Non-compete Covenant Upheld
June 1, 2007
A question that frequently arises when companies are bought and sold is the effect of a covenant not to compete. In a recent case, decided by the United States Court of Appeals for the 5th District, the plaintiff sought review of a judgment from the United States District Court for the Western District of Louisiana, which granted summary judgment in favor of the defendant who was the vice president of a corporation who sold its alarm accounts to the plaintiff. The plaintiff filed the action seeking an injunction to restrain the vice president and the defendant corporation from contacting plaintiff’s customers, who plaintiff purchased from defendant, to solicit business for the defendant’s competing business.
The United States District Court for the Western District of Louisiana granted the defendants’ summary judgment, dismissing the action, holding that the non-competition clause was invalid under Louisiana revised statue section 23:921 because it contained no geographic or time limitations.
Both parties were engaged in the business of selling, installing and monitoring residential security systems. The defendant sold a number of its customer alarm-monitoring accounts to the plaintiff. As part of the transaction, the plaintiff and defendants signed a contract prohibiting the defendant from engaging in any conduct that might adversely affect the plaintiff’s interest in having customers renew their monitoring accounts with plaintiff. The plaintiff alleged in its complaint that the defendant vice president solicited plaintiff’s customers or signed names to cancellation notices.
The District Court, in granting the summary judgment, reasoned that the non-compete provision was void because the sale did not include a sufficient geographic limitation or any time limitation in the agreement not to compete.
In a previous case in the state of Louisiana, the Louisiana Supreme Court described the issue before it as “Whether the prohibition of non-competition agreements applies to contracts executed by two corporations on equal footing.”
In the case before the court, the court pointed out that the defendants presented no evidence from which a court could conclude that defendant was anything other than on an equal footing with plaintiff. Unless the court could determine that the corporations were not on an equal footing, the District Court should find that statute 23:921 has no application and the contract provisions should be enforced. The court therefore concluded that the District Court erred in granting summary judgment under the legal standard established by the Louisiana Superior Court. The case was then remanded to the District Court for further proceedings to determine whether the two corporations were on equal footing, therefore upholding the applicability of the covenant not to compete.