by Al Vreeland
A bill signed into law over the summer will significantly strengthen Alabama employers’ ability to enforce noncompete agreements when the law takes effect January 1, 2016.
The state’s old noncompete statute makes a broad statement that noncompete agreements are void. It then creates several exceptions into which courts have shoehorned the modern version of the noncompete.
Alabama courts have generally stated that noncompetes are disfavored, but they can be enforced when they are related to a legitimate interest (e.g., protecting customer relationships or proprietary information) and are reasonably limited in time and geographic scope. That formula gave an enormous amount of discretion to judges to decide whether noncompetes would be enforceable and left employers with uncertainty.
The new law provides greater detail on when noncompete agreements will be enforceable and for how long.
No-hire agreements for key employees. An employer’s agreement not to hire another company’s employee will be enforceable if the employee “holds a position uniquely essential” to the employer. This type of “no-raiding” agreement is likely to arise when a business assigns a critical employee to work for one of its clients or engages in a joint venture with another employer.
Exclusive business dealings. An agreement between two businesses to limit commercial dealings with each other will be enforceable.
Sale of a business. When someone sells a business (including its goodwill), the seller may agree not to compete with the buyer as long as the agreement is reasonably limited in time and geographic scope. The statute provides that agreements of one year or less are presumed to be reasonable.
Noncompetes for employees and agents. An employee or agent can agree with a “commercial entity” not to engage in similar business in a specific territory. The statute provides that agreements of two years or less are presumed to be reasonable. Note that the provision is not limited to employers and includes any “commercial entity.” That suggests businesses could enter into noncompetes with independent contractors and employees of staffing and temp agencies.
Nonsolicitation agreements. An employee or agent can agree not to solicit the current customers of a “commercial entity,” subject to reasonable time constraints. The statute provides that agreements of 18 months or less (or while posttermination pay continues, whichever is longer) are presumed to be reasonable. Once again, note that the provision is not limited to employer-employee relationships.
Business dissolution. The owners of a business can mutually agree that they will not operate a similar business in the same geographic area.
To be enforceable, the employer must have a “protectable interest” in preventing the employee from competing. The kinds of interests that will support a noncompete are trade secrets, confidential information, customer contacts, customer goodwill, and specialized and unique training that is more than mere job skills. To be enforceable, an agreement must be in writing and signed by all parties.
For more information on Alabama’s new noncompete law, see the July issue of Alabama Employment Law Letter.