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Restraints of Trade in Alabama

Nov. 1, 2019

In Alabama, it has long been the general rule that any contract restraining someone from engaging in a legal profession, trade or business is void. Effective as of January 1, 2016, the Alabama Legislature enacted new legislation dealing with “exceptions” to this general rule and revising the prior Alabama statutes and case law on restrictive covenants or restraints of trade.

“Restraints of trade” are any contract or agreement which would prevent a person from working or earning a living. Typically, we think of these as a “non-compete” or “non-solicitation” agreement. These are also commonly known as “restrictive covenants.”

The new law continues the tradition in Alabama of discouraging restraints of trade, but with a few new changes. Previously in Alabama, an employer could restrict an employee’s ability to compete with an employer as a condition of the employee’s continued employment. These restrictions had to be limited in terms of reasonable time and geography. But there were no explicit statutes governing what was “reasonable.” This decision was left to the courts to decide. “Professionals” such as doctors, lawyers and accountants could not be restricted from practicing their profession by such agreements.

The new restrictive covenant statutes provide for certain specified situations in which a restriction is permissible. First, any restriction must be related to a “protectable interest.” A “protectable interest” includes (1) trade secrets, (2) “confidential information,” (3) commercial relationships or contacts with specific prospective or existing customers, patients, vendors, or clients; (4) good will associated with an ongoing business or a specific marketing or trade area; and (5) specialized and unique training involving substantial business expenditure specifically directed to a particular employee, provided that such training is specifically set forth in writing as the consideration for the restraint. The new law makes clear that “job skills in and of themselves, without more, are not protectable interests.”

Second, any contract or agreement containing a restrictive covenant must be in writing, signed by all parties and supported by something of value (“adequate consideration”).

The specific situations in which a restriction are permissible include:

• A contract between individuals or businesses or an individual and a business to limit the ability to hire an employee or agent but only if that employee or agent “holds a position uniquely essential to the management, organization, or service of the business

• A contract between individuals or businesses or an individual and a business “to limit commercial dealings to each other”

• A seller of a business that includes the sale of “good will” may agree with the buyer of the business from engaging in a similar business (non-competition) or soliciting customers of the business (non-solicitation) within a certain area, but only so long as the buyer carries on a like business in that area and subject to reasonable time and place restrictions. The statute provides that restraints of one year or less are presumed to be reasonable

• An employee may agree with the employee’s employer to refrain from carrying on a similar business within a specified area (non-competition), but only so long as the employer carries on business in that area and subject to reasonable time and place restrictions. Restraints of two years or less are presumed to be reasonable.

• An employee may agree with the employee’s employer to refrain from soliciting current customers of the employer (non-solicitation), but only so long as the employer carries on that same business and subject to reasonable time restrictions. Restraints of 18 months or so long as the employee is paid consideration after separating from the employer are presumed to be reasonable.

• Upon the dissolution of a business, the partners or owners of the business may agree that none of them will carry on a similar business in the geographic area where the dissolving business operated.

If a restraint is overly broad or unreasonable in its duration, the new statute grants courts the ability to “void the restraint in part and reform it to preserve the protectable interest or interests.” If, however, a restraint does not fall within the limited exceptions described above, then a court “may void the restraint in its entirety.”

In any dispute regarding a restrictive covenant, the party seeking enforcement of the covenant bears the burden of proof. But the party resisting enforcement of the covenant has the burden of proving the existence of undue hardship, if that is raised as a defense. Just as with the prior statute and laws, the new statute adopts the pre-existing law excluding “professionals” from being prevented from practicing their professions.

A party successfully enforcing a restrictive covenant may obtain broad relief, including (1) injunctive and other equitable relief; (2) the actual damages suffered as a result of the breach or lawful liquidated damages if provided in the contract; or (3) any other remedies available in contract law, including attorneys' fees or costs, if provided for in the contract or otherwise provided for by law. The new statutes shall not limit the availability of any defense otherwise available in law or equity.