Author Davis Allgood is a member of the Jones Walker law firm’s Business & Commercial Litigation and Healthcare Practice Groups. He is also a Partner at the firm and a contributor to at Trade Secret Insider, which chronicles legal insights on trade secrets, non-competes, computer fraud and confidential data theft. This article was originally posted on tradesecretsinsider.com.
The U.S. District Court for the Eastern District of Louisiana recently held that the Federal Arbitration Act preempts Louisiana’s non-compete statute (La. R.S. 23:921). Among other things, this statute invalidates forum selection clauses in employment agreements unless the employee agrees to or expressly ratifies the clause after the incident that gives rise to the dispute. Though the statute expresses a strong public policy of Louisiana, the Eastern District found that federal courts must enforce otherwise valid arbitration clauses that select a particular forum—even if the clauses violate Louisiana’s non-compete statute.
Background. In Sherman v. RK Restaurant Holdings, Inc., No. 13-6054 (E.D. La. 2014), a former employee sued his former employer in state court in New Orleans, where the employee had worked at the employer’s restaurant. The employer removed the case to the Eastern District, and then moved to stay the lawsuit pending arbitration. The employer claimed that an arbitration clause in the employment agreement required that the parties arbitrate their dispute in either Lufkin or Nacogdoches, Texas.
In response, the employee argued that Lufkin and Nacogdoches, Texas, were each more than 350 miles away from his home in New Orleans and that enforcing the arbitration clause would be unconscionable. The employee also argued that the clause was invalid under La. R.S. 23:921 because he had not agreed to or ratified the forum selection clause after the dispute arose. The employee pointed out that the United States Supreme Court had said in M/S Bremen v. Zapata Off–Shore Company, 407 U.S. 1 (1972) that contractual forum selection clauses “should be held unenforceable if enforcement would contravene a strong public policy of the forum in which the suit is brought.” According to the employee, Louisiana has such a policy, expressed in La. R.S. 23:921.
Rationale. The Eastern District ultimately found that the Federal Arbitration Act preempted La. R.S. 23:921 and required the court to enforce the arbitration agreement as written.
The court agreed that the arbitration clause “contains a forum selection clause that violatesLa. R.S. 23:921” because it calls for a Texas forum. But the Federal Arbitration Act says that an arbitration clause in a contract involving interstate commerce “shall be valid, irrevocable, and enforceable, save upon such grounds exist at law or in equity for the revocation of any contract.” Thus, the court noted, “as a matter of federal law, arbitration agreements and clauses are to be enforced unless they are invalid under principles of state law that govern all contracts.”
From there, the court concluded that the arbitration clause would be valid under generalcontract law principles in Louisiana. Consequently, the FAA required the court to enforce the arbitration clause, notwithstanding its conflict with La. R.S. 23:921.
The Take–Away. Louisiana has a strong public policy that limits the enforceability of forum selection clauses in employment agreements. An employer who expects to be able to use a non-Louisiana forum to enforce a non-compete agreement or another employment-related agreement with a Louisiana employee may find its efforts blocked by La. R.S. 23:921. However, an otherwise valid arbitration clause covered by the FAA may be enforceable, even if it would violate the restrictions in La. R.S. 23:921 on forum selection clauses.