On June 11, 2015, Governor Bentley signed into law legislation repealing the 1975 version of Alabama Code Section 8-1-1, “Contracts restraining business void; exceptions”, replacing it with a new Section 8-1-1. The effective date of this new law is January 1, 2016, only 6 months away.
The new law has several significant changes. Section 8-1-1 continues to state, in Section 1, that “[e]very contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided by this section is to that extent void.” The new law recognizes 6 exceptions to Section 1, “the following contracts are allowed to preserve a protectable interest”:
- 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 This non-compete language is very similar to repealed Section 8-1-1.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.”
The new law defines “Protectable Interest” to include the following:
- Trade secrets, as defined by Alabama law.
- “Confidential information, including, but not limited to, pricing information and methodology; compensation; customer lists; customer data and information; mailing lists, prospective customer information; financial and investment information; management and marketing plans; business strategy, technique, and methodology; business models and data; processes and procedures; and company provided files, software, code, reports, documents, manuals, and forms used in the business that may not otherwise qualify as a trade secret but which are treated as confidential to the business entity, in whatever medium provided or preserved, such as in writing or stored electronically.”
- “Commercial relationships or contacts with specific prospective or existing customers, patients, vendors or clients.” The inclusion of “patients” raises some interesting questions as to what the legislature intends by this language, especially in light of the language later in the statute that this new law does not change the definition of “Professionals” as recognized by Alabama courts. Could this be a reference to others involved in the medical arena such as nurses, office staff, etc. or drug treatment facilities and other similar businesses? Time will tell.
- “Customer, patient, vendor, or client good will associated with any of the following:
- An ongoing business, franchise, commercial, or professional practice, or trade dress.
- A specific marketing or trade area.”
- “Specialized and unique training involving substantial business expenditure specifically directed to a particular agent, servant, or employee; provide that such training is specifically set forth in writing as the consideration for the restraint.”
The new law specifically states that: “Job skills in and of themselves, without more, are not protectable interests.” Many employers with non-compete agreements will not be agreeable with this language, and will need to prove more than a job skill to enforce a non-compete, such as training, good will, or other things as defined as a protectable interest by the new law.
To be enforceable, any contract or agreement “executed pursuant to this act shall be reduced to writing, signed by all parties, and be supported by adequate consideration.” Under existing case law, Alabama recognized continued employment at “adequate consideration”, and I don’t believe the new law changes this.
The new law codifies the concept of “blue penciling”, permitting a court to void an overly broad or unreasonable in duration restraint in part and reform it to “preserve the protectable interest or interests.”
The burden is placed on the party seeking enforcement to proof every element. The party that is resisting the contract has the burden of proving “the existence of undue hardship, if raised as a defense.”
The law provides the following remedies for breach of an agreement as follows:
- “Such injunctive and other equitable relief as may be appropriate with respect to any actual or threatened breach.”
- “The actual damages suffered as a result of the breach or lawful liquidated damages of provided in the contract.”
- “Any remedies available in contract law, including attorneys' fees or costs, if provided for in the contract or otherwise provided by law.”
The new law does not abolish the “Professional Exemptions”, currently recognized by Alabama courts as Doctors, Lawyers, Certified Professional Accountants and Veterinarians. Additionally, the United States District Court for the Middle District of Alabama has also recognized “Physical Therapists” as professionals.
Section 8 of the law declares “that this act expresses fundamental public policies of the State of Alabama. Therefore, this act shall govern and shall be applied instead of any foreign laws that might otherwise be applicable in those instances when the application of those foreign laws would violate a fundamental public policy expressed in this act.”
With the new legislation, a number of questions remain unanswered, and will probably take time for the courts to address and answer. In addition to the questions raised previously, some of the questions that remain unanswered are:
- With an effective date of January 1, 2016, are existing agreements going to be judicially reviewed in light of existing law or the new law after January 1?
- By using the language, on multiple occasions, “agent, servant…of a commercial entity”, does the new law permit the use of non-compete agreements with independent contractors?
- It is relatively clear that, in order to enforce a non-compete agreement, the plaintiff must prove a protectable interest, and reasonable restrictions as to time and geographic location. Does the plaintiff have to prove that there is no “undue hardship”, or is “undue hardship” an affirmative defense which must be proven by the defendant?
Practice pointers. The new law codifies many of the judicial decisions rendered over the years that have interpreted Alabama’s Non-Compete law. This provides some certainty for employers when drafting non-compete agreements. In light of the changes, effective January 1, 2016, now is the time for employers who have existing non-compete agreements, or who may be considering the use of non-compete agreements, to review what is currently being used or considered, to ensure compliance with the new law. This is especially important in light of the “presumptive” time durations set forth under various scenarios, from 12 months to 2 years. Employers should consider adopting the language set forth in the new law as it defines “protectable interest”, as well as the time durations for the various scenarios as set forth above. Now is the time for Employers to begin getting ready for the changes in Alabama’s Non-Compete law.