Note: Since the time this blog post was written, the Federal Trade Commission issued a rule substantially narrowing the instances a non-compete agreement may be used. The Federal Trade Commission described the rule as banning non-compete agreements. However, the rule did make a few exceptions to the ban, for example, when a non-compete clause is entered into pursuant to a bona fide sale of a business entity. Following the issuance of the rule, a federal court entered an order striking down the rule reasoning that issuance of the rule was beyond the authority of the Federal Trade Commission. As of the writing of this note, the Federal Trade Commission is considering whether to appeal the decision. The federal court order did not prohibit the Federal Trade Commission from addressing non-competes on a case-by-case basis.
What is the rule for Non-Compete Agreements in Alabama?
Alabama, like most states, has a provision in its Code that allows for Non-Compete Agreements; however, it is called a “Restrictive Covenant”. A Non-Compete Agreement or “Restrictive Covenant” is an agreement that prohibits an employee from working for a competitor or opening a competing business, typically for a certain period of time after an employee leaves a job. A Non-Compete Agreement may be one section of an employment contract or a standalone contract that an employee signs before or after employment begins.
The Alabama statute is restrictive as to when a Non-Compete Clause is enforceable. Specifically, the Alabama Code Section 8-1-190 states that such clauses are void or unenforceable except in certain circumstances that are listed in the statute.
The statute limits the applicability of Non-Compete Clause because such clauses are generally viewed unfavorably as being contrary to public interest. That is, the public in general is usually harmed by the restriction of business.
What is the Law in Alabama?
The place to begin a discussion of Non-Compete Agreement in Alabama is Section 8-1-190, the current law in Alabama as amended in 2016. It states in subsection (a) that “Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided by this section is to that extent void.”
In plain English this means that any contract containing a Non-Compete Agreement or has language that in any way restricts a person from working is void.
However, subsection (b) provides 6 exceptions where a Non-Compete Agreement is enforceable.
What are the exceptions where a Non-Compete Agreement in Alabama is enforceable?
The six exceptions listed in the statute are the only instances available where Non-Compete Agreements are enforceable in Alabama.
Exception 1: “A contract between two or more persons or businesses or a person and a business limiting their ability to hire or employ the agent, servant, or employees of a party to the contract where the agent, servant, or employee holds a position uniquely essential to the management, organization, or service of the business.”
The key wording here is “a position uniquely essential to the management, organization, or service of the business”. This wording is special in that it is both extremely broad and narrow at the same time. The question is what is “uniquely essential”? This involves a facts and circumstances analysis and will require a good argument on the employer’s part if challenged in court.
Exception 2: “An agreement between two or more persons or businesses or a person and a business to limit commercial dealings to each other.”
This exception is fairly straightforward. This is when the agreement only affects the commercial dealings between the two parties signing the contract.
Exception 3: “One who sells the good will of a business may agree with the buyer to refrain from carrying on or engaging in a similar business and from soliciting customers of such business within a specified geographic area so long as the buyer, or any entity deriving title to the good will from that business, carries on a like business therein, subject to reasonable time and place restraints. Restraints of one year or less are presumed to be reasonable.”
This exception is fairly straightforward though it is limited. It affects the selling of “good will” of a business. One can think of this applying whenever one buys a business from another. Such an agreement can contain a Non-Compete Agreement to the extent that it prohibits the seller from engaging in a similar business and poaching customers within a geographic area for a limited period of time. One year is presumed reasonable. That means, a court generally will enforce such an agreement if the time restrictions are not too burdensome. Whether two years, three years, or four years is reasonable depends largely on the business and the location. However, the idea that a contract to sell a business can prohibit the seller from ever competing with the buyer is wishful thinking.
Exception 4: “An agent, servant, or employee of a commercial entity may agree with such entity to refrain from carrying on or engaging in a similar business within a specified geographic area so long as the commercial entity carries on a like business therein, subject to reasonable restraints of time and place. Restraints of two years or less are presumed to be reasonable.”
This exception like the one above is fairly straightforward; however, it affects a business’s employees rather than the seller of a business. This exception unlike the above presumes a “two year” restraint against competition to be reasonably limited by geography of course. Limiting competition to Baldwin and Mobile Counties is very different from limiting competition to the whole state of Alabama.
Exception 5: “An agent, servant, or employee of a commercial entity may agree with such entity to refrain from soliciting current customers, so long as the commercial entity carries on a like business, subject to reasonable time restraints. Restraints of 18 months or for as long as post-separation consideration is paid for such agreement, whichever is greater, are presumed to be reasonable.”
This exception prevents poaching of current customers of an existing business. That is, a former employee cannot call, solicit, influence, entice, etc. existing customers away from the employer holding the Non-Compete Agreement. The statute states that 18 months is presumed reasonable. Though, depending on the industry, it could be a little longer. For example, assume your business is roofing. You train an employee over the course of time who then decides to go out on his/her own, they cannot steal your customers for 18 months.
Exception 6: “Upon or in anticipation of a dissolution of a commercial entity, partners, owners, or members, or any combination thereof, may agree that none of them will carry on a similar commercial activity in the geographic area where the commercial activity has been transacted.”
This exception is perhaps the broadest of them all. It contains no time restriction though it does contain a geographic restriction. The difference here with the other exceptions is that the parties entering into the Non-Compete Clause are on an equal footing when negotiating. That is, if you are partnered with another or others and you agree as part of dissolution of your business that you will not compete in a certain geographic area then a court is going to enforce this agreement so long as it is reasonable. A geographic area like Baldwin County is inherently more reasonable than saying Alabama, Mississippi, and the Florida Panhandle.
What is a “Protectable Interest”?
As noted above, Non-Compete Agreements are void unless it represents a protectable interest. Section 8-1-191 defines “protectable interest” to include: trade secrets, confidential information, commercial relationships, and goodwill.
- A trade secret is nebulously defined in Section 8-27-2. To be a protectable interest it must have the following characteristics:
(1) include things that are used or intended to be used for a trade or business;
(2) can be “embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique, or process”;
(3) is NOT publicly known;
(4) cannot be readily ascertainable (think Google search or YouTube videos);
(5) required effort on the part of the employer to develop; and
(6) it has value.
- Confidential Information is just as the name implies. Something that is not available to the general public but is available and known to the persons signing the Non-Compete Agreement.
- Commercial Relationships are the relationships you develop for your business. This includes contacts with specific prospective or existing customers, patients, vendors, or clients.
- Goodwill is a fairly broad term and includes the following:
(1) An ongoing business, franchise, commercial, or professional practice, or trade dress;
(2) Specific marketing or trade area.
- Specialized and unique training involving substantial business expenditure specifically directed to a particular agent, servant, or employee, provided that such training is specifically set forth in writing as the consideration for the restraint. NOTE: Basic job skills are not in and of themselves a protectable interest.
What are the requirements for a Non-Compete Agreement in Alabama?
The agreement must be in writing and signed by both parties and supported by adequate consideration. This means that the party signing the agreement must be your employee at the time of the agreement. You cannot willy nilly have people sign Non-Compete Clauses in order to prevent competition. There must be adequate consideration. That is, the person signing the agreement must be employed by the requesting party and he/she must receive something for signing the agreement (e.g., a job that pays).
Can I put Non-Compete Agreements in all my contracts with new employees?
In theory, yes. But the Alabama statute is very restrictive as to when a Non-Compete Clause is enforceable. You must keep in mind the six exceptions listed above and remember that basic job skills are not a protected interest. For example, if you own a restaurant forcing your servers to sign a non-compete clause is not going to be enforceable. However, if your server knows your secret recipes for certain items on the menu such as your special homemade ice cream then a non-compete clause makes a lot more sense and would be enforceable.
Are there any nuances to the law that I should be aware of?
The Alabama statute is fairly straightforward; however, there are some instances or pitfalls that persons new to the area should be aware:
- The signing employee must be employed at the time of signing the agreement.
- The agreements likely do not function the same for professionals, which is a legal term of art. Think of Doctors, Lawyers, Veterinarians, Accountants, etc. There is no hard and fast rule here, so it requires extra caution when drafting your agreement.
- Non-Compete Agreements DO NOT WORK against independent contractors.
- It has little to no effect with regard to No-Hire Agreements. That is, a Non-Compete Agreement will not prevent the departing employee from poaching current employees if those employees want to leave and work for the departing employee. The best solution here is to have all employees sign the Non-Compete Agreement.
What are my remedies if a former employee violates a Non-Compete Agreement?
If you have a Non-Compete Agreement in writing and signed by a former employee who then violates that agreement, certain remedies are available to you. They include:
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- Injunctive relief – This happens when the Court prohibits the former employee from engaging in whatever activity that is violating the agreement.
- Actual monetary damages suffered by you as a result of the breach of the agreement.
- Any remedy available in contract law, including attorneys’ fees or costs, if provided for in the contract or otherwise provided for by law. NOTE: It is important to draft your Non-Compete Agreements well because a court will enforce what you have written so long as it is reasonable.
Final Thoughts on Non-Compete Agreements in Alabama
Non-Compete Agreements are a useful and effective way to protect your business. The Alabama law as amended in 2016 is infinitely better than the law that existed prior. However, it is important to craft your Non-Compete Agreement with care to avoid issues that could arise later and to ensure that you and your business receive the best protection available.
If you would like some help preparing or reviewing a non-compete agreement, please call us at (251) 215-9275 or write us on the contact page to schedule an appointment to discuss how we can help.
