Employees in Alabama, like in many other places, often are required to sign employment agreements, most of which contain future restrictions on certain activities. The menu items for these agreements usually include covenants not to compete, not to solicit customers, not to poach other employees, and not to steal information (we call that committing a “data breach” now). Many of these agreements are written by really smart corporate lawyers and can be almost incomprehensible. Hopefully, this post will help in identifying the key language in these agreements while highlighting the new law on such agreements that just passed in Alabama.
As a quick update on this subject, The Alabama legislature in its recently-ended session passed a comprehensive revision of the state’s noncompete statute, and the act was signed into law by Governor Bentley on June 11, 2015. It is effective on January 1, 2016. While the new statute does not plow much new ground, it does modify existing law in several areas and raises a few questions as well as providing some answers.
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.” While this sounds like noncompetes in Alabama face an uphill battle, they really don’t. We cannot count how many times we have advised clients in Alabama that, actually, yes, that agreement that you have is enforceable here.
To be enforceable in Alabama, these agreements historically must have involved:
- a so-called protectable interest of the company
- a restriction of some sort that is related to that interest
- a restriction that is not too long or too broad geographically
- a restriction that does not impose an undue hardship on the employee
Alabama law specifically exempted professionals—like lawyers, doctors, and CPAs—from enforceability of noncompetes, and Alabama always had a quirk in the law that a noncompete had to be signed while the parties were in an employer-employee relationship. In other words, no enforceability if the agreement was signed before employment started, and no enforceability at all for independent contractors.
Regarding the first two elements of enforceability mentioned above, the Alabama legislature now has spelled out for the first time 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 pre-statute 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 validly be subject to a post-employment covenant.
The principal change made by the statute regards element three and is the legislature’s use of presumptively reasonable time periods for certain types of agreements. Employer/employee noncompetition 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. Notably, 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 unduly long or overbroad geographically.
Regarding element four, one other important change is that the statute assigns to the party opposing enforcement of a noncompete the burden of proving that enforcement will work an undue hardship on him or her. Previously, lack of undue hardship was an element that plaintiff was required to plead and prove.
The statute leaves unaddressed several thorny issues that sometimes arise in these cases. For example:
- Exactly who is a “professional” under the new law (and thus can be immune from competitive restrictions)?
- Does it matter anymore whether an employment relationship was in place at the time the noncompete was entered into? And, does it matter whether the worker even was an employee at all as opposed to having been an independent contractor? These questions arise because the new statute replaces the word “employer” with “commercial entity” in several places.
- Can a successor employer enforce its predecessor’s contract?
In sum, while the statute sets forth some limited policy changes, that noncompete of yours very likely will continue to be enforceable to some degree in Alabama, whether “as is” or after the application of the old “blue pencil.” The unanswered questions, as usual, will be left to the lawyers and the courts.