United States Court of Appeals,
Fifth Circuit.
No. 92-9590.
TEAM ENVIRONMENTAL SERVICES, INC., Formerly Leak Repairs, Inc., A Texas
Corporation, Plaintiff-Appellee,
v.
Rory K. ADDISON, Dwayne S. Dugas, Thomas C. Prestridge, and William H. Zimmerman,
Defendants-Appellants.
Sept. 17, 1993.
Appeal from the United States District Court for the Middle District of Louisiana.
Before POLITZ, Chief Judge, REYNALDO G. GARZA and JOLLY, Circuit Judges.
POLITZ, Chief Judge:
Former employees of Leak Repairs, Inc. (LRI), now Team Environmental Services, Inc.,
appeal the grant of a preliminary injunction enforcing an agreement not to compete. Finding that the
agreement violates the controlling Louisiana statute and may not be reformed, we vacate the
injunction and render judgment for the defendants.
Background
LRI is a Texas corporation specializing in the detection and repair of industrial piping system
leaks, including fugitive emissions repair. The four appellants herein, Rory K. Addison, Dwayne S.
Dugas, Thomas C. Prestridge, and William H. Zimmerman, worked in its Baton Rouge, Louisiana
branch office. Zimmerman was a sales representative who was discharged on February 7, 1992 for
poor performance. Within three weeks, he obtained employment as a sales representative and branch
manager with Leak Stop, Inc., an LRI competitor. Addison and Dugas, assistant technicians,
resigned from LRI to accept employment as technicians with Leak Stop on March 8, 1992.
Prestridge, first an assistant technician and then a sales representative with LRI, resigned on
September 17, 1992 and also went to work for Leak Stop. All four worked in Leak Stop's Baton
Rouge office.
In the course of their employment with LRI each of the four signed employment agreements
containing a covenant not to compete. The agreements provided in pertinent part:
[F]or a period of two (2) years following the voluntary or involuntary termination of
Employee's employment hereunder, Employee shall not ... act as an ... employee ... or
manager ... [of] any business activity which is competitive with any services offered by, or any
business activities pursued by Employer at the time of termination, within a two hundred
(200) mile radius of Employee's base of operations at the time of termination....
The agreements also contained a savings clause, which stated:
Should a co urt of competent jurisdiction declare any of the covenants contained in this
Paragraph unenforceable due to an unreasonable restriction of duration or geographical area,
such court shall have the express authority and consent of the parties to this Agreement to
reform these covenants to a reasonable restriction....
On November 2, 1992, LRI brought the instant action to enforce the agreements. Although
the contractual geographical term was broader than that permitted by statute, the district court issued
a preliminary injunction enforcing the agreements to the extent permitted by Louisiana law, enjoining
the defendants from working for a competitor for a period of two years within any of the 13
Louisiana parishes and 5 Mississippi counties in which LRI worked. It also enjoined Zimmerman and
Prestridge from soliciting LRI customers. This appeal timely followed.
Analysis
The sole issue presented for review is whether the covenants not to compete are enforceable.
The parties agree that the applicable law in this diversity case is that of Louisiana.1 We review the
district court's determination that the agreements are enforceable under Louisiana law de novo,2 and
conclude that they are not.
The instant noncompetition agreements are governed by La.R.S. 23:921 as amended in 1989
and 1990. The statute provides in pertinent part:
A. Every contract or agreement, or provision thereo f, 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.
1
Although three of the four agreements call for application of Texas law, the defendants argue,
and LRI does not dispute, that Louisiana law controls in light of its strong public policy against
covenants not to compete. See La.Civ.Code articles 3537, 3540. The defendants raise for the
first time on appeal that the contractual choice of law should prevail if Louisiana law does not bar
enforcement.
2
Concise Oil & Gas Partnership v. Louisiana Intrastate Gas Corp., 986 F.2d 1463 (5th
Cir.1993).
....
C. Any person ... who is employed as an agent, servant , or employee may agree with his
employer to refrain from carrying on or engaging in a business similar to that of the employer
and/or from soliciting customers of the employer within a specified parish or parishes,
municipality or municipalities, or part s thereof, so long as the employer carries on a like
business therein, not to exceed a period of two years from termination of employment.
On their face, LRI's agreements do not conform to the statutory requirements because they prohibit
competition within 200 miles of the employees' base of operations rather than specifying the parishes
or municipalities in which LRI does business. LRI, however, advances two arguments that the
agreements nonetheless should be enforced: (1) the statutory provisions describing permitted
noncompetition agreements should be broadly construed because the 1989 amendment represents a
reversal in public policy; and (2) the inconsistency is merely a technical deficiency which does not
justify discarding the agreements, especially where, as here, the agreements contain a savings clause
expressly providing for reformation. Louisiana jurisprudence, albeit nascent in this area, is to the
contrary.
Louisiana's longstanding policy against covenants not to compete was codified in 1934. In
1962 the legislature exempted from its blanket bar those situations in which the employer had
invested substantial amounts in the training or the advertising of the particular employee.3 In 1989
the legislature redrafted the statute to broaden the exceptions. The amended statute, however, retains
the general proscription; the first subsection proclaims that every agreement not to compete shall be
null and void, except for those explicitly sheltered. We do not perceive this as a reversal in public
policy, nor have those Louisiana intermediate appellate courts which have addressed the issue.4 "As
the statute itself so plainly says," the Second Circuit stated in Comet Industries, Inc. v. Lawrence,
"these contracts are against public policy...."5 The Fourth and Fifth Circuits expressly or implicitly
3
Orkin Exterminating Co. v. Foti, 302 So.2d 593 (La.1974).
4
A federal court sitting in diversity must follow decisions of the state's intermediate appellate
courts, unless convinced by persuasive data that the highest court would decide differently.
Exxon Co., U.S.A., a Div. of Exxon Corp. v. Banque De Paris Et Des Pays Bas, 889 F.2d 674
(5th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3230, 110 L.Ed.2d 676 (1990).
5
600 So.2d 85, 87 (La.App.), writ denied, 604 So.2d 1002 (La.1992).
have held the same.6 Therefore, "a contract seeking to fit into an exception to this rule must strictly
comply with the requirements contained in the statute."7 LRI's contracts do not.
Nor can these contracts be saved through reformation. In Comet, the Second Circuit refused
to reform and thereby validate a contract proscribing competition in the continental United States
despite a savings clause similar to that incorporated in LRI's contracts. Similarly in Water Processing
Technologies, Inc. v. Ridgeway,8 the Fourth Circuit declined to save by reformation a noncompetition
clause in a distributorship agreement in which the geographic term was omitted, even though the
limits of the clause could be inferred from the distributorship agreement. LRI maintains that its
geographic term comes much closer to the statutory requirement and hence should be reformed and
enforced. We are not persuaded. Finding the locational limitation too uncertain, the Fourth Circuit
in Medivision, supra, invalidated an agreement prohibiting competitive employment within ten miles
of any of the employer's offices in the Greater New Orleans area. The LRI agreements sub judice
inform with far less certainty the area in which its employees are precluded from accepting competing
employment.
La.R.S. 23:921 permits noncompetition agreements only in parishes or municipalities where
the employer "carries on a like business"; LRI's agreements barred competition in a far larger area.
As the district court found, LRI engaged in leak detection and repair services in a 13-parish area in
the vicinity of the petrochemical corridor along the Mississippi River between Baton Rouge and New
Orleans, as well as in five counties in Mississippi.9 The agreements, however, covered a 200-mile
radius area around Baton Rouge, including most of Louisiana, a substantial portion of Mississippi,
6
Medivision, Inc. v. Germer, 617 So.2d 69 (La.App.), writ denied, 619 So.2d 549 (La.1993);
Daiquiri's III on Bourbon, Ltd. v. Wandfluh, 608 So.2d 222 (La.App.1992), writ denied, 610
So.2d 801 (La.1993).
7
Comet, 600 So.2d at 88 (emphasis in original), cited in Medivision and Daiquiri's III.
8
618 So.2d 533 (La.App. 4th Cir.1993); see also Daiquiri's III (court invalidates a
noncompetition agreement without a territorial limitation).
9
LRI also engaged in emissions monitoring, a different service, in seven additional Louisiana
parishes, all in the southeast corner of the state. Because Leak Stop did not offer a competing
service, the district court did not include these parishes in the injunction.
and small parts of Texas and Arkansas.10
An employee barred from plying his trade within 200 miles of his home would be far more
hesitant to leave his job than if the proscription affected a substantially smaller area. This increased
hesitancy obviously impacts the bargaining relationship with the current employer. Were courts to
reform and enforce agreements like those at bar, employers would be free routinely to present
employees with grossly overbroad covenants not to compete. While the employer presumptively
would know that the agreement would be enforced only to the limit of the law, the employee likely
would not. The result would be an impact on the employer-employee relationship not intended by
the legislature when it enacted the 1989 amendments. That type expansion is a matter better
addressed to the Louisiana Legislature.
By invalidating the LRI agreements, we do not require employers to use "magic words."
Rather, consistent with Louisiana jurisprudence, we require a geographic term which substantially
conforms to the statute by identifying with reasonable certainty those areas in which the employer
lawfully may prohibit competition. The instant LRI agreements do not satisfy this standard and
therefore cannot be enforced.
The preliminary injunction is VACATED and judgment is RENDERED in favor of the
defendants.
10
At oral argument, LRI's counsel sought to justify the 200-mile figure by noting that LRI had
a Mississippi customer 194 miles from Baton Rouge. To the contrary, this argument highlights
the pitfall of describing the covered area by miles radius; there is no justification in preventing an
employee from pursuing his occupation throughout virtually the entire State of Louisiana in order
to protect the employer's relationship with one distant customer.