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American Academy of Emergency Medicine

Louisiana Supreme Court Limits Restrictive Covenants

by Larry Weiss, MD JD FAAEMand Joseph Wood, MD JD FAAEM

In an unexpected victory for emergency physicians, the Louisiana Supreme Court recently imposed severe limitations on restrictive covenants.1 For many years, businesses inserted these covenants into contracts to prevent employees and independent contractors from later competing against them in the same community.

Louisiana's law first states the general rule that any contract or agreement "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." 2 The major exception states that an agent 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 . . . not to exceed a period of two years from termination of employment." (emphasis added) 3 Like similar statutes in other states, the Louisiana law first declares the general right of individuals to practice their trade or profession. It then lists some exceptions to that general rule. Courts generally interpret exceptions narrowly.

In this case, Bond worked as a carpenter for Swat 24 Shreveport Bossier, a construction company. Bond signed a contract that included a broad restrictive covenant. This covenant did not allow Bond to establish his own business or work for another construction company in a large geographic area for two years after he terminated his relationship with Swat 24. When Bond quit his job and went to work for a competitor, Swat 24 sought an injunction to enforce the restrictive covenant. The district court and the Court of Appeal both denied the request for injunctive relief. Swat 24 then appealed to the Louisiana Supreme Court.

The Supreme Court decided to hear this case to resolve a split in the state courts of appeal regarding the permissible scope of restrictive covenants. In its analysis of the restrictive covenant statute, the Supreme Court focused on the phrase "engaging in a business." The court concluded that the legislature intended this exception to apply only to former employees and agents (i.e., independent contractors) who attempted to establish competing businesses and/or tried to solicit customers of the former employer. The Court stated that the exception does not allow former employers to prohibit an employee or agent from working for a competitor, and declared that provision null and void.

Therefore, in the context of emergency medicine, contract companies may no longer prevent physicians from working for other contractors or other hospitals in Louisiana. If such a provision exists in a contract, courts will declare that provision null and void. Contract companies may still prevent physicians from establishing a competing business and soliciting former patients to the new business. This significantly limits the scope of protective covenants in Louisiana.

In essence, the Louisiana Supreme Court's decision upholds the principle that a business cannot use a restrictive covenant clause to shield itself from ordinary competition. It may use such a clause to prevent employees from stealing its established business, especially when the means of taking over the business were achieved through the employment relationship. For example, if several physicians employed by a group covertly talked the hospital administration into terminating the contract so they could take over, this action would probably be barred even under the Bond decision. However, if a Contract Management Group (CMG) lost the contract through poor management, it's likely the Bond decision would support the right of previously employed physicians working for the succeeding group.

Enforcement of restrictive covenant clauses varies widely from state to state. Interestingly, these clauses are generally forbidden in the legal profession. In fact, in some states, it may be considered a violation of professional ethics for an attorney to ask another lawyer to sign a restrictive covenant clause as a condition of employment.

The impact of restrictive covenant clauses should not be under-estimated by emergency physicians. These clauses are one of the most important tools used by CMGs to make the physician dependent upon the contract manager, rather than the other way around. We need to continue to lobby for a shift back to the days when corporate managers worked for the physicians rather than the physicians working for and answering to managers.

References

1. Swat 24 Shreveport Bossier v. Bond, ________ So.2d, ________ (No. 00 1695) (La. 2001)
2. La. R.S. 23:921 (A) (1)
3. La. R.S. 23:921 (C)