On January 1, 2016, Employers and Employees should be aware that a new version of Section 8-1-1 of the Code of Alabama will become effective. This new version will drastically change those rules and guidelines that must be followed with regard to contracts that attempt to restrain an individual or entity from competing.
Both the old law and the new state: “[e]very contract by which anyone is retrained from exercising a lawful profession, trade, or business of any kind other than is provided by this section is to that extent void.” With the new legislation signed into law by Governor Robert Bentley, there are several new exceptions to this. The law says that contracts of non-competition and non-solicitation are allowed to preserve a “protectable interest.” The new exceptions are outlined below:
- Where an “agent, servant, or employee holds a position uniquely essential to the management, organization, or service of the business.”
- A voluntary agreement between two or more persons or businesses to limit commercial dealings to each other.
- “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”
- An agent, servant, or employee of a commercial entity may agree with the entity to refrain from engaging in similar business within a specified geographic area. The restriction must be reasonable in time and geography. Again, restraints of two years or less are presumed to be reasonable.
- An agent, servant or employee may agree not to solicit customers of the commercial entity. Restraints of 18 months are presumed reasonable.
- In anticipation of a dissolution of a commercial entity, the partners/members/owners may agree to restrict commercial activity post dissolution.
The new statute also defines “protectable interest” to include:
- Trade secrets as defined by Alabama law
- Confidential information that is defined quite broadly.
- Commercial relationships or contacts with “specific” prospective or existing customers, patients, vendors, or clients.
- A customer, patient, vendor, or client “good will” associate with an ongoing business or a specific market/trade area.
- Specialized and unique training involving “substantial business expenditure” specifically directed at a particular agent, servant, or employee. The caveat to this is that the training must specifically state that the training is consideration for the restraint of trade.
Above, we have included in quotation marks some areas that are not defined and will likely be fact-based and dependent on each particular situation.
Under Alabama case law, the courts have on occasion limited or voided certain parts of non-competes or non-solicitation agreements that are overly broad in scope, geography, or duration. The new law specifically codifies that a court may now void or limit these agreements or void them in their entirety.
The new law also codifies that the party seeking enforcement of the covenant has to prove that the alleged breaching party is in default, but the party resisting enforcement must prove the existence of an undue hardship should they plead that as a defense.
The new law also specifically details what a potential employer can seek as a remedy for the alleged breach:
- Injunctive or other equitable relief. In other words, a court order prohibiting certain behavior or forcing a party to do something.
- Damages suffered by the enforcing party as a result of the breach.
- Any other remedies available in “contract law” including attorney’s fees. This is extremely important for the employee or party resisting enforcement to note. While employment contracts usually have provisions stating that the non-breaching party (enforcing party) should be able to collect attorney’s fees in the event of enforcement, many do not. An argument for collecting attorney’s fees now appears available even if such a provision isn’t expressly included in the contract.
Finally, nothing in this new law is meant to eliminate the “professional exemption.” Under Alabama law, some professions such as lawyers, doctors, or dentists.
As one can see, while the new statute clarifies certain areas as it pertains to post-employment contracts and covenants, these contracts remain nuanced. If you are an employee or employer and subject to or are trying to enforce a non-compete, we highly recommend consulting with an attorney who may specialize in post-employment contracts or employment law before proceeding with any legal action or separation.