Alabama Rewrites Its Noncompete Statute

Litigation Alert

Client Alert

The Alabama legislature recently passed a comprehensive revision of the state’s noncompete statute, and Governor Bentley has signed the act into law. The new statute will become effective January 1, 2016. The new statute does not plow much new ground but codifies established Alabama precedent in this area of law. Nevertheless, the new statute does modify existing law in several areas, and companies, employees, and lawyers should be aware of those changes.

The new statute, like its predecessor, Section 8-1-1 of the Alabama Code, provides that “[e]very contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided in this section is to that extent void.” The statute spells out the exceptions, where contractual limitations on the practice of a livelihood are permitted. These include agreements by employees with their employers not to compete for a specified period following the conclusion of their employment; post-employment restrictions on solicitation of the employer’s customers; agreements not to compete in connection with the sale of the goodwill of a commercial entity; agreements (under certain circumstances) between businesses that limit their ability to hire the employees of one another; agreements not to compete in anticipation of or as part of the dissolution of a commercial entity; and agreements in which persons or businesses agree to limit commercial dealings to one another. All of these types of agreements have been found enforceable in appropriate circumstances under Alabama case law.

For the first time, the legislature has spelled out what constitutes a “protectable interest,” or aspect of a company’s business that makes it permissible to enforce a competitive restriction. In the employment context, these interests traditionally have included the employee’s access to the employer’s trade secrets or confidential business information, and the employee’s commercial relationships or contacts with customers, vendors, or clients. The interests listed in the statute do not materially vary from what has been recognized previously under Alabama law. The statute provides that “[j]ob skills, in and of themselves, without more, are not protectable interests.” In view of that language and existing decisions, it seems likely that going forward, an employee will need to have managerial, technical, executive, or sales responsibilities or specialized training or knowledge to be subject to a post-employment covenant.

The new statute’s principal change is its use of presumptively reasonable time periods for certain types of agreements. Employer/employee noncompete agreements are now presumed to be of a reasonable duration if they are two years or shorter. Covenants in connection with the sale of a commercial entity, by contrast, are presumptively reasonable if they are one year or shorter. Agreements not to solicit customers of a former employer have a presumptively reasonable duration of the longer of 18 months or the time period over which the employer is paying consideration in exchange for the nonsolicitation promise.

The presumptively reasonable time periods are a new creature under Alabama law (though a number of other states, including Georgia and Florida, have them). It’s not clear why the legislature chose to assign the time periods it did: Typically employer/employee agreements are thought to be more onerous on individuals than sale-of-business covenants and usually involve far less consideration to the promisor; yet the statute makes the presumptively reasonable time for employee covenants twice as long as for sale-of-business covenants. Likewise, prohibiting solicitation of an employer’s customers is certainly less restrictive than prohibiting competition generally; yet the legislature makes the presumptively reasonable time period shorter for the former than for the latter.

One other notable change is that the statute assigns to the party opposing enforcement of a noncompete the burden of pleading and proving that enforcement will work an undue hardship on him or her. Previously, lack of undue hardship was an element that the plaintiff was required to plead and prove.

Consistent with current practice, the statute retains the principle of “blue penciling,” meaning that courts will continue to have the ability to enforce only the reasonable aspects or limitations of an agreement that would otherwise be overly broad or unduly long.

The statute leaves unaddressed several thorny issues that sometimes arise in the noncompete context: Is the employee a “professional” (and thus immune from competitive restrictions)? Is the employer a successor attempting to enforce its predecessor’s contract? Was an employment relationship in place at the time the noncompete was entered into? Legal analysis of such issues will remain the province of the courts.

In sum, while the statute sets forth very limited policy changes (most notably the new regime of presumptive reasonableness), it does address fairly comprehensively most aspects of noncompete law in Alabama, and is worth study by companies and practitioners alike.