The Federal Trade Commission recently proposed a ban on noncompete clauses in employment contracts. The proposed rule can be found here: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking. Proponents of the rule claim that banning or restricting the scope of non-competes could help ease the tight labor market by allowing employees to seek employment with a competing company. However, non-competes have long been used by employers to prevent employees from leveraging valuable trade secrets, customer lists, and other information to obtain a job at a competing company. If the FTC follows through with the ban, companies likely will turn to alternative strategies for retaining employees and protecting valuable trade secrets. Employers may increasingly rely on nondisclosure agreements and employment contracts incentivizing employees to stay put.
Non-competes are generally regulated by state legislatures and state appellate courts. Alabama’s restrictive covenant law (including non-competes and non-solicitation) can be found in Alabama Code §§ 8-1-190 through 8-1-190 through 8-1-197. In Alabama, non-competes and non-solicitation agreements are void unless the agreement satisfies certain exceptions in the law.
An employer seeking to enforce a non-compete must first establish it has a protectable interest.
Protectable interests include:
- Trade secrets,
- Confidential information, including, 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;
- 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;
- Commercial relationships or contacts with specific prospective or existing customers, patients, vendors, or clients;
- Customer, patient, vendor, or client goodwill 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; provided that such training is specifically set forth in writing as the consideration for the restraint.
Assuming an employer has a protectable interest, an employer may enforce a non-compete agreement with an employee where the employee is prohibited from working for a competing business. The scope of the restrictions must be reasonable in time and geographic scope.
- Restraints of two years or less are presumed to be reasonable.
- Employers seeking to restrict an employee’s ability to work for a competing business within a certain geographic area must show the employer competing within that same geographic area. For example, a Birmingham-based technology support company providing on-site tech support for small businesses in the Birmingham area likely cannot restrict an employee’s ability to work for a Mobile-based technology support company providing on-site tech support for small businesses on the Gulf Coast.
- Assuming an employer has a protectable interest, an employer may enforce a non-solicitation agreement with an employee where the employee is prohibited from soliciting the employer’s current customers, so long as the employee’s new employer carries on a similar business. Restraints of 18 months or for as long as post-separation consideration (ie severance pay) is paid for a non-solicitation agreement, whichever is greater, are presumed to be reasonable.
Additional Considerations
- A non-compete or non-solicitation agreement must be in writing and signed by the employer and employee.
- An employee must be employed at the time he/she signs the non-compete agreement.
- An employer cannot lock down an employee by having a potential employee sign a non-compete prior to the commencement of an employer-employee relationship.
- Common law exempting professionals from non-competes and non-solicitation agreements remain in effect. Although the term “professionals” is not specifically defined in the statute, judicial interpretations of the term include doctors, physical therapists, lawyers, veterinarians, and accountants.
- Non-compete agreements are not enforceable against independent contractors.
- Continued at-will employment is sufficient consideration to bind a non-compete or non-solicitation agreement.
M. Jansen Voss has developed a diverse defense litigation and appellate practice in both state and federal courts in Alabama and Mississippi. He represents a wide range of businesses, governmental entities, and individuals in complex personal injury and wrongful death lawsuits, as well as business disputes and breach of contract matters. He represents restaurants, bars, breweries, and hotels in Dram Shop lawsuits and assists clients with regulatory and licensing matters before the Alabama Beverage Control Board.
About Christian & Small
Christian & Small LLP represents a diverse clientele throughout Alabama, the Southeast, and the nation with clients ranging from individuals and closely-held businesses to Fortune 500 corporations. By matching highly experienced lawyers with specific client needs, Christian & Small develops innovative, effective, and efficient solutions for clients. With offices in Birmingham, metro-Jackson, Mississippi, and the Alabama Gulf Coast, Christian & Small focuses on the areas of litigation and business, is a member of the International Society of Primerus Law Firms, and is the only Alabama-based member firm in the Leadership Council on Legal Diversity. Our corporate social responsibility program is focused on education, and diversity is one of Christian & Small’s core values.
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