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Louisiana Court Treats Inevitable Disclosure Provision as Non-Compete Clause Subject to Geographic Restrictions

May an employer enforce a contract provision that forbids an employee to leave and take another job that would require him to use or reveal the employer’s confidential information? In Louisiana, maybe not, unless the agreement complies with Louisiana’s non-compete statute, La. Rev. Stat. § 23:921.

In O’Sullivan v. Sunil Gupta, M.D., LLC, 2017 WL 3438349 (E.D. La. 2017), a federal district judge in Louisiana invalidated such a clause because the contract did not list geographic restrictions required by La. Rev. Stat. § 23:921. That statute nullifies “[e]very contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind,” unless the agreement meets certain criteria. Among other things, the agreement must be limited in duration to no more than two years after employment ends, and it may apply only to specified parishes (counties) and municipalities in which the employer “carries on a like business.” The confidentiality agreement in O’Sullivan did not restrict the application of the clause to any particular parishes or cities.

The employer in O’Sullivan argued that the clause was a valid confidentiality agreement that did not need to comply with the non-compete statute. Courts in some jurisdictions, under the “inevitable disclosure” doctrine, will preclude an employee from working for a competitor, even without a non-compete agreement, if use of confidential information or trade secrets would be the inevitable result of the employment. In the famous case, PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), the federal Seventh Circuit upheld a preliminary injunction that prevented a departing employee from starting work with a new employer, even though he had not signed a non-compete agreement. The court in PepsiCo said that, under the particular facts of that case, it was not realistic to think the employee could avoid using at his new job the secrets and protected confidential information that he had learned from his previous employer. Louisiana courts so far have not adopted PepsiCo, although courts in other jurisdictions have approved its holding.

In the O’Sullivan case, the employer had essentially written the rule of the PepsiCo case into the agreement. The provision in O’Sullivan simply spelled out a remedy that cases like PepsiCo say a court already may grant under trade secret law, regardless of whether the employee agreed to such a remedy in advance. But the court in O’Sullivan found the clause “explicitly targets O’Sullivan’s ability to ‘accept or engage in . . . business or activity.’” Thus, “the restraint on revealing confidential information is nested within a restraint on O’Sullivan’s ability to exercise ‘a lawful profession, trade, or business’ – the hallmark of a covenant not to compete that is subject to § 23:921.”

So, under O’Sullivan, no contract may prohibit a Louisiana employee from going to work for a competitor under circumstances that inevitably would require her to disclose trade secrets or confidential information, unless the agreement complies with the Louisiana non-compete statute. And thus, an employer should not expect to enforce such a provision unless it includes the temporal and geographic restrictions required under La. Rev. Stat. § 23:921.

 

© 2017 Jones Walker LLP

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Davis B. Allgood, Pepper Algood, partner, JonesWalker
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Pepper Allgood has helped clients successfully resolve complex business disputes, contracting issues, and regulatory problems for over 30 years. A member of the firm's Business & Commercial Litigation and Construction Practice Groups, Pepper has counseled and represented companies and individuals in various businesses and industries, in particular energy and construction. His litigation experience over that time, in addition to many different types of contract claims, covers business tort, antitrust, and trade secret cases. Additionally, Pepper has handled litigation...

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