Alabama’s governor, Robert J. Bentley, recently signed an amendment to Section 8-1-1 of the Code of Alabama into law. The law goes into effect on Jan. 1, 2016, and provides clarity for organizations with employees in Alabama regarding restrictive covenants under Alabama law.
The revised version did not change the framework regarding the general ban against restricting employees from engaging in “a lawful profession, trade, or business of any kind.” Nor does the new statute alter the six exceptions to that general ban, which are as follows:
- When the "agent, servant, or employee holds a position uniquely essential to the management, organization, or service of the business."
- "An agreement between two or more persons or businesses or a person and a business 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...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 such entity to refrain from carrying on or engaging in a similar business within a specified geographic area so long as the commercial entity carries on a like business therein, subject to reasonable restraints of time and place. Restraints of two years or less are presumed to be reasonable." This non-compete language is very similar to repealed Section 8-1-1.
- "An agent, servant or employee of a commercial entity may agree with such entity to refrain from soliciting current customers, so long as the commercial entity carries on a like business, subject to reasonable time restraints. Restraints of 18 months or for as long as post-separation consideration is paid for such agreement, whichever is greater, are presumed to be reasonable." This addition addresses the back and forth in the Alabama courts over whether or not non-competition and non-solicitation agreements were treated the same: the legislature says yes.
- "Upon or in anticipation of a dissolution of a commercial entity, partners, owners, or members, or any combination thereof, may agree that none of them will carry on a similar commercial activity in the geographic area where the commercial activity has been transacted."
Noteworthy revisions provide clarity with respect to the extent of permissible temporal and geographical restrictions. Specifically, the statute provides presumptively reasonable time period restrictions. An agreement where an employee promises not to engage in a similar business of an employer within a geographic area is presumptively reasonable if the limitation is effective for two years or less. Non-solicitation agreements are presumed reasonable if the limitation is effective for no longer than 18 months or the time period during which post-separation consideration is paid. Additionally, a geographic restriction is permissible provided it is limited to the area in which the company operates a similar business. Importantly, the amended statute continues to allow for blue penciling of restrictive covenant agreements to remove unenforceable provisions, if necessary.
The statute also provides clarification regarding what constitutes a “protectable interest.” That defined term includes trade secrets, confidential information, commercial relationships, customer, patient, vendor, or client good will, and specialized and unique training. Job skills alone, however, are not considered a protectable interest.
Quite possibly the most significant aspect of the amendment is that the burden of proof regarding enforcement of restrictive covenants has shifted. Under the old version, the plaintiff had the burden of proving there was a lack of undue hardship. The amendment provides that the party opposing enforcement of the agreement is required to establish that enforcement would result in undue hardship.
Prudent employers will use this amendment as an opportunity, through the guidance of an attorney, to implement and utilize restrictive covenants that will effectively protect their business.