MedX Inc. of Florida v. Ranger, Civ. A. No. 91-3099.

• Decision Date: 30 October 1991
• Docket Number: Civ. A. No. 91-3099.
• Citation: 780 F. Supp. 398
• Parties: MEDX INC. OF FLORIDA v. Raymond T. RANGER.
• Court: U.S. District Court — Eastern District of Louisiana

780 F. Supp. 398

MEDX INC. OF FLORIDA v. Raymond T. RANGER.

Civ. A. No. 91-3099.

United States District Court, E.D. Louisiana.

October 30, 1991.

Tommy Wood Thornhill and David L. Thornhill, Thornhill & Associates, Slidell, La., for MedX Inc. of Florida.

Robert L. Salim, Kelly & Salim, Natchitoches, La., Edward F. Kohnke, IV and James H. Brown, Jr., Lemle & Kelleher, New Orleans, La., for Raymond T. Ranger.

ORDER AND REASONS

MENTZ, District Judge:

Before the Court is the plaintiff's demand for a preliminary injunction to prevent a former employee from continuing to violate certain contractual restrictive covenants. For the reasons set out below, the Court finds the plaintiff's demand to be well taken. Accordingly, a preliminary injunction will issue against the defendant pending the trial of this matter on the merits.

I. FACTUAL BACKGROUND

On July 22, 1988, defendant Raymond T. Ranger entered into two contracts with plaintiff MedX, Inc., of Florida, a medical waste disposal company. These contracts consisted of an "Asset Purchase Agreement" and an "Employment Agreement." In section 1(a)(i) of the asset purchase contract, Mr. Ranger agreed to sell his business, Specialty Waste Management, Inc., to MedX. That section provided that Mr. Ranger would convey his business together with its name, goodwill, going concern value, and substantially all of its assets. Mr. Ranger worked for MedX under the terms of the employment contract from the date of the sale until March 16, 1990.

MedX has brought suit to enforce its rights under the employment contract. Section 6 of that contract purports to prevent Mr. Ranger from competing with MedX, accepting employment from its competitors, soliciting its clients or employees, or revealing MedX's trade secrets, all for a period of two years from the end of his employment with MedX. Mr. Ranger is currently doing all of these things, but he asserts that the restrictive covenants are invalid. Both of the contracts recite that they are to be governed by Florida law.

II. APPLICABLE LAW

Because this Court is sitting in diversity, Louisiana's rules governing conflict of laws will determine whether the contractual choice of law clauses are enforceable. Interfirst Bank Clifton v. Fernandez, 853 F.2d 292, 294 (5th Cir.1988). Louisiana conflicts doctrine requires that a contractual choice of law clause be given effect "`unless there is a statutory or jurisprudential law to the contrary justifying the refusal to honor the contract as written.'" Delhomme Indus., Inc. v. Houston Beechcraft, Inc., 669 F.2d 1049, 1058 (5th Cir.1982).¹ Thus, because of the Florida law clauses in both contracts, that state's law will govern this matter unless strong concerns of Louisiana public policy require otherwise.

A. Noncompete covenants in Louisiana: the general rule and the exception for the sale of a business

Louisiana law provides extensive support for the general rule that most restrictive covenants in employment contracts are void due to conflict with strong public policy concerns. See, e.g., ADR v. Graves, 374 So.2d 699, 702 (La.App. 1st Cir.), writ denied, 377 So.2d 843 (1979). On several occasions, federal courts sitting in diversity have voided noncompetition and nonsolicitation covenants on the basis of that rule.² However, such covenants are not deemed contrary to public policy when they are specifically excepted by statute or caselaw from the general rule. See Nat'l Oil Serv., Inc. v. Brown, 381 So.2d 1269, 1272-73 (La.App. 4th Cir.1980).

Such an exception exists for restrictive covenants made in conjunction with the sale of a business. La.R.S. 23:921(B) (West Supp.1991) provides that any person "who sells the goodwill of a business may agree with the buyer that the seller will refrain from carrying on or engaging in a business similar to the business being sold or from soliciting customers of the business...."³ Agreements governed by this provision are enforceable by injunction "upon proof of the obligor's failure to perform i.e. failure to refrain from competing, and without the necessity of proving irreparable injury. ..."⁴

This statutory exception to the general rule is a codification of jurisprudence that favors enforcement of noncompete covenants that are made in connection with the sale of a business. See, e.g., Target Rental Towel, Inc. v. Byrd, 341 So.2d 600, 603 (La.App. 2d Cir.1977) (clause enforceable against seller of going concern who remained employee of purchaser after sale).⁵ In light of this line of authority, Mr. Ranger's specific sale of the goodwill of his business strongly suggests that the clause is enforceable. See Hirsh v. Miller, 167 So.2d 539, 541 (La.App. 2d Cir.1964). Thus, to the extent that the covenant at issue here falls within this exception, no Louisiana public policy objection will void the contractual choice of Florida law.

B. Applicability of the exception

1. The "single contract" question

Mr. Ranger has asserted vigorously that the restrictive covenant should not fall under the exception for the sale of a business because the covenant appears in the employment contract rather than in the asset purchase contract. This claim is without merit for two reasons. First, neither the statute nor the caselaw interpreting it creates a requirement that the clause be contained in the instrument of sale in order to be valid and enforceable. The statute merely recites that one who sells a business "may agree" with the buyer not to compete, and that injunctive relief is available when such agreements are violated. La.R.S. 23:921(B) (West Supp.1991). Furthermore, the Louisiana Second Circuit has found that the exception applied in a case where the asset purchase agreement and the noncompete covenant were in separate documents that were executed at different times. Gold & Suckle, Inc. v. Suckle, 335 So.2d 713, 715 (La.App.2d Cir.), writ denied, 338 So.2d 700 (La.1976).

Second, the simultaneity of the two agreements, as well as their similarity in subject matter, establish that they were two incidents of a single transaction. The agreements were executed on the same day, and testimony from Mr. Ranger and others at the preliminary injunction hearing demonstrated that the agreements were made in the larger context of the sale of the business. For these reasons, it is evident that "the employment contract containing the agreement not to compete was an incident of and was ancillary to the sale." Suckle, 335 So.2d at 715-16.⁶

2. The statutory time limit

Mr. Ranger has correctly observed that a 1990 amendment to La.R.S. 23:921 modified the previous two-year limit on noncompete covenants made under the exception. The statute now provides that this two-year period is calculated from the date of the sale of the business. La.R.S. 23:921(B) (West Supp.1991). Mr. Ranger further claims that because the sale took place on July 22, 1988, the noncompete covenant expired on July 22, 1990. In opposition, MedX notes that the noncompete covenant does not expire under its own terms for two years "after the date that this employment agreement expires or is terminated for any reason." The parties terminated the employment agreement on March 16, 1990. For this reason, MedX claims that the noncompete covenant will not expire until March 16, 1992.

Mr. Ranger's argument assumes that this case only involves application of the Louisiana statute. However, the precise question to which the statutory exception applies is whether Louisiana law governs this case at all. Louisiana law gives effect to contractual choice of law clauses as a matter of course unless doing so would violate a strong public policy of the state. Because Louisiana law generally validates the category of noncompete covenant at issue here, it cannot be maintained that Louisiana law is gravely offended by the enforcement of such a covenant. Any argument to that effect would have the odd implication that a noncompete covenant of two years or less from the date of sale is entirely innocuous, while one of any greater duration violates a strong public policy. Accordingly, this Court finds that the exception for the sale of a business applies in this case.

C. The general rule and Louisiana public policy

This District has previously ruled that Louisiana's strong public policy against noncompete covenants stems from "`the disparity in bargaining power, under which an employee, fearful of losing his means of livelihood, cannot readily refuse to sign an agreement which, if enforceable, amounts to his contracting away this liberty to earn his livelihood except by continuing in the employment of his present employer.'" Fine v. Property Damage Appraisers, Inc., 393 F.Supp. 1304, 1310 (E.D.La.1975).⁷ Many Louisiana courts have likewise advanced this interpretation. See, e.g., National Oil Serv., Inc. v. Brown, 381 So.2d 1269, 1272 (La.App. 4th Cir.1980).

The testimony in the preliminary injunction hearing clearly showed that the parties in this case dealt at arm's length, and that there was no taint of coercion or adhesion in their dealings. Therefore, the exception to the general rule, as well as the public policy supporting that rule, dictate that enforcement of the noncompete covenant is permissible under Louisiana law. See Vault Corp. v. Quaid Software Ltd., 655 F.Supp. 750, 760 (E.D.La.1987). This conclusion also applies to covenants against solicitation of clients and compromise of trade secrets. See id. at 760; Commonwealth Life Ins. Co. v. Neal, 521 F.Supp. 812, 817 (M.D.La.1981), aff'd, 669 F.2d 300 (5th Cir.1982).⁸ Thus, for all the reasons set out in this section, Florida law will govern this dispute.

III. VALIDITY OF THE NONCOMPETE COVENANT UNDER FLORIDA LAW

Florida Statute 542.33(2)(a) (1990) provides in part that a seller of the goodwill of a business "may agree with the buyer ... to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a...