Louisiana Court Upholds Ruling Allowing For The Reformation Of A Noncompetition Agreement

The Louisiana Second Circuit Court of Appeal recently held that a noncompetition provision under La. R.S 23:921 affecting a former member of an accounting limited liability company (LLC) could be reformed when the scope of the defined business and geographic limitation was overly broad. It also held that an LLC may not prohibit its former members from becoming employed by a competing business, though it can prohibit an employee from owning an interest in a competitor.

Background

In Heard, McElroy & Vestal, LLC v. John C. Schmidt, et al., 52,783-CA (September 25, 2019), an accounting firm, Heard, McElroy & Vestal, LLC (HMV), sued its former member John Schmidt, a certified public accountant (CPA), and his limited liability company John Schmidt CPA, LLC (Schmidt LLC) for violations of the noncompetition provision in HMV's operating agreement.

La. R.S. 23:921(L) allows an LLC and its members to agree to "refrain from carrying on or engaging in a business similar to" the LLC or from soliciting customer of the LLC for a period of up to two years.

In July 2013, Schmidt LLC became a member of HMV and agreed to be bound by the provisions of its operating agreement. Under Article 22 of the agreement, "members of HMV may terminate a member at any time for cause, which includes conduct considered by the other members to be unbecoming to a CPA or detrimental to HMV's reputation." In June 2018, two-thirds of HMV's members "voted to terminate Schmidt LLC for cause."

Article 25 of the HMV operating agreement contained a noncompetition provision, which provided that once terminated for cause, Schmidt LLC was prohibited from the following conduct:

Engaging in the performance of accounting services within the geographic area designated in the agreement, including serving as a director, manager, officer, agent, or employee Soliciting clients of HMV within the designated area Serving as an executor or trustee of any client of HMV within the area "Serving as a voting member on the board of Directors of a company nonprofit organization that HMV is auditing at the time of the termination date or at any time during the restricted term" The trial court found that Article 25 was overly broad in how it defined the competing business and its geographic range under La. R.S. 23:921(L), but that the noncompetition provision was nevertheless enforceable after reformation by the court. The trial court held that (1) Schmidt was not allowed to carry on or engage in his own...