Non-Compete Agreement Basics
Non-Compete Agreements are contracts (also known as covenants not to compete) between an employer and employee prohibiting the employee from doing certain things (for example, from working for a competitor of his or her employer) for a certain period of time and/or within a certain geographic area after the employee leaves his or her employment with the employer.
Non-compete agreements are also known as restrictive covenant agreements (or covenants not to compete). The purpose of a non-compete agreement, of course, is to prevent an employee from going to work for a competitor and using confidential information and trade secrets that they learned while working for the employer against the employer’s best interests . In most cases, non-compete agreements will in fact include language that limits the former employee’s ability to use the employer’s sensitive information for a certain period of time against the employers best interests. Of course, in order for the agreement to be enforceable, it generally must be supported by adequate consideration – typically in the form of a new job or even in the form of employment.
Most non-compete agreements will have a geographic scope or range that limits the place or places where the former employee is prohibited from taking employment with a competitor. These ranges are sometimes highly contested in litigation.
While many states allow the courts to modify unenforceable non-compete agreements to make them enforceable, in Alabama a non-compete agreement is only enforceable if it meets strict restrictions contained in the Alabama Code.
Alabama’s Non-Compete Laws
In Alabama, non-compete agreements are governed by the general contract law principles relating to mutual assent and consideration for valid contractual obligations. Moreover, since Alabama has among the most anti-employee restrictive covenant enforcement statutes in the country, we look to the statutes as they have evolved in both amendments to the statutes and case law to model the restrictive covenants and other post-employment obligations.
As a practical matter, the two most likely avenues for imposing post-employment restrictions and obligations on employees are non-compete agreements (where the restriction is not to compete against the employer for a prescribed period of time) and non-solicitation agreements (where the restriction is limiting the moving employee’s ability to solicit the employer’s current customers or former customers.) Their status as valid means of post-employment restrictions is a little different.
A non-compete agreement merely limits an employee’s ability to work for competitors after leaving the employer. It is not possible in Alabama to seek by agreement to limit an employee’s status as able to work or availability to work for a competitor; i.e., the agreement cannot restrict the number of job offers the employee may refuse during the non-compete period. Rather, the agreement is a direct and linear restriction, such as an employee may not work for a competitor of the employer for a specified period of time after leaving.
With respect to non-compete agreements, Alabama law is found in three important statutes: (1) 8-1-1; (2) 8-1-1.1 and (3) 8-1-1.2. The first one, which dates back to 1831, holds to be void and unenforceable any restrictive covenant that would impose any restraint that is greater than is needed by the employer to protect its "legitimate business interests." This statute is applied in conjunction with the two later statutes to which I will refer. It was used by the Supreme Court of Alabama very frequently until the mid-1990’s to strike down agreements the court felt overly restrictive, unfair or unreasonable.
The second – 8-1-1.1 – dates from 1996. The legislature passed this statute to overrule a line of cases that emanated from the 1980’s that limited the ability of employers to enforce non-competes. In doing so, the legislature went as far as it could in the explicit realm of what is seen as an intrusion on the employment contract. Even as amended, the 1996 version though cannot be used to further an employer’s interests after the employee leaves, such as through liquidated damages and the like, as these are precluded by 8-1-1.
The third statute, adopted in 2009 – 8-1-1.2 – is meant to limit non-competes in the employment setting, and is essentially a restatement of almost all of the limitations that have been adopted over the years in case law pre-dating the 2009 statute, but that were not included in the 1996 statute. It is not used as often as the other two because it essentially just adds a statutory framework to what has been established by case law. It does provide some assistance to employees because it establishes the serious burdens that employers must undertake in trying to establish their "legitimate business interests" to overcome the presumptions against enforcement of the employer’s agreements under 8-1-1.
Alabama’s Standards for Enforcing Non-Competes
In Alabama, the primary aspect that applies in determining the enforceability of a noncompete provision is the reasonableness of the provision. The Alabama courts consider many factors in determining reasonableness, including reasonable duration, geographic scope, and whether the employer has a legitimate business interest to protect. Alabama Code § 8-1-1(9) provides that a company has a protectable interest when it has "a legitimate business interest if it can show that it has: 1. Trade secrets; 2. Valuable confidential information not generally known to or readily ascertainable by the public, the use of which could result in competitive injury; or 3. Customer goodwill associated with (i) an ongoing business, (ii) a resulting work in progress, or (iii) a future business or product." The Alabama courts have upheld noncompete provisions ranging from one year to three years in duration. Sean Kramer, "All That You Need to Know About Enforcing Non-Compete Agreements," Law360, October 6, 2015 (three-year noncompete deemed to be reasonable duration by Alabama court). Additionally, the Alabama Supreme Court has held that a geographic scope of as little as 50 miles was reasonable. The limits of what may be considered reasonable duration and geographic scope in an Alabama noncompete is currently under review by the Alabama legislature. See, Flaum and John H. Melton, "Wayward Riders: Alabama Senate Bill 238," March 3, 2016. As a matter of public policy, Alabama courts will not uphold a noncompete provision in an employment contract when it results in an employee being unable to make a living. Those contract terms are instead void. Article 2, Alabama Noncompete Agreements, "Summary and Analysis of Alabama Noncompete Choices, December 15, 2006, Revised February 25, 2009.
Industries that Use Non-Compete Agreements in the Workplace
While non-compete agreements can be and are used in a variety of industries, some sectors see wider use of non-competes than others. For example, non-competes are quite common in the medical field. A health care provider may work for a company while they are making money for that company. However, if the provider leaves and takes patients with them, their former employer could claim that the ex-employee stole lucrative business, leading to litigation. Not only is it important to protect patient lists, but it is also crucial for facilities to protect capital investments, such as devices or products that are helping to make money for the service provider. Often times, companies will ask employees in close business areas to sign a non-compete agreement.
Laws in Alabama have been used to uphold non-compete agreements for employees in the health care field. Because this is a very regulated field, the investment that a service provider puts into hiring highly trained professionals is significant. As alluded to above, there are considerable investments that are made in the hopes of a profitable return.
Another industry that often utilizes non-competes is the construction industry. This is because someone with a specific skill could potentially impact the bottom line of a company. If this skill could be exploited or stolen, this could cause the company to lose money. The company would then utilize a non-compete agreement to get its investment back. For example, if a company trains a contractor to use a specific product and that contractor takes this method to a competing construction site, the first company is losing out. This potential loss is greater than would be the case for a clerk who moves to another grocery store and continues their work as they did at the previous grocery store.
Technology companies also utilize non-competes. The information, products and ways to accomplish technical tasks change very quickly in this industry. Therefore, trade secrets are crucial. A software engineer, for example, may work on a product that is updated or changed frequently. If that person leaves and brings that knowledge with them, competitive harm could be suffered by the company. Developers often work for multiple companies, resulting in a lot of competition. This increases why a company asks an employee to sign a non-compete, even if the position that is departing is none or a lower-ranking position.
When Can You Contest a Non-Compete Agreement in Alabama
An employee can contest a non-compete agreement in Alabama and many other non-compete states. The first step often requires filing an Answer in court when a legal action is commenced by the employer. Later, parties may require injunction or other hearings to fully adjudicate a case. The case will often settle before it goes to trial. When non-compete agreements go to trial, it is up to a jury or judge to decide whether, and if so how, the contract will be enforced. The Court may deny injunctive relief entirely or modify the language of the non-compete. An agreement may be declared void and unenforceable.
Sometimes, important facts regarding the geographic or temporal scope of the covenant are not clearly established prior to trial. Moreover, some of the most compelling facts to remove a non-compete from consideration arise only after the employee has started working for the new employer. These developments do not necessarily mean that it will be expensive to litigate the case. In fact, many cases can be tried on a limited basis as to damages, especially when a temporary injunction is issued against the employee’s competing activity in violation of the covenant. Adding facts later can resolve the case and bring about a settlement at earlier stages of litigation.
Suits can be heard and decided quite rapidly in Alabama. For example, litigation styled "for foreclosure on restrictive covenant" can be set for hearing anywhere from 10 to 30 days after the case is filed. In addition to "foreclosure" cases, non-compete cases often involve a jury determination as to damages. Non-compete injunction cases require a hearing on the merits. Businesses with pending non-compete cases sometimes attempt to settle, but they may not be willing to extend the dated restriction or agree to other concessions.
How to Draft a Valid and Enforceable Non-Compete Agreement
To maximize the enforceability of a non-compete agreement under Alabama law, each agreement should follow best practices. Foremost on the list is that a non-compete agreement must preserve a legitimate business interest owned by the company. Otherwise, an agreement that seeks to withhold an employee from competition is not enforceable.
A legitimate business interest includes both protection of trade secrets and confidential and proprietary information, as well as company goodwill. Goodwill describes the value attached to a business that includes its name and reputation. So, employers who have trade secrets and confidential and proprietary information should include this interest in a non-compete agreement. Companies that do not have these interests should nevertheless include the interest of goodwill in an employment agreement. While the interest of a customer relationship or client relationships is not a standalone legitimate business interest, it falls within the broad sphere of goodwill.
Another best practice for having a commercially useful non-compete agreement is to use template agreements that contain no restrictive provisions not necessary to accomplish the objectives of the agreement . Some companies insist on the use of broad language across the board even when the company has no legitimate business interest in enforcing the restriction. Such overreaching makes it difficult to enforce the restrictive provisions that are compliant with Alabama law.
Careful drafting of the clauses setting out the scope or breadth of a non-compete agreement should be made to only cover those geographic or territorial areas where the company has a business presence and only where the employee actually performs services. If the employee performs services in one area of the state but not elsewhere, the company should limit the non-compete restriction to the areas where the employee performs competitive services.
Another common pitfall in the drafting is for certain businesses like professional service firms with multiple places of business, to require all employees to uphold the agreement throughout the multiple locations. Such a practice can be a source of confusion for the employee and the drafting attorney. The employee may be unsure which jurisdiction’s laws will be applied in the event the agreement is breached. There is no long-held practice that creates a presumption about which states’ laws apply when a non-compete agreement terms is breached.
Modifications and Exceptions to Non-Compete Agreements
In addition to the drafting of the non-compete, one of the most common ways in which non-compete agreements come up in Alabama employment law cases is through a modification or exception. Specifically, the parties may mutually agree to amend the terms of the covenant not to compete, or it may be set aside or rendered void as a matter of law. For instance, in Stone v. Stanton, 99 So.3d 1222, 1237 (Ala.Civ.App.2011), the Court of Civil Appeals for the State of Alabama held that a non-compete agreement signed by the employee after he was hired was an unlawful condition of continued employment. In other words, because the employer did not offer the subject position to the employee unless he agreed to sign the non-compete, it was deemed to have been done under duress or duress and undue influence. In Alabama, agreements that are entered into under duress or undue influence may be rendered void.
Further, there are instances in which the non-compete agreement would be rendered void or unenforceable as a matter of law based on a legal doctrine called "blue-penciling." Under the doctrine of blue-penciling, when a non-compete agreement is overly broad, meaning, it restricts the employee even more than necessary to protect the employer’s business interest, it is voided only to the extent as necessary to render it enforceable. Chen v. City of Gainesville, 154 F.3d 919, 923-924 (11th Cir.1998). In Chen, the employee was hired to work as a zookeeper in Alabama, where the defendant resided. The employee (and other employees) were required to sign a document prohibiting them from representing that they were employed by the facility in any television production, documentary, or movie without written permission. The Eleventh Circuit held that the agreement was overbroad because it prohibited the employee from somewhat tangentially using the zoo for a project unrelated the zoo. However, the court went on to say that if given the choice between a blue-pencil remedy and voiding the contract entirely, it would "incline toward fashioning a blue-pencil remedy."
The Effects of Non-Compete Agreements on Employees and Businesses
For Alabama employees and employers alike, non-compete agreements present a legal framework through which employees can be restricted in seeking to obtain employment with or provide services to one competing with an employer (or former employer). The trade-off contemplated by such agreements is that while competition among businesses may be restricted as to the employee, other businesses may be able to access the employee’s services after the employer has given rise to such an opportunity (whether by contract, some act or omission justifying restrictions, or perhaps even by creating that opportunity in the first place).
Both sides have to be careful what they ask for in a non-compete agreement. The negotiators for an employee would want to avoid overly restrictive provisions that limit future employment opportunities and negotiate for removal or modification of any overly broad provisions, and the negotiators for an employer must be cognizant of how such restrictions may affect operation of the employer’s business.
Recent Changes and Developments
As with many states, an increase in restrictive covenant litigation has found its way to Alabama’s courts in recent months and years. Although a significant precedent-setting case regarding non-compete agreements took place on the federal level when the Eleventh Circuit decided Specialty Healthcare & Rehab. Servs. Corp. v. Newman (pdf), 625 F.3d 1225 (2010) (en banc), that case was not the first of its kind in Alabama. In late 2008, the Alabama Supreme Court affirmed a lower court’s summary judgment ruling in favor of a former employee and spouse in a breach of contract and misappropriation action against their former employer based on the trial court’s determination that the agreement by the parties lacked a reasonable geographic scope. Disease Riskations v. Thrash, Civil Action No. 06-0521-CG-N (S.D. Ala. Dec. 2, 2008), aff’d in part, remanded in part, 518 F.3d 1374 (11th Cir. 2008).
Outside non-compete agreements, emerging trends have also been seen in connection with non-solicitation and confidentiality agreements. Perhaps the most interesting recent development has been the emergence of cases deciding the enforceability of "narrow" non-competes, defined as covenants having a somewhat less direct impact on competition than traditional non-compete agreements. In what is thought to be the first Alabama case interpreting the enforceability of narrow non-compete agreements, an Alabama Circuit Court found that a non-disclosure agreement was enforceable, but refused to extend the non-compete duration beyond two years , the duration of the non-compete itself, after considering the nature of the business and the interest to be protected. Global Services, LLC v. KSM, Inc., Civil Action No. 2011-CA-00723 (Ala. Cir. May 21, 2012).
Pivotal judicial consideration of non-compete agreements recently occurred in Alabama in the 2012 case of O’Neal Steel, Inc. v. McEwen, Civil Action No. CV05-1006-S (N.D. Ala. Pag. Dec. 17, 2012), where the Northern District of Alabama rejected the plaintiff’s attempt to argue that Alabama law with its respect to non-compete agreements is to be found within Alabama’s Statutory Restriction of Unauthorized Employee Competition Act (A.S.Section 8-1-1, et seq.) due to the 1949 amendment of that act. The court found that the prior authority and general sentiment were for the application of the common law, not a statutory law, with respect to restrictive covenants. Therefore, the court found that the provision in O’Neal Steel’s employment agreement with its employee was unreasonable because it included a statewide restriction. Because the agreement prohibited the employee from conducting business anywhere in the State of Alabama, including in places where O’Neal Steel had no customers, the court ruled that a reasonable geographic scope was not contemplated.
Until Alabama’s appellate courts provide any additional guidance on the issue of "narrow" non-compete agreements, the applicability of traditional non-competes will remain the subject of careful consideration by Alabama employers and their counsel.