Enforcing non-compete agreements in Alabama.

• Author: Weller, Christopher W.

INTRODUCTION

Many businesses routinely require prospective applicants to execute non-compete agreements as a condition of employment. Employers use non-compete agreements to protect their financial and competitive interests by preventing the disclosure and use of valuable competitive information not generally available to the public. Typically, an employee who executes a non-compete agreement promises that, upon termination of his employment relationship with a company, he will not accept employment with a competitor within a certain geographic area for a specific period of time. The proper limits of such restrictions have been an abundant source of litigation in Alabama. The Supreme Court of Alabama has issued an increasing number of decisions addressing the validity of non-compete agreements. These decisions have produced a body of law establishing a reasonably consistent set of guidelines and principles delineating the permissible scope of non-compete agreements.

Alabama's stated public policy generally favors competition and opposes restraints on trade when such restraint is to the detriment of the public welfare. Hence, Alabama's public policy disfavors (4) contracts that include non-compete covenants that attempt to restrain employment because these covenants (5) deprive society of efficient service, and also create an impoverished individual. (6) Despite this disfavor, there are statutory exceptions that permit employers to impose reasonable restrictions on a former employee's fight to pursue employment with a competitor. However, the person or entity seeking to enforce a contract that restrains a lawful trade or business bears the burden of showing that the contract is not void under the ALA. CODE [section] 8-1-1 (1975). (7) Furthermore, the mere fact that a contract contains an invalid noncompete provision does not automatically render the entire agreement void under the statute. (8) In fact, non-compete agreements continue to serve as an essential tool in protecting businesses from unfair competition. (9)

Although non-compete agreements are enforceable, contract drafters should review and consider the reasonable limitations they use during the drafting phase of the non-compete agreements. This article is intended to provide guidance for drafting enforceable non-compete agreements in the State of Alabama and to assist the uninitiated from avoiding the many pitfalls that often doom the enforceability of such agreements.

DRAFTING ENFORCEABLE NON-COMPETE AGREEMENTS

Courts in Alabama will enforce non-compete agreements if they (1) fall within a statutory exception to the general prohibition, (10) and (2) are reasonably limited as to territory, duration and subject matter. (11) The statutory exception to the general prohibition against non-compete covenants provides:

(b) [A]n agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof so long as ... the employer carries on a like business therein. (12) Nonetheless, if a company seeks to enforce the covenant, it bears the burden of proving the inapplicability of a statutory exception. (13) Alabama courts also require the existence of an employee-employer relationship at the time of contract formation in order for the statutory exception to apply. (14) Furthermore, the party sought to be restrained from engaging in some aspect of trade or business must have entered into a contract with the party seeking to enforce the contract and received consideration for making this agreement. (15)

Moreover, a covenant not to compete must be reasonable, which is determined on a case specific basis. (16) In order to establish that a covenant not to compete is reasonable, the party seeking its enforcement must establish the following requirements:

1. the employer has a protectable interest;

2. the restriction is reasonably related to that interest;

3. the restriction is reasonable in time and place;

4. the restriction imposes no undue hardship [on the employee]. (17)

   Irrespective of the statutory exceptions, (18) and as will be discussed in greater detail herein, non-compete agreements cannot be used to unlawfully restrain the practice of a profession. (19)

   If a non-compete agreement does not prohibit the practice of a "profession" or "professionals," the following four factors must be examined to determine the reasonableness and, consequently, the enforceability of the agreement.

   1. Factor No. 1: Existence of Protectable Interest

      For purposes of determining reasonableness under Alabama law, the covenant must relate to an employer's protectable interests. (20) To establish a protectable interest, the employer must possess "a substantial right in its business sufficiently unique to warrant the type of protection contemplated by [a] noncompetition agreement." (21) Protectable interests may exist in several capacities. (22) For example, when an employee has gained access to valuable trade information (23) or has developed profitable customer relationships during his or her employment, courts have declared information as an interest capable of being protected by a noncompete covenant. (24) This is particularly true when the acquisition and protection of customer lists and clientele are of crucial importance. (25)

      A protectable interest may also exist when an employer has invested substantial time, resources, and responsibility in the employee. (26) For example, in Daniel v. Trade Winds Travel, Inc., the Supreme Court of Alabama found that a non-compete agreement was reasonable and valid because the employer substantially in, vested in office space and equipment for the employee s use. (27)

      Courts are also more likely to enforce non-compete agreements to protect valuable customer relationships where the former employee's new employer is a direct competitor. In Booth v. WPMI Television Co., Booth, an advertising salesman for WPMI, cultivated and maintained client relationships on behalf of his employer. (28) After resigning to work elsewhere, Booth attempted to contact several customers from his former client base at WPMI, in direct violation of his employment agreement. (29) The Court held that because the formation of customer relationships is imperative to the success of highly competitive advertising firms, WPMI held a protectable interest. (30) On the other hand, courts will refuse to recognize that an employer possesses a protectable interest if the information obtained is easily accessed by outsiders, or is common to others in the same business, e.g., when customer names are readily available on the internet or in an employer's advertising materials. (31) Likewise, a simple labor skill is not a protectable interest under the law governing noncompetition agreements. (32)

   2. Factor No. 2: Restrictions Must Be Reasonably Related To Employer's Interest

      The restriction in a covenant not to compete must also be reasonably related to the employer's protectable interest. Once an employer establishes the existence of a protectable interest, the court will prohibit competition that threatens that interest. In Central Bancshares of the South, Inc. v. Puckett, the court held that a restriction regarding competition in the banking business reasonably related to the bank's protectable interest because the restriction was designed to protect the bank only in the area in which it had a "legitimate interest: the banking industry." (33) The Court further noted that the agreement did not preclude the employee from pursuing work outside of banking. (34)

      Nevertheless, Alabama courts are often unwilling to enforce non-compete agreements that attempt to restrict future employment "in any capacity." (35) Alabama generally finds such restrictions overly broad and unenforceable because they "impose a greater limitation upon the employee than is necessary for the protection of the employer." (36) On the other hand, agreements that are limited to the protection of activities related to the employee's former job duties and that are of legitimate interest to the employer, are generally considered to be properly enforceable. (37) It should be noted, however, that Alabama courts will often modify (or "blue pencil") agreements that attempt to prevent former employees from working in another line of business within the employer's protected interest or from working in a similar line of business outside the employer's protected interest. For example, in Booth v. WPMI, the Court modified the broad non-compete agreement of an employer television station by limiting the restriction thereon to the sale of television advertising by a former employee. (38)

   3. Factor No. 3: Reasonable Temporal & Geographic Limitations

      Section 8-1-1 of the Alabama Code provides that an "employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof.... (39) The Alabama Supreme Court has construed this provision as requiring that restrictions be reasonable in time and place. (40) Therefore, "[t]o secure enforcement of a non-compete clause within a particular territory, the employer must demonstrate that it continues to engage, in that locale, in the activity that it seeks to enjoin." (41) In Kershaw v. Knox Kershaw, Inc., the Supreme Court of Alabama found a non-compete agreement to be overly broad because the covenant sought not only to restrict trade within the region that the firm did business, but it also attempted to restrict trade in unidentifiable areas through the use of ambiguous language. (42) Although prudence dictates that the agreement specifically identify the geographic scope of the restriction, the Supreme Court of Alabama has upheld general restrictions prohibiting employees from opening competing businesses. (43)

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