• Maximize The Protection Offered By Louisiana's Non-Compete Law When Buying a Louisiana Business
  • July 20, 2016 | Author: Jude C. Bursavich
  • Law Firm: Breazeale, Sachse & Wilson, L.L.P. - Baton Rouge Office
  • When purchasing an existing Louisiana business, a buyer should make sure as part of the sale that the seller doesn’t immediately open up a competing business. How do you do so under Louisiana law? How long can a buyer be protected from competition from the seller? While Louisiana law on non-compete agreements only allows an agreement not to compete for two years after the sale of the goodwill of a business, there are practical ways to extend this two year time period. To do so, however, Louisiana law must be carefully followed to ensure a valid non-compete agreement.

    The validity of non-compete agreements in Louisiana is strictly controlled by a single statutory provision (La. R.S. 23:921) and its judicial interpretations. La. R.S. 23:921(A)(1) begins with the 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 is 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.

    Louisiana has long had a strong public policy against non-compete agreements. Because these agreements are in derogation of the common right -- the right to work in your chosen field -- Louisiana jurisprudence has narrowly construed the exceptions to the general prohibition listed in La. R.S. 23:921. These exceptions, for the most part, are based upon relationships. The list of exceptions include the employee/employer relationship, the sale of the goodwill of a business, the dissolution of a partnership, the franchisor/franchisee relationship, the employer/computer employee relationship, the corporation/shareholder relationship, the partnership/partner relationship (without consideration of any possible dissolution), and the limited liability company/member relationship.

    Once it is demonstrated that a particular non-compete agreement falls within one of the listed exceptions, most Louisiana courts require a valid non-compete agreement to contain an area of prohibition described by parishes, municipalities, or parts thereof, together with a term of no longer than two years from date of termination of the relationship. These requirements are derived from statutory language.

    While not contained within the statute, some Louisiana courts also require a valid non-compete agreement to define narrowly and accurately 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 must be narrow and accurate.

    To obtain the two year period of non-competition from the seller allowed by law, the agreement must specifically state that the goodwill of the business is being sold to implicate that particular exception. That ensures two years of non-competition from the seller if drafted correctly. Can that two year period be extended? The answer is yes, if properly drafted.

    If you want to extend your protection, part of the sale and the sales price should include a three year independent contractor agreement with the seller. Under the employee/employer exception to the general prohibition contained in La.R.S. 23:921(A)(1), an independent contractor is treated like an employee for purposes of a non-compete agreement. For three years after the sale of the business, the seller, as independent contractor, should contractually make himself available to perform any services specifically requested by the buyer. Part of the sales price for the transaction should include annual payments to the seller as an independent contractor. The independent contractor agreement should provide that during the agreement, and at the termination of the independent contractor agreement, the seller, as independent contractor, agrees not to compete with the buyer for two years from that point. If drafted correctly, this gives the buyer an additional three years under Louisiana law of non-competition from the seller. (A total of five years).

    As demonstrated herein, the protection offered by Louisiana’s non-compete law when purchasing a business can be maximized if done correctly. If not drafted correctly, however, a buyer may find himself competing with the seller of the purchased business not long after the sale.