Everything You Need to Know (And Probably Don’t) About Covenants Not to Compete - Alabama

Non-Compete Agreement Series

Firm Alert

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The next state in our series exploring non-compete agreements is Alabama. The Yellowhammer State has a fulsome history of litigation (resulting in many reported decisions) involving non-competes and other post-employment competitive restrictions. The legislature has recently revised its non-compete statute, codifying existing law in some areas, while making new law elsewhere. For this chapter, we’ll add the insights of my Birmingham, Alabama, partner John Goodman, who has for more than 30 years represented non-compete plaintiffs and defendants in Alabama courts (as well as the courts of more than a dozen other states).  

Alabama’s non-compete law is similar to that of many other jurisdictions: Such agreements are void as against public policy[i] unless they satisfy one of several statutorily prescribed exceptions.[ii] The most commonly used of these exceptions are for agreements between employers and employees, agreements between employer and employee not to solicit from the former’s customers, and agreements between sellers of the good will of a business and buyers of the same.[iii] Assuming the agreement in question is a recognized exception, it is only enforceable if (a) the party seeking enforcement possesses a valid (and now statutorily defined) “protectable interest” and the restriction is reasonably related to that interest; and (b) the agreement is reasonable in its duration and the geography it covers.[iv] 

Some Alabama Peculiarities - Alabama law contains a few “potholes” or impediments to enforcement that are not typical under other states’ laws:

  • Employee must be employed at time of signing. For employer-employee agreements, the employment relationship must exist at the time the non-compete is entered into; a company cannot “lock up” employees by having them sign prior to commencement of the employment relationship.[v] This defense has been applied fairly rigidly (one might say hyper-technically) in some cases.[vi]
  • No good against “professionals.” Non-competition agreements are unenforceable against “professionals,” a term of art that includes (per reported decisions) attorneys,[vii] physicians,[viii] accountants,[ix] veterinarians,[x] and physical therapists.[xi] The contours of what qualifies as a “profession” for this purpose remain imprecise.[xii]
  • Non-competes no good against independent contractors. The Alabama Supreme Court has also construed the wording of the current statute’s predecessor (language also contained within the current statute) to preclude enforcement of non-compete agreements against independent contractors (as distinguished from employees).[xiii]
  • No-hire agreements. As addressed below, Alabama’s statute significantly restricts a business’ ability to prevent a departing employee from hiring his or her co-employees following departure.

Statutory Authorization - The current version of Alabama’s non-compete statute, Ala. Code § 8-1-190 et seq., effective January 2016, largely retains the language of its predecessor statute and codifies some principles from Alabama case law. The areas in which the statute most clearly deviates from existing law involve “presumptively reasonable” time periods for competitive restrictions[xiv] (see “Restricted Period” below) and the conditions under which “no hire” contractual provisions can be enforced.[xv]

Consideration and Other Contract Formation Issues - In Alabama, continued employment (even at-will employment) constitutes sufficient consideration to support a non-compete or non-solicitation agreement.[xvi]

Alabama requires a covenant to be in writing and signed by all parties, [xvii] and runs against only the parties that have signed it.[xviii] However, non-signatories can be enjoined if they are found to be aiding the covenantor to breach.[xix]

Geographic Limitations - Alabama’s statute refers only to an undefined “specified geographic area”.[xx] Case law under the predecessor statute makes clear, however, that any defined geography can be permissible so long as the area is reasonable. Alabama courts have, under appropriate circumstances, upheld restrictions covering the entire state,[xxi] and geographic areas far beyond the state.[xxii] The statute, however, makes clear that the entity seeking enforcement of the restriction must “carry on a like business” in the covered area.[xxiii] This requirement is reflective of the general principle that non-competition agreements are only enforceable to the extent necessary to protect the substantial business interest of a plaintiff.[xxiv]

Non-Solicitation/Non-Hiring of Employees - While the Supreme Court has changed its view on the question over time,[xxv] as of the amendment of the non-compete statute, agreements not to hire the employees of another were enforceable as “partial restraints of trade.”[xxvi] The statute, however, provides that a “contract between two or more persons or businesses or a person and a business limiting their ability to hire or employ . . . [the employee] of a party to the contract” is only enforceable to the extent the person to the contract is “uniquely essential to the management, organization, or service of the business.”[xxvii] While there are no reported decisions to date interpreting or applying the “uniquely essential” language, it is plain the legislature intended to make the enforcement of any non-hiring of employees provision very difficult. The takeaway here is that, if you want your company’s employees not to be “poached” by a departing employee, have all employees (or those you wish not to be hired by a competitor) bound to enforceable non-compete agreements. 

Non-Solicitation of Customers - An employer can prohibit its employee upon separation from soliciting its current customers for a reasonable time period (addressed infra), so long as the employer carries on a “like business.”[xxviii] Pre-statute case law had held that non-solicitation prohibitions could extend to prospective customers,[xxix] and that “solicitation” could cover competitive actions by the former employee even if initiated by the customer.[xxx] It remains to be seen if the statute will be applied in line with this pre-statutory authority.

Protectable Interest - Non-compete agreements and other statutorily permissible restraints on competition can be enforced so long as they “preserve a protectable interest,”[xxxi] a defined term within the statute. Protectable interests include trade secrets, confidential information (defined broadly), commercial relationships or contacts with specific prospective or existing customers, and specialized or unique training that has been provided to the employee.[xxxii] Job skills themselves, without more, are not protectable interests.[xxxiii]

Restricted Period - The Alabama statute sets out what are deemed presumptively reasonable time periods, depending upon the contractual limitation involved. Non-compete agreements of up to two years are presumptively reasonable.[xxxiv] Agreements preventing solicitation of a commercial entity’s current customers are presumptively reasonable if they extend no longer than 18 months or the time period during which post-employment consideration is being paid for the promise, whichever is longer.[xxxv] Non-competition agreements of up to one year based on the sale of the good will of a business are presumptively reasonable.[xxxvi] 

The “presumptively reasonable time period” statutory regime, while not uncommon elsewhere,[xxxvii] is new to Alabama. (Prior to the modification of the statute, periods of two years for employee covenants,[xxxviii] and longer for the sale of business covenants,[xxxix] were frequently enforced.) The legislature’s choice of time periods is curious. Employee covenants have a longer presumptively reasonable time period than sale of business covenants; in practice, sale of business covenants are typically much longer and generally involve significantly more consideration flowing to the promisor. The statute also allows for a presumptively longer period for employee non-competes than for customer non-solicitation agreements, though the former agreements are by definition more restrictive and onerous as regards to the employee. To date no reported decisions have addressed the statutory time periods, nor dealt with the quantity or quality of evidence that might be necessary to overcome the presumptions.

Reformation/Blue Penciling - Courts are permitted to reform or modify a contractual competitive restraint if it is overly broad or unreasonable as to duration.[xl] The restraint must be of the type recognized as an exception under the statute; if it is not, the court is authorized to void the restraint in its entirety.[xli]

Remedies for Enforcement

  • Damages are recoverable for breach of a non-compete covenant.[xlii] Nominal damages are awardable, and are not discretionary, if a breach is established yet no actual damages are proven.[xliii] Liquidated damages – if the specified damages represent a reasonable pre-breach estimate of the expected loss – are enforceable (assuming, of course, that the covenant itself is enforceable), whether or not injunctive relief is also awarded.[xliv]
  • Injunctive Relief. In order to obtain injunctive relief, the employer or promisee must show (1) that without the injunction the plaintiff would suffer immediate and irreparable injury;  (2) that the plaintiff has no adequate remedy at law;  (3) that the plaintiff has at least a reasonable chance of success on the ultimate merits of his case;  and (4) that the hardship imposed on the defendant by the injunction would not unreasonably outweigh the benefit accruing to the plaintiff.[xlv] It is possible for the employee to rebut an inference of irreparable injury, however, by showing (for example) that the employee had no particular hold over the employer’s customers and that customers’ buying decisions were based on other factors; or that the employee lacked confidential information or that such information as was provided was not in fact confidential.[xlvi] A contractual provision that irreparable harm will be found in the event of breach is not controlling if the facts indicate that no irreparable harm will occur.[xlvii]
  • Attorneys’ Fees. Alabama courts have enforced attorneys’ fee contract provisions in the non-compete context.[xlviii] Attorneys’ fees are not recoverable in Alabama absent statutory authorization (not present in the non-compete statute) or contract between the parties.

Successor Company Enforcement/Assignability - Employers who succeed to non-compete agreements by way of stock sale or merger have standing to enforce the agreements entered into by their predecessors.[xlix] However, employee covenants cannot be enforced by successor employers if they became so by reason of a sale of assets.[l] There is case law to the effect that an assignee of a non-compete cannot enforce the same against an employee,[li] but dicta from a later decision suggests that enforcement by an assignee might be permissible.[lii]

Statutes of Limitation - The statute of limitations in Alabama for breach of contract is six years.[liii] Most tort or other statutory claims frequently asserted in this context – such as trade secret misappropriation,[liv] intentional interference with contractual or business relations,[lv] and breach of fiduciary duty[lvi] – are all subject to two-year statutes of limitation.

 


 

[i] Ala. Code § 8-1-197. Such policy is based on the view that non-competes tend to deprive the public of efficient service and can impoverish the individual. James S. Kemper & Co., S.E. v. Cox & Assocs., 434 So. 2d 1380, 1384 (Ala. 1984); Robinson v. Computer Servicenters, Inc., 346 So. 2d 940, 943 (Ala. 1977).

[ii] Ala. Code § 8-1-190(a).

[iii] Ala. Code § 8-1-190(b)(3), -(4), -(5). The statute also permits contracts between persons or entities prohibiting them from hiring each other’s employees (albeit only under limited circumstances), exclusive dealing contracts, or agreements among partners or owners of a commercial entity not to carry on a similar business following dissolution of the entity. Id., § 8-1-190(b)(1), -(2), -(6).

[iv] Clark v. Lib. Nat’l Life Ins. Co., 592 So. 2d 564, 565-66 (Ala. 1992).  A former element of an enforcing plaintiff’s case was that the restriction did not work an undue hardship on the employee/covenantor, see, e.g., Chavers v. Copy Prods. Co., 519 So. 2d 942, 944 (Ala. 1988). Hardship is now by statute an affirmative defense to be pleaded and proven by the defendant. Ala. Code § 8-1-194.

[v]Pitney Bowes, Inc. v. Berney Office Solutions, 823 So.2d 659 (Ala. 2001). 

[vi]See, e.g.,  Cajun Steamer Ventures, LLC v. Thompson, 2019 WL 3068430 at *6-7  (N.D. Ala. July 12, 2019) (holding that question of fact existed as to enforceability of covenant signed on February 2, when termination of employment occurred by reason of a release signed on February 2 but purportedly “effective as of” February 1).

[vii] Pierce v. Hand, Arendall, Bedsole, Greaves & Johnston, 678 So. 2d 765 (Ala. 1996).

[viii] Salisbury v. Semple, 565 So. 2d 234 (Ala. 1990).

[ix] Burkett v. Adams, 361 So. 2d 1 (Ala. 1978).

[x] Friddle v. Raymond, 575 So. 2d 1038, 1040 (Ala. 1991).

[xi] Benchmark Medical Holdings, Inc. v. Barnes, 328 F. Supp. 2d 1236 (M.D. Ala. 2004).

[xii]Optometrists are not professionals for purposes of the exception, Board of Optometry v. Eagerton, 393 So.2d 1372 (Ala. 1981), nor are prosthetists, J.E. Hanger, Inc. v. Scussel, 937 F. Supp. 1546 (N.D. Ala. 1996), or pest exterminators, Dobbins v. Getz Exterminators of Ala., 382 So. 2d 1135 (Ala. Civ. App. 1980). The non-compete statute, addressed infra, makes clear that the statute is not intended to alter the professional exemption as it existed as of the new statute’s passage. Ala. Code § 8-1-196.

[xiii] See, e.g., Premier Indus. Corp. v. Marlow, 295 So. 2d 396 (Ala.), cert. denied, 419 U.S. 1033 (1974).

[xiv] Ala. Code §§ 8-1-190(b)(3), -(4), (-5).

[xv]Ala. Code § 8-1-190(b)(1).

[xvi] See, e.g., Daugherty v. Capital Gas Co., 229 So. 2d 480 (Ala. 1969).

[xvii] Ala. Code § 8-1-192.

[xviii] See. e.g., Russell v. Mullis, 479 So. 2d 727, 729 (Ala. 1985) (“a person who has not executed or signed the covenant is not bound by the stipulation against engaging in business, and he may not be enjoined from competing with the covenantee”). Similarly, there are no “implied” non-competes. See, e.g., Joseph v. Hopkins, 158 So. 2d 660 (Ala. 1963) (no covenant against competition implied from sale of good will of business).

[xix] See, e.g., Daughtry, 229 So. 2d at 485; Yost v. Patrick, 17 So. 2d 240, 244 (Ala. 1944).

[xx] Ala. Code §§ 8-1-190(b)(3), -(4).

[xxi] Central Bancshares of the South v. Puckett, 584 So. 2d 829 (Ala. 1991).

[xxii] Parker v. Ebsco Indus., 209 So.2d 383 (Ala. 1968) (entire U.S. east of Rocky Mountains); Kershaw v. Knox Kershaw, Inc., 523 So. 2d 351 (Ala. 1988) (anywhere in U.S. and Canada where plaintiff did business).

[xxiii] Ala. Code §§ 8-1-190(b)(3), -(4).

[xxiv] Birmingham Television Corp. v. DeRamus, 502 So.2d 781 (Ala. Civ. App. 1986).

[xxv] See Dyson Conveyor Maintenance, Inc. v. Young & Vann Supply Co., 529 So. 2d 212 (Ala. 1988).

[xxvi] Ex parte Howell Eng’ng and Surveying, Inc., 981 So. 2d 570 (Ala. 2006) (overruling Dyson Conveyor, supra).

[xxvii] Ala. Code § 8-1-190(b)(1).

[xxviii]Ala. Code § 8-1-190(b)(5).

[xxix] See, e.g., Digitel Corp. v. DeltaCom, Inc., 953 F. Supp. 1486, 1496-97 (M.D. Ala. 1996) (prohibition on soliciting or accepting business from employer’s active or prospective customers was reasonable and enforceable).

[xxx] Digital Corp., 953 F. Supp. at 1497 n.10.

[xxxi] Ala. Code § 8-1-190(b).

[xxxii] Ala. Code § 9-1-191(a).

[xxxiii] Ala. Code § 8-1-190(b).

[xxxiv] Ala. Code § 8-1-190(b)(4).

[xxxv] Ala. Code § 8-1-190(b)(5).

[xxxvi] Ala. Code § 8-1-190(b)(3).

[xxxvii] See, e.g., O.C.G.A. § 13-8-57(b); Fla. Stat. § 542.335.

[xxxviii] See, e.g., Clark v. Lib. Nat’l Life Ins. Co., 592 So. 2d 564 (Ala. 1992); Central Bancshares, 584 So. 2d at 831.

[xxxix] See, e.g., Kershaw, 523 So.2d 351 (upholding five-year covenant). See generally Concrete Co. v. Lambert, 510 F. Supp. 2d 570, 572 (M.D. Ala. 2007) (“A survey of Alabama cases strongly suggests that [a] five-year period is at the outermost limits of what is considered reasonable by the Alabama courts . . . [and] that in order to be reasonable, a non-competition agreement’s time restraint should be shorter.”).

[xl]Ala. Code § 8-1-193; see also Mason Corp. v. Kennedy, 244 So. 2d 585, 590 (Ala. 1971); Cullman Broadcasting Co. v. Bosley, 373 So. 2d 830 (Ala. 1979).

[xli] Ala. Code § 8-1-193.

[xlii] See, e.g., Clark, 592 So. 2d at 567; Aldridge v. Dolbeer, 567 So. 2d 1267, 1269 (Ala. 1990).

[xliii] James S. Kemper, 435 So. 2d at 1385.

[xliv]James S. Kemper, 435 So. 2d at 1385; Cullman Broadcasting Co. v. Bosley, 373 So. 2d 830, 837 (Ala. 1979).

[xlv]Perley v. Tapscan, Inc., 646 So.2d 585, 587 (Ala.1994).

[xlvi] Ormco Corp. v. Johns, 869 So. 2d 1109 (2003).

[xlvii] Stokes v. Moore, 77 So. 2d 331 (Ala. 1955).

[xlviii] See, e.g., Buckley v. Seymour, 679 So. 2d 220, 227 (Ala. 1996).

[xlix]Sevier Ins. Agency v. Willis Corroon Corp. of Birmingham, 711 So. 2d 995 (Ala. 1998).

[l]Clark Substations, L.L.C. v. Ware, 838 So. 2d 360 (Ala. 2002).

[li]Sisco v. Empiregas, Inc. of Belle Mina, 237 So. 2d 463 (Ala. 1970).

[lii]Russell v. Birmingham Oxygen Service, Inc., 408 So. 2d 90, 93 (Ala. 1981) (declining to enforce covenant at request of purported assignee because no evidence of assignment, but noting “Appellees are correct in their assertion that an assignment of a contract may be either oral or written and that no magic words are necessary”).  

[liii] Ala. Code § 6-2-34(e).

[liv] Ala. Code § 8-27-5.

[lv] Ala. Code § 6-2-38(l); Teng v. Saha, 477 So.2d 378 (Ala. 1985).

[lvi] Ala. Code § 6-2-38(l); Davis v. Brown, 513 So.2d 1001 (Ala. 1987).