Alabama’s New Non-Compete Law
In June of this year, the state Legislature passed House Bill 352 to “clarify and restate” the law on restrictive covenants, or non-competes as these agreements are often called. Approved and signed by Governor Bentley, this Act will take effect at the beginning of 2016. While the Act codifies a number of rules developed from case law that may already be familiar to some (e.g. preserving the well-known exemptions for doctors, accountants, and other professionals), all employers, employees and business owners who are parties or potential parties to a non-compete agreement need to fully understand the changes that are just around the corner. This Act, which repeals the former Alabama Code Section 8-1-1, will govern virtually all aspects of the non-compete agreement, from the creation of valid agreements to their enforcement and the outcomes of litigation about such agreements. Any non-compete or restrictive covenant entered into on or after January 1, 2016, not complying with the Act will be void and unenforceable.
The Act lays out the six categories of enforceable restrictive covenants. These agreements may limit:
Category #1: When one party may hire the employee of the other party;
Category #2: Two parties to exclusive commercial dealings with one another;
Category #3: The seller of a business from competing with the buyer;
Category #4: An employee or agent’s ability to conduct business similar to that of the employing commercial entity;
Category #5: An employee or agent’s ability to solicit current customers of his or her employing commercial entity; and
Category #6: The ability of the partners, members, etc., of a commercial entity to conduct business similar to that of the entity upon or in anticipation of dissolution.
For many of these categories, the Act delineates a specific length of time for the duration of the agreement that is presumptively reasonable, e.g., for Category #3 the time listed is one year, and for Category #5 the Act provides a two year duration. Similarly, many of these categories are subject to geographical restrictions. The Act also sets forth another very express requirement – that an enforceable restrictive covenant must “preserve a protectable interest.” Defined in Section 2 of the Act, a protectable interest can be a trade secret, confidential information (a very broad category), commercial relationships, customer good will, or specialized training (although the Act makes a point to distinguish specialized training from regular job skills and training.)
In addition to defining the scope and content of acceptable non-competes, the Act lays out the nuts and bolts of non-compete litigation. The new law codifies the longstanding practice of reforming a non-compete to a more reasonable duration, if a court finds that the original time period was unreasonable. Of course, a non-compete that fails to comply with the Act can be thrown out in its entirety. Additionally, the law states in detail what remedies are available in the event a valid restrictive covenant is breached: appropriate equitable or injunctive relief, actual damages (liquidated damages if the contract so provides), and any other contract remedies, including attorney’s costs and fees, if the law or the agreement itself provides for them. Defenses normally available at law or equity are preserved, and the new law makes it clear that defendants bear the burden of proving the defense of undue hardship, while the party attempting to enforce the agreement bears the burden of proving the elements of that claim. Finally, the Act contains a choice of law provision which expresses a mandatory preference for Alabama law in the event that other law could be applicable and the foreign law conflicts with the “fundamental public policies” contained in the Act.
The new law is fairly transparent in many regards, and employers, employees, business owners and partners can all take some solace in knowing that the Act was in part an overt attempt to provide some clarity to those who have to write, abide by and enforce these agreements. The Act, however, was expressly a restatement of the law. Accordingly, parties and future parties to non-competes should take the time to evaluate their current or forthcoming agreements in light of the new law and, where appropriate, seek the assistance of effective counsel to help ensure the validity of the agreement.