appears to have been a substantive portion of the trial court’s opinon: “The validity of the non-compete cause was never raised at trial, and therefore is not an issue on this appeal. Nevertheless, we find the non-compete clause is enforceable.” Perhaps the appellate court added this to avoid a remand, another trial, and another appeal. Chief Judge Brown concurred in the result, but nonetheless opined on the enforceability of the non-compete using the traditional analysis for non-competition agreements. Judge Brown wrote:
Ticheli was employed by [Carter Co.] simply as a Valve Repair Coordinator in the West Monroe branch. He had no particular knowledge, contacts or confidential information that would disadvantage [the company] outside of the West Monroe area. There is a strong public policy not to lock former employees out of their ability to earn a living. Even though [the company] operates statewide, it appears in the circumstances of this case that such a blanket prohibition is overly broad. A savings clause in the non-compete contract would allow a reformation to make the geographic limitation conform to the parishes where Ticheli actually worked.
Unlike Judge Brown’s concurrence, the majority’s decision seems to run counter to two of the three principles set forth at the outset of this post. First, the court did not require Carter Co. to show a bona fide need for enforcement of the non-compete before being awarded an injunction. Second, the court did not examine the hardship to Ticheli as a potential a mitigating factor. So, although the Court found the covenant enforceable, it gave neither the parties nor readers any indication why.