Published Article

5th Circ. Ruling Guides On Noncompete Agreement Timing

May 24, 2022

In a per curiam decision released on March 8, the U.S. Court of Appeals for the Fifth Circuit in New Orleans found that a noncompete agreement was not enforceable because the employee signed it before he was officially hired.[1]

Though not published, the decision affirms the district court’s logic and is persuasive in interpreting Louisiana law on noncompete agreements. With this ruling, Louisiana law is now confirmed to match that of some other states, but remains opposed to others.

This article will discuss the case and its interaction with Louisiana law, as well as a brief overview of the issue in other jurisdictions and best practices for employers generally.

Rouses Enterprises LLC v. Clapp

The Fifth Circuit case involved an executive employee for Rouses Enterprises who signed a noncompete agreement during the hiring process, but before he was officially employed. His interview was in December 2017. The agreement was signed shortly after, and he was not offered the position until nearly a month later, in January 2018.

Following the end of his employment with Rouses in 2020, the employee began working for a competing entity in Texas. Rouses then sued for damages and injunctive relief.

Louisiana law disfavors restrictive covenants generally; any variation from the statutory language is strictly construed.[2] Part of that language requires that the statute applies “only to persons in employee-employer relationships” and should not be extended beyond that.[3]

At least one other recent state court case — Setpoint Integrated Solutions Inc. v. Kiteley, decided by Louisiana’s Third Circuit Court of Appeal in January — has found that a noncompete agreement signed after an employee was terminated was not enforceable because the agreement must be between an employer and an employee.[4]

The Fifth Circuit applied statutory interpretation principles and those state court precedents to find that the noncompete agreement was not enforceable.

In affirming the U.S. District Court for the Eastern District of Louisiana, the Fifth Circuit upheld the idea that the employment relationship must be official before signing a noncompete agreement.

Other Jurisdictions

The law on noncompete agreements in other jurisdictions is storied and complex.

Some jurisdictions, such as California and North Dakota, have near-total bans on noncompete agreements, with narrow exceptions.[5] Others, like Louisiana, are strict about the requirements that must be met to enforce a noncompete. And some, like Alabama, require only minimal standards to be enforceable — the reasonableness standard, discussed more below.[6]

This variation in enforcement levels makes it difficult to interpret the general enforceability of a noncompete based on the time and the place it was signed, where the employee conducted the work, where jurisdiction is provided in the agreement, and where the company is domiciled.

Still, case law is useful in discerning timing issues. For example, Wyoming law requires that the noncompete be made as “part of a contract of employment,” or else it will be considered against public policy.[7]

Minnesota requires that the agreement be signed at the inception of employment, requiring that the covenant be “ancillary to the employment agreement.”[8]

In Oregon, a unique notice element is included, requiring that the employer inform the employee at least two weeks before the first day of employment that the noncompete is a required condition of employment.[9]

Some courts have considered issues similar to that which the Fifth Circuit tackled above.

In Runzheimer International Ltd. v. Friedlen, the Wisconsin Supreme Court in 2015 considered the difference between signing a noncompete as part of the hiring employment contract, and having an existing at-will employee sign one.

Because that jurisdiction, like many, requires lawful consideration — a benefit granted for the fulfillment of a promise entered into — to support the formation of a contract, the court ultimately decided that the employer’s promise to not fire the employee during employment was sufficient consideration, even compared to the benefit of entering a covenant in exchange for a job at the outset of employment.[10]

The Supreme Court of Washington has held the opposite, finding that consideration generally exists if the employee enters into the agreement at the time of hire, not subsequently.[11]

In an interesting 2021 case, Miller v. Honkamp Krueger Financial Services Inc., the U.S. Court of Appeals for the Eighth Circuit, interpreting Iowa law, found that an employee’s noncompete made as part of an employment agreement was not enforceable following the termination of that agreement.

The court distinguished between the term of the employment as opposed to the agreement itself, rendering the noncompete unenforceable.[12] This strict application of contract interpretation is a perfect example of why employers should be cautious of the terms of these restrictive covenants in employment.

Best Practices

Thus, while every jurisdiction interprets these provisions differently, there are certainly some rules of thumb that are true across the board.

Generally, restrictive covenants should not be signed before the employment relationship begins, such as during the interview process, nor after the relationship ends. In jurisdictions like Louisiana, an agreement signed prior to the employment relationship will likely be found unenforceable.

Even in states where this type of practice is not explicitly prohibited, employees have a good chance of pleading their case. For example, one could claim that consideration was lacking when the agreement was signed due to the nonexistence of an employment relationship.

Additionally, noncompete agreements should not be executed after the employment relationship ends. While restrictive covenants are allowed in separation agreements as part of the termination of the relationship, noncompetes executed after the separation will be difficult to support.

After all, the goal of the separation agreement is a clean severance between the parties, and an additional restrictive covenant would unnecessarily complicate the matter.

Noncompete agreements should be made a part of the onboarding process after a hiring decision has been made, accepted and the employee has started the position.

The language of the agreement should be clear and concise, with specific attention paid to potential misinterpretations of the covenant’s terms. This will ensure that the employment relationship unquestionably exists at the time the agreement or clause is executed.

So long as the noncompete is not invalid by some other metric or otherwise prohibited under state law, an agreement entered into at this point should generally be enforceable in any jurisdiction that allows them.

And finally, employers must be aware of the unique laws governing noncompete agreements in their state. While each state’s exact requirements differ, there are some that are fairly common, and the operative word is “reasonable.”

For example, many states require that the restrictive covenant be limited to a reasonable geographic area, such as those locales where the employer maintains business or has contacts.[13] Often, the covenant must be limited to a reasonable, limited time frame.[14] Some states require that the covenant be reasonably necessary to protect the employer’s trade secrets or other legitimate business interests.[15]

All things considered, the most important practice is to check the specific requirements of the jurisdiction when drafting an enforceable noncompete agreement. However, by ensuring that the agreement is signed while an employment relationship exists, and generally in association with an employment agreement, employers can rest assured that they have checked at least one issue off the list.

This article was originally published in “Expert Analysis” on May 24, 2022, by Law360. The original publication is available here with a subscription.

[1] Rouses Enterprises, L.L.C. v. Clapp , No. 21-30293, 2022 WL 686332 (5th Cir. Mar. 8, 2022).

[2] See SWAT 24 Shreveport Bossier, Inc. v. Bond , 2000-1695, p. 4 (La. 6/29/01); 808 So. 2d 294, 298.

[3] Simpson v. Kelly Servs., Inc ., 339 So. 2d 490, 495 (La. Ct. App. 1976), writ denied, 341 So. 2d 1121 (La. 1977).

[4] Setpoint Integrated Sols., Inc. v. Kiteley , 2022 WL 225093, 21-322, p. 26 (La. App. 3 Cir. 1/26/22); 2022 WL 225093, at *11.

[5] Cal. Bus. and Prof. Code §§ 16600-16607; N.D. Cent. Code § 9-08-06.

[6] See Ala. Code § 8-1-190-197.

[7] Hassler v. Circle C Res. , 2022 WY 28, ¶15, 505 P.3d 169 (Wyo. 2022).

[8] Safety Ctr., Inc. v. Stier , 903 N.W.2d 896, 900 (Minn. Ct. App. 2017).

[9] Ameritox, Ltd. v. Savelich , 92 F. Supp. 3d 389, 397 (D. Md. 2015) (interpreting Oregon law).

[10] Runzheimer Int’l, Ltd. v. Friedlen , 2015 WI 45, 362 Wis. 2d 100, 862 N.W.2d 879.

[11] Labriola v. Pollard Grp., Inc ., 152 Wash. 2d 828, 100 P.3d 791 (2004).

[12] Miller v. Honkamp Krueger Fin. Servs., Inc ., 9 F.4th 1011, 1014-15 (8th Cir. 2021).

[13] See, e.g., Team IA, Inc. v. Lucas , 395 S.C. 237, 717 S.E.2d 103 (Ct. App. 2011) (geographic restrictions are reasonable if limited to the area where contact was established with the employer’s customers.).

[14] See, e.g., Utah Code § 34-51-201 (limiting non-competes to one year from the end of employment).

[15] See, e.g., Surgery Ctr. Holdings, Inc. v. Guirguis , 318 So. 3d 1274 (Fla. Dist. Ct. App. 2021) (limitation on restrictive covenant was reasonably related to proving legitimate business interest in preventing competition).

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