On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed new rule banning non-compete agreements.
The proposed rule seeks not only a ban of future non-compete agreements, but also the required rescission of existing agreements. FTC is seeking public comment for 60 days on the proposed rule before either modifying it or issuing a final rule. Serious legal challenges are expected if FTC continues these efforts to ban non-compete agreements nationwide.
Questions regarding the enforceability of non-compete agreements are currently left to the individual states. Louisiana’s non-compete law is crafted to create a “delicate balance” between business protection and protecting individuals. Non-compete agreements can be difficult to enforce in Louisiana. While enforceable, their use in Louisiana is limited to certain relationships and are only enforceable if drafted correctly.
The validity of non-compete agreements in Louisiana is controlled by a single statute. La. R.S. 23:921, Louisiana’s controlling statute, begins with a general prohibition against any agreement whereby anyone is restrained from exercising a lawful profession, trade or business unless one of the narrow exceptions to the general prohibition contained therein has been satisfied.
It provides: “Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade or business of any kind, except as provided in this section, shall be null and void.”
This opening paragraph of La. R.S. 23:921 reflects Louisiana’s strong public policy against these agreements. The exceptions to the general prohibition, for the most part, are based upon relationships. They include the employer/employee relationship, the sale of the goodwill of the business, the dissolution of a partnership, the franchisor/franchisee relationship and the employer/computer employee relationship. Additional exceptions added by the Louisiana Legislature in recent years are again based upon relationships. They include the corporation/shareholder relationship, the partner/partnership relationship, without consideration of any possible dissolution and the limited liability company/member relationship.
Because these agreements are in derogation of the common right to earn a living, Louisiana jurisprudence has strictly construed these exceptions to the general prohibition.
To fall within these exceptions, most Louisiana courts have required non-compete agreements to list the area of prohibition by parishes, municipalities or parts thereof, together with a term of no longer than two years from the date of termination of the relationship.
While not specifically contained within the statute, various Louisiana courts have also required that a valid non-compete agreement accurately define the business in which the individual is prohibited from competing. Other Louisiana courts deny the need for this additional non-statutory-based requirement. If the business is defined within the agreement, however, the definition should be narrow and accurate.
FTC’s current proposal appears primarily to be concerned with the employer/employee relationship. It is not clear how FTC’s proposed rule, if it takes effect, would deal with other relationships in Louisiana where non-compete agreements are allowed, including the partner/partner- ship relationship, the corporation/shareholder relationship and the limited liability company/member relationships. Moreover, the proposed rule has no immediate effect on non-compete agreements in Louisiana.
The proposed rule, if it becomes final, will have to survive serious legal challenges by the individual states and the business community before ever affecting the use of non-compete agreements nationwide. It is therefore suggested in today’s competitive marketplace that the use of non-compete agreements in Louisiana continue until further notice.
Jude C. Bursavich is a partner in the Baton Rouge, office of Breazeale, Sachse & Wilson L.L.P. He has over 30 years of experience in representing businesses against former employees throughout Louisiana.
For more information, visit bswllp.com or call (225) 381-8045.
