The Louisiana Third Circuit Court of Appeal recently issued an opinion that might pave the way for employers to use liquidated damages as a means of discouraging competition by former employees in certain circumstances.
In the December, 9, 2015 case ERA Helicopters, LLC v. Amegin, the Louisiana appellate court held that an employer asserted a valid cause of action when it sought to enforce a liquidated damages provision in an employment agreement with its former employee. The provision at issue required that the employee reimburse the employer the $80,000 that it cost the employer to pay for the employee’s helicopter pilot training in the event that the employee terminated his employment with the company before working there for two years.
The employer paid for the training and the employee voluntarily terminated his employment before working for the company for two years. The company filed suit in Calcasieu Parish in the southwestern corner of Louisiana to enforce the $80,000 reimbursement obligation. The employee filed an exception stating that the employer had not asserted a valid cause of action because the liquidated damages provision at issue violated Louisiana’s broad prohibition on restraint of trade as set forth in Louisiana Revised Statutes (La. R.S.) 23:921, which is the law that governs the enforceability of noncompetition agreements in Louisiana. That section provides in pertinent part: “Every contract or agreement, or provision thereof, 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.”
The statute carves out limited exceptions to the blanket prohibition on noncompetition agreements, but the exceptions are strictly construed against enforcement. In practice, agreements are routinely struck down based on noncompliance with section 921—a common issue for non-Louisiana employers unaware of Louisiana’s demanding regime.
Additionally, Louisiana public policy heavily disfavors noncompetition agreements. The Louisiana Supreme Court has rejected noncompetition agreements that call for an employee to pay liquidated damages if the employee accepts employment in a competing field of business. Against that legal backdrop, the employer in ERA Helicopters was clearly fighting an uphill battle to enforce the liquidated damages provision.
The employee argued that, as a practical matter, the financial burden imposed by the requirement to reimburse his employer for the training amounted to a restriction on exercising a lawful profession, trade, or business of any kind(unless, of course, he remained employed by his employer for two years). However, the Third Circuit rejected the employee’s argument, instead finding that the provision “does not restrain [the employee] in any way from seeking other employment as a helicopter pilot or in any other capacity in the helicopter industry or in any other profession, business, or trade. Indeed it is likely that the . . . training expanded [his] opportunities for more lucrative employment as a helicopter pilot.”
In rejecting the employee’s reasoning, Louisiana’s Third Circuit relied on the fact that the primary purpose of the liquidated damages provision in the contract at issue in ERA Helicopters was for the company to recoup the investment that it made in its employee without regard to whether the employee chose to compete with his former employer. By contrast, in the case of a traditional noncompetition agreement subject to a liquidated damages provision, the liquidated damages are a secondary obligation imposed on the employee as a means of enforcing the primary obligation not to compete. The latter is invalid under Louisiana law.
The Third Circuit thus drew a distinction between a liquidated damages provision that is primarily meant to enforce a noncompetition obligation and a liquidated damages provision that is primarily meant to reimburse the employer for expenses that it actually incurred—even if the provision has the incidental effect of preventing competition by enforcing a reimbursement obligation. It appears that the latter type of liquidated damages provision would not be subject to the same strict, formalistic requirements required of an agreement to qualify for an exception to the general ban on noncompetition agreements set forth in La. R.S. 23:921.
Under ERA Helicopters, employers that expend substantial resources training their employees may be able to discourage competition by requiring that the employee reimburse the employer for the costs of their training if they do not remain employed for a specified period of time. Employers that are serious about imposing a noncompetition obligation on their employees should still craft noncompetition provisions that comply with the strict requirements of La. R.S. 23:921. But these “recoupment” clauses, used in conjunction with a traditional noncompetition agreement, could provide a powerful disincentive for employees to compete even if the noncompetition agreement is challenged for failing to comply with La. R.S. 23:921.