Executive Summary: Effective January 1, 2016, Alabama passed a new non-compete and non-solicitation statute, repealing § 8-1-1 of the Alabama Code (the "New Act"). The New Act attempts to codify principles the Alabama courts have previously addressed. It sets out explicitly the types of agreements allowed, including:
- Agreements preventing the seller of the good will of a business from opening a competing business or soliciting the buyer's customers within a specified geographic area;
- Agreements preventing an employee from engaging in a similar business (i.e., a non-compete agreement), and
- Agreements preventing an employee from soliciting current customers (i.e., a non-solicitation agreement).
The New Act defines the "protectable interests" that can support a restrictive covenant, including access to trade secrets and certain confidential information (including pricing and customer lists); relationships with specific prospective or current customers, clients, patients or vendors; the good will associated with a business's customers, clients, patients or vendors; and specialized training that involves significant expense as long as that training is set forth in the agreement as the reason for the restraint.
The New Act explicitly permits the long-used practice of "blue penciling" by the courts, allowing a court to modify or restrict the duration or geographic scope of an agreement (without invalidating the entire agreement) where it finds either term to be excessive.
The New Act also sets reasonable time limits for restrictive covenants, including the following:
- Two years is presumed to be reasonable for a non-compete agreement.
- Eighteen months is presumed to be reasonable for a non-solicitation agreement.
- One year or less is presumed to be reasonable for a non-compete or non-solicitation agreement arising out of the sale of the good will of a business.
What Changes are in the New Act?
New Presumptive Time Limits. The most notable change in the New Act is the implementation of presumptive time limits of one year, 18 months, and two years, respectively, for restrictive covenants in the sale of a business, non-solicitation agreements, and non-compete agreements. The new provision regarding the sale of the good will of a business may be the most disturbing as Alabama courts have upheld non-compete and non-solicitation agreements with a term of five years that arise out of the sale of a business.
Non-solicitation Agreements are Specifically Regulated. The New Act's treatment of non-solicitation agreements is a significant change in the law. The Alabama Supreme Court held in 2006 that Alabama's prior version of § 8-1-1 did not govern partial restraints of trade. Thereafter, some courts held that non-solicitation agreements did not require identification of a protectable interest and were only governed by a notion of reasonableness in scope and duration. The New Act, however, now seems to require that an employer possess a protectable interest to enforce a non-solicitation agreement and appears to impose other requirements similar to those needed to enforce non-compete agreements.
Non-solicitation Agreements Can Apply Only to Current Customers. While the New Act applies to non-solicitation agreements, it only allows agreements prohibiting solicitation of current customers and not prospective or past customers with whom an employer hopes to establish or re-establish a relationship.
Agreements Prohibiting Employee Solicitation are Severely Limited. The New Act, while unclear on the subject, appears to regulate agreements preventing solicitation of a company's employees. Such non-solicitation agreements previously were considered partial restrictions of trade not subject to § 8-1-1. The New Act seemingly allows such agreements, while restricting their application to prevent a departing employee's solicitation of a current employee who "holds a position uniquely essential to the management, organization, or service of the business." The New Act does not define that provision, and it will be left up to the courts to interpret and to apply it.
"Commercial Entity" Replaces "Employer." The New Act applies to non-compete and non-solicitation agreements entered into by commercial entities (instead of just "employers," as provided in the prior statute). This expansion raises the questions of whether restrictive covenants may be used by non-profit, religious, and charitable entities and whether they can be applied to independent contractors. The New Act also specifically references franchises, finding that a protectable interest includes customer, vendor and client good will in connection with an ongoing franchise. This provision allows franchises to enter into restrictive covenants to protect these interests, and likely subjects those agreements to the time limits set forth in the New Act.
Does the New Act Apply Retroactively?
The New Act is silent on whether it applies to agreements entered into before the effective date, but there is a strong presumption that it does not. Alabama courts do not apply state laws retroactively if they impact substantive rights as opposed to procedural or remedial rights. The Alabama Supreme Court has also stated on multiple occasions that a statute should not apply retroactively unless it contains an express provision of legislative intent to do so. Thus, a strong presumption exists that this statute will apply only prospectively because there is no clear and explicit intention otherwise. An exception exists for statutes that are merely remedial, which are those that do not impair any contracts or vested rights and do not disturb any past transactions. The New Act's provisions reducing the normal time limits of agreements that the courts will enforce and, for example, limiting non-solicitation agreements to current customers would certainly impact substantive rights in contracts if applied retroactively. There could be an interesting debate with those who argue that the New Act is merely an attempt to codify common law principles already applied by Alabama courts.