Heard, McElroy & Vestal, LLC v. John C. Schmidt and John C. Schmidt, CPA, LLC

• Court: Louisiana Court of Appeal
• Decided: September 25, 2019
• Docket: 52,783-CA
• Status: Published

Opinion

Judgment rendered September 25, 2019. Application for rehearing may be filed within the delay allowed by Art. 2166, La. C.C.P.

No. 52,783-CA

COURT OF APPEAL SECOND CIRCUIT STATE OF LOUISIANA

*****

HEARD, McELROY & VESTAL, Plaintiff-Appellant LLC

versus

JOHN C. SCHMIDT AND JOHN Defendants-Appellees C. SCHMIDT, CPA, LLC

Appealed from the First Judicial District Court for the Parish of Caddo, Louisiana Trial Court No. 610442

Honorable Michael A. Pitman, Judge

COOK, YANCEY, KING & GALLOWAY Counsel for Appellant By: Bernard S. Johnson

DOWNER, JONES, MARINO & WILHITE Counsel for Appellees By: Allison A. Jones

Before WILLIAMS, STEPHENS, and THOMPSON, JJ. WILLIAMS, C.J.

The plaintiff, Heard, McElroy & Vestal, LLC, appeals a judgment

granting a preliminary injunction to prohibit the defendants, John Schmidt

and John Schmidt, CPA, LLC, (“Schmidt”) from carrying on or engaging in

a business in competition with plaintiff and from soliciting plaintiff’s clients

for a two-year period, but allowing Schmidt to work as an employee for a

competitor of plaintiff. In its answer to the appeal, Schmidt seeks reversal of

that part of the judgment granting a preliminary injunction. In the

alternative, Schmidt seeks modification of the judgment to allow Schmidt to

engage in his business in competition with plaintiff or to solicit plaintiff’s

clients. For the following reasons, we affirm.

FACTS

In 2011, John Schmidt became a member of Heard, McElroy &

Vestal, LLC (“HMV”), an accounting services firm, after working as an

employee for several years. In July 2013, John Schmidt CPA, LLC

(“Schmidt LLC”), became a corporate member of HMV, replacing Schmidt,

who signed the HMV operating agreement individually and on behalf of

Schmidt LLC, agreeing to be bound by its provisions. Article 22 of the

operating agreement provides that the 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 the members voted to terminate

Schmidt LLC as a member of HMV for cause, based on a finding that

Schmidt had acted in a manner unbecoming to a CPA by failing to advise

other members that an HMV employee was planning to leave her job and take a large client of HMV with her and by preparing tax returns for

taxpayers without billing them as HMV’s clients.

Under the noncompetition provisions of Article 25 of the operating

agreement, once Schmidt LLC was terminated for cause he was prohibited

from:

(i) Engaging in the performance of accounting services … practiced by him while a member in HMV for persons who reside, or entities with a place of business located, within the Area in any capacity as a principal or on his own account, or solely or jointly with others as a partner, stockholder or holder of any equity security, or member in a limited liability company, or in any capacity for an entity in which such former member owns or does not own an equity interest, including but not limited to as a director, manager, officer, agent or employee; and/or (ii) Soliciting clients of HMV that, if a natural person, resides within the Area, or if the client is an entity, has a place of business located within the Area; (iii) Serving as an executor or trustee for any natural person who resides within the Area that is a client of HMV, or that owned an interest in an entity that has a place of business located within the Area that is a client of HMV; and/or (iv) 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 former member shall resign as a member of the Board of Directors or other governing board of any such company.

In August 2018, HMV filed a petition seeking preliminary and permanent

injunctions, declaratory relief and damages against defendants, John

Schmidt and Schmidt LLC (jointly referred to as “Schmidt”). The original

and amended petitions alleged that Schmidt had engaged in activities that

were restricted by the noncompetition clause of the operating agreement.

After a hearing, the trial court issued written reasons granting in part

and denying in part HMV’s request for injunctive relief. The trial court

found that Article 25 was overbroad in scope and geographic range under

La. R.S. 23:921(L), but that the noncompetition agreement was enforceable 2 after reformation by the court. The trial court rendered judgment ordering

that Schmidt may not carry on or engage in his own business in competition

with HMV and may not solicit HMV’s clients for a period of two years. The

trial court further ordered that Schmidt was entitled to seek employment

with and be employed by HMV’s competitors. HMV appeals the judgment.

Schmidt filed an answer seeking reversal of the injunctive relief ordered.

DISCUSSION

HMV contends the trial court erred in finding that La. R.S. 23:921(L)

does not allow a member of an LLC to contractually agree not to seek

employment with a competitor of the former company after termination.

HMV argues that the trial court’s determination is based on an incorrect

interpretation of the statute.

The starting point for the interpretation of any statute is the language

of the law itself. Succession of Boyter, 99-0761 (La. 1/7/00), 756 So.2d

1122. The meaning and intent of a statute is determined by considering the

law in its entirety. A statute must be interpreted in a manner consistent with

logic and the presumed intent of the legislature. Succession of Boyter,

supra. When the law is susceptible to different meanings, the language must

be interpreted as having the meaning that best conforms with the purpose of

the law. La. C.C. art. 10. When the words of a law are ambiguous, their

meaning must be sought by examining the context in which they occur and

the text of the statute as a whole. La. C.C. art. 12.

Louisiana has long followed a public policy disfavoring employment

noncompetition agreements. Innovative Manpower Solutions, LLC v.

Ironman Staffing, LLC, 929 F.Supp.2d 597 (W.D. La. 2013); SWAT 24

Shreveport Bossier, Inc. v. Bond, 2000-1695 (La. 6/29/01), 808 So.2d 294. 3 This public policy is expressed in La. R.S. 23:921(A)(1), which provides

that every contract or agreement by which anyone is restrained from

exercising a lawful profession, trade or business of any kind, except as

provided by the statute, shall be null and void. The public policy restricting

noncompetition agreements is based on the intent to prevent an individual

from contractually depriving himself of the ability to earn a living. Yorsch v.

Morel, 2016-662 (La. App. 5 Cir. 7/26/17), 223 So.3d 1274. Such contracts

are in derogation of the common right to work and must be strictly construed

against the party seeking their enforcement. Innovative Manpower, supra.

A limited liability company and the individual members of such

limited liability company may agree that such members will refrain from

carrying on or engaging in a business similar to that of the limited liability

company and from soliciting customers of the limited liability company

within a specified parish or parishes, or parts thereof, for as long as the

company carries on a similar business therein, not to exceed a period of two

years from the date membership ceases. A violation of this subsection shall

be enforceable under Subsection H of the statute. La. R.S. 23:921(L). For

the purposes of Subsections B and C, a person who becomes employed by a

competing business, regardless of whether that person is an owner or equity

interest holder of that competing business, may be deemed to be carrying on

or engaging in a business similar to that of the party having a contractual

right to prevent that person from competing. La. R.S. 23:921(D).

In its brief, HMV points out that Subsection L uses the same phrase,

“carrying on or engaging in” a business similar to the former company, that

the legislature previously defined in subsection D as including employment

by a competing business. HMV argues that for the sake of consistency, this 4 definition of carrying on or engaging in a similar business in Subsection D

must be applied to the same phrase in Subsection L, such that Schmidt could

agree to refrain from being employed by a competitor of HMV as provided

in the noncompetition agreement. However, the language of the statute

demonstrates that Subsection D is applicable specifically for “the purposes

of Subsections B and C.”

Additionally, we note that although Subsection L was added to R.S.

23:921 after Subsection D, the legislature did not make Subsection D

applicable to Subsection L or specify that L was subject to Subsection D, as

was done with Subsection H. HMV asserts the trial court’s interpretation is

inconsistent in treating employees and members of limited liability

companies differently with respect to restricting their future ability to

compete. However, treating employees and members differently may be

based on the contrasting roles of each in the entity, just as is done by HMV,

in which members sign the operating agreement and decide how the LLC

will be managed while employees do not.

Recognizing that noncompetition agreements are in derogation of the

common right and must be strictly construed against the party seeking their

enforcement, we are constrained to limit application of Subsection D to

those situations addressed in Subsections B and C. Consequently, we cannot

say the trial court erred in determining that pursuant to Subsection L,

Schmidt may be prohibited from acting as a member or owner of a

competitor of HMV, but he is not restricted from being employed by a

competing business. Thus, this assignment of error lacks merit.

HMV contends the trial court erred in finding that R.S. 23:921( C) did

not apply to Schmidt. HMV argues that Subsection C applies to Schmidt 5 because he was an agent of HMV and as a result could agree to refrain from

being employed by a competing business.

Any person 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 from soliciting customers of the

employer within a specified parish or parishes for a period not to exceed two

years from termination of employment. La. R.S. 23:921( C). A mandate is a

contract by which a person, the principal, confers authority on another, the

mandatary, to transact one or more affairs for the principal. La. C.C. art.

2989.

HMV argues in its brief that Schmidt was in effect an agent of HMV

because he acted on behalf of HMV in supervising the communication with

and assessing the needs of certain clients. Contrary to HMV’s argument, the

evidence presented does not establish there was an agreement between the

parties providing that Schmidt was employed as an agent or mandatary for

HMV. The HMV operating agreement and petition refer to Schmidt as a

member, not as an agent or employee. Members of HMV, not employees or

agents, were asked to sign the operating agreement. Based upon this record,

we cannot say the trial court erred in finding that Subsection C is not

applicable in this case because Schmidt was not an employee or agent of

HMV. Thus, the assignment of error lacks merit.

In answer to the appeal, Schmidt contends the trial court erred in

granting in part HMV’s request for a preliminary injunction. Schmidt

argues that the noncompetition provision in Article 25 of the operating

agreement is null and void because the language does not comply with La.

R.S. 23:921. 6 For a noncompetition agreement to be valid under La. R.S. 23:921(L),

the scope of the agreement must be confined to an agreement (1) to refrain

from carrying on or engaging in a business similar to that of the limited

liability company and soliciting its customers (2) within a specified parish or

parishes (3) for as long as the limited liability company carries on a similar

business therein, not to exceed a period of two years from the date that

membership ceases. Thus, the statute limits (1) the scope of the activity

from which one agrees to refrain, (2) the geographic area in which one

agrees to refrain from that activity, and (3) the time period during which the

agreement to refrain from the specified activity may be effective. Yorsch v.

Morel, supra.

In this case, the trial court reviewed the provisions of Article 25 and

determined that the noncompetition agreement is overbroad in scope and

geographic range. The trial court specifically found that the agreement’s

definition of clients made it difficult to determine the limits of solicitation

and that the geographic range improperly extended to locations where HMV

might intend to do business. Based upon this record, the trial court did not

err in concluding that the noted provisions of the noncompetition agreement

did not comply with R.S. 23:921(L). Considering the noncompliance of

Article 25 with the statute, we find that the trial court was reasonable in

considering whether the noncompetition agreement could be reformed rather

than declared null and void. Thus, this assignment of error lacks merit.

In two assignments, Schmidt contends the trial court erred in

reforming the overbroad noncompetition agreement. Schmidt argues that

the trial court should have declined to reform Article 25 because of the

7 numerous violations of the statute, including the overbroad definitions of

solicitation and clients.

A noncompetition agreement is a contract between the parties and

should be construed according to the general rules of contract interpretation

provided in La. C.C. arts. 2045-2057. The interpretation of a contract is the

determination of the common intent of the parties with courts giving the

words in the contract their generally prevailing meaning. La. C.C. arts.

2045, 2047; SWAT 24, supra.

In the present case, a severability clause is contained in Article

25.1(e), which provides in pertinent part:

It is the intent and desire of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, to the extent that the covenant hereunder shall be adjudicated to be invalid or unenforceable in any one such jurisdiction, this Agreement shall be deemed amended to reform the portion thus adjudicated to be invalid or unenforceable in such a manner to allow the restriction to be enforced to the broadest extent consistent with the intent of the parties[.]

If any court of competent jurisdiction shall at any time deem the Restricted Term too long, the Area too extensive, the restrictions too broad or any other provision of this Agreement to be invalid, the other provisions of this Agreement shall nevertheless stand, and otherwise consistent with this Agreement, . . . the restrictions shall be deemed to be the broadest permissible by law under the circumstances. The parties hereto agree that they shall request the court in each case to reduce the Restricted Term, the restrictions and/or the Area to the maximum permissible duration, breadth or size.

In the appellate brief, Schmidt asserts that the trial court should not

have reformed Article 25.1 because the overbroad language required

excessive revisions. However, we note that the operating agreement’s

severability clause reflects the parties’ intent that if possible, the court

should reform the agreement by excising any offending language. 8 The record shows that in reforming Article 25.1 of the operating

agreement, the trial court narrowed the geographic range to locations where

HMV conducted business activities, removed sentences from the solicitation

provision, deleted part of the definition of client and deleted the provision

that prohibited Schmidt from being employed by HMV competitors.

Although the trial court’s revisions were fairly extensive, we cannot say the

trial court abused its discretion in deciding to reform Article 25.1 by deleting

the overbroad provisions, resulting in an enforceable noncompetition

agreement.

Schmidt argues that even as edited by the trial court, Article 25.1(a)(i)

violates R.S. 23:921 by prohibiting Schmidt from performing accounting

services for persons who reside, or entities with a location, in the specified

geographic area and by prohibiting Schmidt from carrying on a business that

is not similar to that of HMV.

Article 25.1(a)(i) prohibits Schmidt from performing accounting

services practiced by him while a member of HMV for persons who reside,

or entities with a place of business located, in the specified area. The

language of this provision suggests that the reference to residence or place of

business relates to the question of where the accounting services would be

performed, so that Schmidt could not perform the services he practiced at

HMV in the specified parishes, but could perform such services in Claiborne

Parish, to use Schmidt’s example. Regarding the contention that Article

25.1 improperly restricts Schmidt from engaging in a dissimilar business, we

find that the reference in Article 25.1(a)(i) to engaging in the services that

Schmidt performed as a member of HMV may reasonably be interpreted to

refer to carrying on a business similar to that of HMV. 9 Based on the language of the provision in its entirety, we find that the

noncompetition agreement as revised by the trial court is in compliance with

R.S. 23:921(L). Thus, these assignments of error lack merit.

Schmidt also contends the trial court erred in failing to find that HMV

waived enforcement of Article 25. Schmidt argues that HMV waived the

noncompetition provisions by agreeing that Schmidt could perform work for

HMV clients if he did not initiate the contact.

Waiver is the intentional relinquishment of a known right, power or

privilege. Steptore v. Masco Construction Co., Inc., 93-2064 (La. 8/18/94),

643 So.2d 1213.

In this case, Schmidt testified that at a meeting with Robert Dean,

managing member of HMV, and Roy Prestwood in June 2018, Dean stated

that HMV clients could choose where their work would be done as long as

Schmidt did not solicit such business. However, both Dean and Prestwood

testified that Dean had not made such a statement. In addition, HMV

introduced into evidence an email from Dean to Schmidt stating that Article

25 would be operable unless Schmidt proposed a modification that was

accepted by the members of HMV.

The trial court heard the conflicting testimony and did not address the

issue of waiver in either its written reasons or the judgment, implicitly

finding that HMV had not waived the right to enforce the noncompetition

agreement. The evidence presented supports such a finding. Thus, the

assignment of error lacks merit.

CONCLUSION

For the foregoing reasons, the trial court’s judgment is affirmed.

Costs of this appeal are assessed one-half to the appellant, Heard, McElroy 10 & Vestal, LLC, and one-half to the appellees, John Schmidt and John

Schmidt, CPA, LLC.

AFFIRMED.