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CITIZENS BANK & TR. CO. v. West Bank Agency, Inc.

Louisiana Court of Appeal
540 So. 2d 440, 1989 La. App. LEXIS 349, 1989 WL 20718 (1989)
ELI5:

Rule of Law:

A non-competition agreement structured as a 'promesse de porte-fort,' in which a party promises that a third-party insurance agent will refrain from certain business activities, is unlawful and unenforceable if its enforcement would require acts of coercion or intimidation prohibited by the state's insurance code.


Facts:

  • In July 1984, Stephen Harmon sold his insurance business, West Bank Agency, to Citizens Bank and Trust Co.
  • The sales contract included a clause where Stephen Harmon promised that he and his relatives would not solicit insurance accounts in Iberville Parish for two years.
  • Stephen Harmon's adult son, Thomas Harmon, was an independent insurance agent who operated his own business separately and had no business dealings with his father's agency.
  • Thomas Harmon was unaware of the non-competition agreement or the sale of his father's business.
  • During the 1984 football season, Thomas Harmon had a conversation with Freddie H. Pitre, the Sheriff of Iberville Parish, which led to Thomas selling an insurance policy for the sheriff's official vehicles.
  • There was no evidence of collusion between Stephen Harmon and Thomas Harmon regarding the sale of the policy to the sheriff.

Procedural Posture:

  • Citizens Bank & Trust Co. sued Stephen Harmon in the trial court for damages for breach of the non-competition agreement.
  • The trial court initially ruled in favor of the defendant, Stephen Harmon.
  • The plaintiff, Citizens Bank, successfully moved for a new trial.
  • On rehearing, the trial court reversed its prior judgment and rendered judgment for the plaintiff, Citizens Bank, awarding $139,800 in damages and $6,000 in attorney fees.
  • The defendant, Stephen Harmon, as appellant, perfected a devolutive appeal to the Court of Appeal of Louisiana against the appellee, Citizens Bank.

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Issue:

Does a non-competition clause in a contract for the sale of an insurance agency, wherein the seller promises that his relatives will not solicit insurance business in a specific parish, constitute an unlawful restraint of trade under the Louisiana Insurance Code and is therefore unenforceable?


Opinions:

Majority - Watkins, Judge

Yes, the non-competition clause is an unlawful restraint of trade and is unenforceable. While Louisiana law recognizes a 'promesse de porte-fort' (a promise for a third person's performance), such an agreement is unlawful if its cause or enforcement would produce a result prohibited by law or public policy. The Louisiana Insurance Code, specifically LSA-R.S. 22:1214(4), prohibits entering into any agreement that commits an act of 'boycott, coercion or intimidation' resulting in an unreasonable restraint of the insurance business. For Stephen Harmon to procure his son's compliance with the agreement, he would have had to engage in coercion or intimidation, especially given the exorbitant stipulated damages clause. The pressure on Thomas Harmon not to bankrupt his father would be immense. Because the practical enforcement of the agreement would require unlawful coercion, the cause of the obligation is unlawful, rendering the agreement unenforceable.



Analysis:

This decision establishes a significant public policy limitation on the application of the civilian doctrine of 'promesse de porte-fort' within a regulated industry. It demonstrates that courts will invalidate a contractual provision, even if theoretically permissible under general contract law, if its practical enforcement conflicts with specific statutory prohibitions aimed at ensuring fair competition. The ruling signals that overly broad non-competition clauses attempting to bind non-signatory third parties are vulnerable to challenge, particularly when the enforcement mechanism inherently involves pressure or coercion. This precedent requires contract drafters in regulated fields like insurance to consider whether the enforcement of a promise for a third party's action would violate industry-specific codes of conduct.

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