By: Michael Balascio and Michelle Rutherford
Legal Corner, a recurring column in Silicon Bayou News, features a discussion of legal issues relevant to entrepreneurs and start-ups. Legal Corner is authored and edited by Michael Balascio and Michelle Rutherford, associates at the New Orleans-based law firm Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. Michael and Michelle have significant experience advising small companies and start-ups with strategic and legal decisions. They are both licensed to practice law in Louisiana – with Michael also licensed in Massachusetts and New York, and Michelle in California. Visit barrassousdin.com for more about their background and experience.
As a start-up venture grows, entrepreneurs should consider using non-compete agreements to protect themselves and their market share from competition by former employees. These agreements limit employees’ ability to engage in a similar business during the course of their employment and for an agreed-upon period of time after they leave. Non-compete agreements can protect start-ups from unexpected competition by former employees seeking to capitalize on information and contacts they’ve gained during their employment.
Louisiana is generally considered one of the more difficult states in which to enforce a non-compete agreement. Courts in Louisiana often refuse to enforce agreements that do not strictly comply with the requirements of the law. While there are many issues that affect the enforceability of a non-compete agreement, in considering how to use these agreements, pay particular attention to the following:
- Duration: Limit the length of the non-compete agreement to no more than two years. Agreements that seek to impose limitations on competition for more than two years usually won’t survive a court’s scrutiny.
- Scope: Specify the parishes where the non-compete will apply. The Louisiana statute governing non-compete agreements permits agreements in which an employee “agree[s] with his employer to refrain 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 parish or parishes.” La. R.S. 23:921(C). To be enforceable, non-compete agreements should specifically list the parishes in which the employee is agreeing to refrain from competing with the employer.
- Choice of law: In most cases, for a non-compete agreement executed in Louisiana, the agreement should specify that Louisiana law will apply. Many contracts contain choice-of-law provisions in which the parties agree which state’s law will apply in the event of a dispute. Under Louisiana law, however, a choice-of-law provision in a non-compete agreement that seeks to apply another state’s law will be void unless the employee has “expressly, knowingly, and voluntarily agreed to and ratified” the choice-of-law provision “after the occurrence of the incident which is the subject of the civil or administrative action.” It’s not difficult to imagine how hard it might be to get a former employee to consent, after a dispute has arisen, to apply the law of another state that would likely be more accommodating of restrictions on competition.
Note also that non-compete agreements can often apply to written agreements with independent contractors as well. Consult an attorney to understand all of the legal issues involved with non-compete agreements.
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