Alabama Enacts Major Revision of Alabama Code 8-1-1
| Publication year | 2015 |
| Pages | 0385 |
"To advise a client on the enforceability of a non-compete agreement under Alabama law is to flirt with malpractice"
-Anonymous Alabama lawyer
Introduction
For generations, Alabama lawyers who addressed issues related to non-corporate agreements have contended with a vague statute (Ala. Code § 8-1-1) ("Restrictive Covenant Act"), conflicting case authority, dramatic shifts in the controlling legal standard and trial courts that feel free to "blue pencil" agreements in ways that no one could have anticipated, turning wholly unenforceable covenants into enforceable covenants or vice versa.
As a result, it was notoriously difficult to advise clients as to the enforceability of restrictive covenants, even in situations where there appeared to be a reported case directly on point. For years, without clear legislative guidance, the Alabama Supreme Court struggled to develop a coherent set of analytical tools for restrictive covenant cases. Among other areas, the question of whether a restriction is "total" or only "partial" restraint, and the degree to which other elements of enforceability (e.g. "protectable interest" and "professional" status) apply to "partial" restraints, have been grafted onto Alabama's restrictive covenant jurisprudence.
With no clear guidance from the legislature, the Alabama Supreme Court's interpretation of the Restrictive Covenant Act shifted dramatically. For example in Sevier Insurance Agency v. Willis Corroon Corp.,1 the Alabama Supreme Court was presented with two cases involving insurance brokers who had allegedly violated identical covenants in two different jurisdictions (Montgomery County and Jefferson County). In the Jefferson County case, the trial court held that the covenant was a valid "partial" non-solicitation agreement and granted declaratory relief for the former employer. In the Montgomery County case, the covenant was held to be an invalid "total" restraint (non-compete agreement). On appeal, the supreme court initially reversed the Montgomery ruling and upheld the Jefferson County result. On rehearing, the Alabama Supreme Court reached the exact opposite result, reversing the Jefferson County holding upholding the covenant and affirming the Montgomery County holding invalidating the covenant. The Alabama Supreme Court ultimately held that, contrary to prior Alabama law, non-solicitation agreements were "total" restraints subject to the restrictions of Ala. Code § 8-1-1-an argument that neither party raised. Eight years later, the Alabama Supreme Court reversed Sevier and announced a new standard that a restrictive covenant was not a "total" restraint unless the bound party was prevented "from practicing her trade or profession."2
History of Alabama's Restrictive Covenant Law
"It is the public policy of Alabama that contracts restraining employment are disfavored."3 Alabama's restrictive covenant law has its roots in English common law. "During the Middle Ages, English courts found all restraints on trade to be void and unenforceable, including post-employment covenants not to compete."4 This is because covenants in restraint of trade violated the customary rules of the craft guilds. During the 15th and 16th centuries, "craft guilds were the dominant vehicles of economic activity in England."5 The guilds were divided among master craftsmen, journeymen and apprentices.6 "The goal of the apprenticeship system was to provide the master craftsman with a small labor force, and provide young men with a means of technical training to introduce them to the skills of the given trade."7 "The relationship between apprentice and master was a contractual one: the master agreed to provide essential training to the apprentice in exchange for low-wage labor over a given period of time, usually seven years. At the end of the contractual period, the apprentice would be free, as a journeyman, to practice his trade, eventually becoming a master."8
However, "[f]reedom of contract emerged as capitalism became the predominant policy concern during the eighteenth and nineteenth centuries. As a result, English courts began issuing decisions which allowed limited restraints on trade."9 Although the courts retained the presumption against the enforceability of restrictive covenants that had developed in the common law, they began applying a "rule of reason" in the enforcement analysis.10 Under the "rule of reason," the inquiry was whether there was "some essential economic or business purpose"11 for the agreement and whether the restrictive covenant "appeared to be made upon good and adequate consideration."12 Over the next century, the English common law "rule of reason" evolved into an interest-balancing analysis. For example, "[i]n Horner v. Graves, the English court found that the element of reasonableness was not limited only to the consideration stated in the contract, but also its potential impact on the public welfare."13
Beginning in the early 19th century, American courts adopted the common law "rule of reason" in their analysis of restrictive covenants and began upholding contracts in restraint of trade "if the restraints [were] reasonable under the circumstances, ancillary to a valid transaction or relationship, and limited in duration and geographic scope."14 It is against this legal landscape that Alabama adopted its first set of restrictive covenant statutes.
Chapter 272, article 7, § 6826 of the 1923 Alabama Code set out the general common law presumption against contracts in restraint of trade that persists today. According to § 6826, "Every contract by which any one is restrained from exercising a lawful profession, trade, or business of any kind, otherwise than is provided by the next two sections, is to that extent, void."15 Sections 6827 and 6828 set out two exceptions to this general rule. First, § 6827 permitted "[o]ne who sells the goodwill of a business" to "agree with the buyer to refrain from carrying on a similar business within a specified county, city, or a part thereof, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein."16 Section 6828, which, except for minor editorial changes, is identical in all material respects to the current version of Ala. Code § 8-1-1(c), allowed partners, "upon or in anticipation of a dissolution of the partnership, [to] agree that none of them will carry on a similar business within the same county, city, or town where the partnership business has been transacted, or within a specified part thereof."17
The Alabama legislature amended § 6827 in 1931 to extend the enforceability of restrictive covenants to the employee-employer relationship and to specifically permit non-solicitation agreements (the statute previously only mentioned agreements "to refrain from carrying on or engaging in a similar business").18 Beginning on July 23, 1931, amended § 6827, which is identical in all material respects to the current version of Ala. Code § 8-1-1(b), stated:
Exception in Favor of Purchaser and Employers-One who sells the good will of a business may agree with the buyer, and one who hires as an 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 a part thereof, so long as the buyer or any person deriving title to the good will from him, and so long as such employer carries on a like business therein.19
Sections 6826-6828 were recodified without material alteration in the 1940 Code20 and again in the Code of 1975.21
Alabama Law Institute Committee Actions to Revise the Restrictive Covenant Act
Alabama is blessed with the superb Alabama Law Institute ("ALI") and its executive director, Othni Lathram. In 2011, the ALI took on the task of providing clarity and predictability to this contentious and confusing area of Alabama law. The ALI convened a committee of judges, law professors and leading practitioners in the field ("Committee"). The committee set a high bar for itself by adopting principles to guide its revision of the Restrictive Covenant...
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