La. R.S. 23:921(A) states that every contract 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. However, there are certain exceptions to this general rule including La. R.S. 921(L) which permits member to agree that members will refrain from carrying on or engaging in a business similar to that of the limited liability company and from soliciting customers of the company within specified parishes or municipalities, as long as the company carries on a similar business therein, for a period not to exceed two years from the date membership ceases. This exception was at issue in Yorsch v. Morel, 223 So.3d 1274 (La. App. 5th Cir. 2017), writ denied, 230 So.3d 307 (La. 2017), where the Court refused to enforce a non-competition and non-solicitation clause. In the first appellate interpretation of this exception regarding members, the Court affirmed the district court denial of a preliminary injunction and declined to reform the clauses at issue.
Yorsch and Morel formed two member-managed LLCs and entered into a Non-Circumvention and Non-Competition Agreement. The non-competition clause stated neither member shall directly or indirectly perform any of the following activities: “work for, manage, operate, control, … or engage or invest in, own, manage, … be employed by or associated with, or render services or advice or other aid to, or guarantee any obligation of, any person or entity engaged in any business whose activities compete in any way with the Business or the Opportunity.” Specific parishes were identified where this covenant applied. Additionally, the members agreed not to circumvent the Companies in any dealings regarding the Business or the Opportunity with any title insurance companies and would not, except on behalf of the Companies, access, contact, solicit and/or communicate with such parties or accept any business, support, investment or involvement from such parties without the other Member’s express consent. The term Business and Opportunity were defined terms in the agreement. When Morel became employed by a competitor, Yorsch filed suit seeking an injunction which was denied. The court of appeals further addressed the claims.
Yorsch argued that the public policy concerns of La. R.S. 23:921 did not apply since he and Morel were sophisticated parties, the agreement was bilateral and the parties were on equal footing as members of the companies. However, the Court noted that the statute was amended in 2008 to bring limited liability companies within the umbrella of the statute. Since La. R.S. 23:921 applied to the dispute, the Court concluded bargaining power and sophistication were not relevant factors.
Yorsch argued that the agreement only restricted members from competing in the field of tax adjudicated closing and title insurance; however, the district court and court of appeals disagreed finding the clause impermissibly broad. According to the language, a member could not render services or advice or other aid to any person or entity engaged in any business whose activities competed in any way of the Business or Opportunity. The broad scope of the clause prohibited a member from working in a completely unrelated capacity for a company whose activities competed with the Business or Opportunity. According to the Court, Morel could not get a job babysitting for an employee of the company that competes with the Business or Opportunity or cater a crawfish boil of a firm that competes in any way with the Business or the Opportunity — because he would be rendering services to a competing entity. The Court concluded the clause “drives a freight train through this limitation”, barring a member from engaging in other occupations that are not similar to that of the company, and is in derogation of La. R.S. 23:921(L).
The Court construed the non-circumvention clause to be a non-solicitation agreement and found it to be unenforceable because it did not contain geographic limitations as required by La. R.S. 23:921(L). While the non-competition clause contained the geographic limitation, the non-circumvention clause did not. The Court stated that the statute requires specificity regarding these geographical limitations and the non-circumvention clause could not stand on its own. The Court declined to reform the non-solicitation clause.
This is another example of a court closely scrutinizing language in a restrictive covenant and declining to enforce. The Court found the exception in La. R.S. 23:921(L) not to be satisfied concluding the language in the obligation not to compete to be overbroad and the non-solicitation not to state geographic boundaries. Most importantly, the Court refused to reform or sever showing one cannot count on a court to remedy language which may be interpreted as overbroad in these covenants. However, in the dissenting opinion, the judge concluded the proper determination to be to remove the potentially overbroad language, “associated with or render[ing] services or advice or other aid to,” from the clause which would make it in compliance with the exception.