LEGAL UPDATE: Employers: If you Choose to Hire Independent Contractors, You May Not Be Able to Prevent Them from Soliciting Its Customers

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In the recently decided Iberia Financial Services, LLC v. John A. Mitchell, the Louisiana 3rd Circuit held that a non-solicitation clause did not apply to an independent contractor. How is that possible? The decision cites the absence of “independent contractor” language from a key provision of Louisiana Revised Statute 23:921.

Case Study

The defendant, Mr. Mitchell, began working for Iberia as a Junior Investment Representative in 2009. Mr. Mitchell built a considerable book of business with Iberia, but resigned his position in late 2018. Simultaneously, Mr. Mitchell moved over 100 client accounts totaling $21,000,000.00 to his new employer, LPL Financial, LLC.

Iberia immediately sought and was granted a temporary restraining order (TRO) on January 7, 2019. Iberia is not a broker-dealer of securities, but contracts with investment advisors to provide related services. Mr. Mitchell had signed a contract as an independent contractor. Mr. Mitchell’s contract contained the following language: “you will not, either directly or indirectly…solicit the securities brokerage, investment advisory or insurance business of, or otherwise contact, any customer whose name became known to you as a direct or indirect result of your engagement…”

Iberia claimed that Mr. Mitchell solicited its customers and requested that they move their business to his new firm. Mr. Mitchell responded that the agreement was null and void under Louisiana Revised Statute 23:921 as it would substantially restrain him from exercising his lawful profession. The trial court agreed with Mr. Mitchell and dismissed Iberia’s claims, while ordering Iberia to pay Mr. Mitchell damages, including attorney fees and costs.

On appeal, Iberia argued that a non-solicitation agreement with an independent contractor falls within an exception found in Louisiana Revised Statute 23:921(C), which states: Any person, including a corporation and the individual shareholders of such corporation, who is employed as an agent, servant, 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 within a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment. An independent contractor, whose work is performed pursuant to a written contract, may enter into an agreement to refrain from carrying on or in engaging in a business similar to the business of the person with whom the independent contractor has contracted, on the same basis as if the independent contractor were an employee, for a period not to exceed two years from the date of the last work performed under the written contract.

Mitchell argued that the non-solicitation agreement is unenforceable because, while LA R.S. 23:921(c) allows independent contractors to be refrained from competing with a business similar to the business of the person with whom the independent contractor has contracted, it does not prohibit them from soliciting customers of the employer. In other words, an independent contractor can be refrained from competing with its former employer but cannot be refrained from soliciting its former employer’s customers.

The Court reasoned that the legislators who drafted the language above specifically excluded the phrase “and/or from soliciting customers of the employer” from the independent contractor provision. Further, Louisiana has a strong public policy against non-competition and non-solicitation agreements and the State’s policy has historically been to prohibit or severely restrict their enforceability. Therefore, the Court strictly construed the language of LA R.S. 23:921(c) in favor of the former employee/agent and allowed the former independent contractor to solicit its former employee’s customers.

Conclusion

Louisiana’s strong public policy against non-solicitation agreements is not going anywhere and Courts will always review them in favor of the employee/agent. Therefore, it’s important to consider a few factors when drafting independent contractor agreements:
• Will the worker be a W-2 Employee or 1099 Independent Contractor?
• Does your company have form employment agreements containing non-competition and non-solicitation provisions?
• Is the language in the employment agreement enforceable under Louisiana law?

Should you or your business have any questions regarding your relationship with employees or independent contractors, please do not hesitate to contact us to schedule a free consultation.

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