Louisiana Restrictive Covenant Signed by C-Suite Employee After Termination Is Unenforceable, State Appeals Court Holds

In Louisiana, restrictive covenants—known locally as “no competes”—are unenforceable by statutory default. The applicable statute declares, “Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind … shall be null and void.” However, the same statute creates a number of exceptions to permit an enforceable restrictive covenant, provided the agreement strictly complies with the requirements for a particular exception.

One exception, based on the employer-employee relationship, authorizes an employer to enforce an agreement preventing a former employee from working for a competing business or soliciting customers after the employee leaves employment with the first employer. For such an agreement to be enforceable, however, the employee must have been currently employed by the employer when he or she signed the agreement. No-compete clauses are a common feature of severance agreements, but they will likely be found to be invalid if a severance agreement with restrictive covenants is tendered and signed after the termination of employment.

This was a hard lesson learned by the former employer in Setpoint Integrated Solutions, Inc. v Kiteley, a decision handed down by the Court of Appeal of Louisiana. In Kiteley, the former employer won a jury verdict enforcing a no compete against Joseph Jobe, a former senior executive who allegedly launched a competing business while still employed by Setpoint Integrated Solutions, Inc. The jury awarded Setpoint monetary damages based on the breached agreement.

The issue on appeal was whether a no-compete provision negotiated as part of a severance package after the termination of Jobe’s employment was enforceable. The appellate court held that current employment was an essential requirement to obtain an enforceable agreement. Because the record indicated that Jobe had agreed to the no-compete obligation after his separation from employment, the agreement was invalid.

It was undisputed that Jobe had a lunch meeting with Jack Guidry, the president and chief executive officer of Setpoint’s parent company on October 30, 2015. During that meeting, Guidry informed Jobe of his employment termination “effective immediately.” Thereafter, Setpoint and Jobe negotiated a severance arrangement, which resulted in a “Separation Agreement and General Release” dated November 25, 2015, containing a no-compete agreement and a waiver of Jobe’s potential claims against Setpoint. The Separation Agreement recited that Jobe’s termination date was October 31, 2022. The Separation Agreement paid Jobe a severance payment, prohibited him from working for a business that competed with Setpoint, and required him to refrain from soliciting Setpoint’s customers.

On appeal, Jobe contended that the no-compete and no-solicitation obligations in the Separation Agreement were invalid because he was not employed by Setpoint when he signed the November 25, 2015, agreement. Setpoint argued that instead of terminating Jobe’s employment on October 31, 2015, it had merely informed him that day that his employment would be terminated in the future. Setpoint further argued that Jobe’s employment termination did not occur until after he signed the Separation Agreement on November 25, 2015.

The appellate court rejected Setpoint’s arguments attempting to move Jobe’s employment termination date to November 25, 2015, for two reasons. First, the court cited ample record evidence coming from Setpoint’s documents and witnesses showing Jobe’s termination date was October 31, 2015. Second, the court held that whatever evidence supported a later termination date was contrary to Louisiana’s rule of strict construction of restrictive covenants, so it resolved any factual issue about Jobe’s employment termination date in favor of invalidating the restrictive covenants. Accordingly, the court reversed the judgment in favor of Setpoint and rendered judgment in favor of Jobe.

Key Takeaways

 Setpoint joins a list of Louisiana cases that may serve to remind employers of the hazards and risks associated with drafting and enforcing no-compete agreements in Louisiana. Where Setpoint confirmed that an employee’s signing a no-compete agreement after termination invalidates the agreement, a March 2022 opinion from the U.S. Court of Appeals for the Fifth Circuit invalidated a no compete signed by an employee before he actually started employment.

In light of these rulings, employers may want to make sure that an individual is actually employed when he or she signs an agreement containing noncompetition and nonsolicitation obligations.

And as 2023 gets underway, employers may want to revisit the geographic restriction requirements of restrictive covenants in Louisiana to make sure their lists of parishes and counties currently match where their companies are doing business for purposes of enforceable post-employment restrictions.