A recent Louisiana non-compete case involving two appellate decisions addresses three significant issues in non-compete litigation: 1) whether a former employee’s referral of customers to a new employer violated the employee’s non-solicitation of customer covenant; 2) the consequences of violating the covenant and court injunction; and 3) the appropriate standard of proof for contempt proceedings.

Summary of decision. Five years into her employment with Acadian Cypress & Hardwoods as a sales representative, Acadian had Joy Stewart sign a non-solicitation agreement.  It provided that for two years after her employment terminated, Stewart would not solicit Acadian’s customers in more than 20 specified Louisiana parishes, eight identified counties in Mississippi, and two specific counties in Alabama.  Several years later, she resigned from Acadian and went to work as a sales representative for one of its competitor.   

Acadian sued Stewart and obtained a preliminary injunction against soliciting sales in the restricted territory.  The new employer’s headquarters was in one of the restricted parishes, and she lived in another one.  Because of the covenant and injunction, she scrupulously avoided selling her new employer’s products to Acadian’s customers, or even calling on them.  However, she phoned other customers from her home, and she had materials shipped to them.  Further, if Acadian’s customers contacted her, she invited them to communicate with her new employer’s other salespersons or its warehouse.  Acadian accused her of violating the injunction and committing contempt of court. The trial court agreed with Acadian.  She appealed but, in a 2-1 decision last week, the Louisiana Court of Appeal affirmed.  Acadian Cypress & Hardwoods, Inc. v. Stewart, 2012 CA 2002 (La. App., 1st Circ., Sept. 3, 2013) (McClendon, J.) (not for publication).

The first appellate court ruling.  This case went to the Court of Appeal twice.  The first time was when Stewart appealed from issuance of the preliminary injunction.  She argued that the covenant was ambiguous and lacked consideration.  Those arguments were rejected.  Perhaps because the applicable statute provided a temporal limitation on restrictive covenants (two years) but was silent with respect to the maximum allowable territory, she did not take issue — at the injunction hearing or on appeal — with the breadth of the non-solicitation’s territorial restriction.

The injunction order was affirmed.  Case No. 2012 CA 1425 (La. App., 1st Circ., Mar. 22, 2013) (McClendon, J.) (also not for publication). Judge Whipple, concurring in the result, expressed concern with regard to “the extensive geographic area set forth in the agreement, which I find comes perilously close to rendering such a contract unenforceable as an overly broad restriction on the interests of free enterprise.  However, this issue was not specifically challenged on appeal.”  Judge Whipple did see merit in Stewart’s argument regarding a lack of consideration for the covenant, and cited “the well-reasoned dissenting opinion” in an earlier Court of Appeal case, but concluded that the court was required to follow the majority’s ruling in that older case to the effect that continued employment was adequate consideration. 

The second appellate court ruling.  The second appeal was taken from Stewart’s appeal of the finding of contempt.  After an evidentiary hearing regarding the motion for contempt, the trial court ordered her “to pay all costs regarding the motion.”  No conditions were attached to the order, apart from paying those costs, and there was nothing else that she was required to do to purge herself of the contempt. 

In a 2-1 decision on her appeal, the majority voiced misgivings about the proceedings below but nonetheless again affirmed the lower court.  The initial problem dealt with was whether Stewart was properly charged with criminal contempt for which the relevant standard of proof is “beyond a reasonable doubt.”  A “preponderance of the evidence” would suffice for civil contempt.  The majority reasoned that because the judgment below ordered payment of court costs and “is an unconditional penalty, one that Ms. Stewart cannot affect or end, it is criminal in nature.”     

The majority agreed with Stewart that the trial court’s interpretation of the injunction — seemingly prohibiting her from (a) speaking with customers outside the area by phone from her home (which was within the restricted territory), and (b) asking the home office (also within the territory) to send materials to those customers — “could effectively prevent her from engaging in her business anywhere in the United States.”  Still, the majority found that referring Acadian’s customers to her new employer “constituted a violation of the non-solicitation provisions of the injunction.  Therefore, based on the record before us, we conclude that any rational trier of fact could find the essential elements of criminal contempt beyond a reasonable doubt.”  The dissenting judge did not write an opinion.

Takeaways.  Stewart may have made two mistakes.  First, at the injunction hearing, she could have challenged the scope of the non-solicitation covenant’s territorial restriction.  Her challenge below might or might not have succeeded, but at least she would have preserved the issue for appeal.  Second, at the time the injunction was issued, and before engaging in any sales activities, she probably should have insisted on clarification with respect to permissible and impermissible conduct. In sum, the case demonstrates that there can be serious consequences for violating a customer non-solicitation provision, including criminal contempt.