Advance Notice of Restrictive Covenants May Be Required, But They Should Not Be Executed Before Employment Begins
Tuesday, June 28, 2022
Fifth Circuit: Signed Non-Compete Agreements Before Employment Starts Not Enforceable

As readers of this blog are aware, many states now require employers to provide prospective employees with copies of any noncompetes (and, in some cases, other restrictive covenants) they will be required to sign as a condition of employment. For example, Massachusetts requires that noncompetes be provided at the earlier of when an offer is made or 10 business days before the first day of employment; in Illinois it is 14 calendar days before employment begins; in Maine it is three days; in New Hampshire and Washington a noncompete must simply be provided before an employee’s acceptance of an offer; in Oregon and Rhode Island it is two weeks before employment begins; and beginning August 9, 2022, Colorado will require not only that both noncompete and non-solicitation covenants be provided to employees at least 14 days before the effective date of employment, but a separate standalone notice must be provided as well.

But it does not follow that such covenants should be executed before an employee’s first day of employment. Indeed, where that occurs the covenant may not be enforceable, as the Fifth Circuit held earlier this year in Rouses Enterprises, LLC v. Clapp, C.A. No. 21-30293 (5th Cir. March 8, 2022). In that case, the Court upheld the dismissal of an action to enforce a noncompete against a former employee, James Clapp, because Clapp was not yet employed by Rouses when he signed the agreement.

Specifically, Clapp signed the agreement on December 28, 2017, but did not begin employment with Rouses until February 12, 2018. In January 2020, Clapp was asked to resign, and in March 2020 he began working for a competitor of Rouses. Rouses sued in Louisiana state court, and Clapp removed the case to the U.S. District Court for the Eastern District of Louisiana, which ruled that the noncompete was invalid under Louisiana law because Clapp was not an employee when he signed it. The Fifth Circuit affirmed that decision on appeal, holding:

Obligations of parties to a contract are fixed at the time the contract is entered into. . . . At the time Clapp signed the non-compete agreement, Rouses was not his employer. The plain text of section 23:921(C) [Louisiana’s noncompete statute] permits non-compete agreements between employees and their “employer.” It does not allow for non-compete agreements between job applicants and potential employers.

This is important for employers both inside and outside of Louisiana because Louisiana is certainly not the only state with a noncompete law that expressly references agreements between an “employer” and an “employee.” It is too soon to tell whether courts in other jurisdictions will follow suit and read the applicable statutes so literally, refusing to enforce restrictive covenants that are signed before an employee’s first day of work—even if only by a day or two. In any event, employers would be well-served to wait until the first day of employment to have employees sign any agreements containing restrictive covenants.

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