Clients routinely call seeking opinions regarding Restrictive Covenants and Non-Competition Clauses; Either employees wondering whether they can change jobs under a non-compete clause or employers seeking to put a non-compete clause in place or enforce an existing non-compete or restrictive covenant against a former employee.
Generally covenants not to compete are disfavored under Alabama law as they are considered to be a restraint on free trade, which tends to deprive the public of efficient service and to impoverish the individual. This overarching principle, however, is in conflict with the public policy in Alabama of enforcing contracts which are freely entered into between parties. It is up to a court examining the covenant not to compete to make the determination as to whether the covenant in a particular case is contrary to the interests of the public by balancing these two policy interests.
Restrictive covenants are governed under Alabama Code Section 8-1-1. Anyone seeking to enforce a covenant not to compete carries the burden of showing it is not void under that statute. In making its determination as to enforceability, Alabama courts consider four factors:
- Whether the employer has a protectable interest;
- Whether the restriction is reasonably related to that interest;
- Whether the restriction is reasonable in time and place; and
- Whether it places no undue hardship on the employee.
There are volumes of case law on each of the above factors. In order to properly construct an enforceable restrictive covenant, each factor must be considered in light of the particular facts surrounding the business.
Many well drafted restrictive covenants fail due to timing of execution and/or due to failure to describe the consideration given in exchange for the agreement to not compete. When an employee signs a covenant not to compete at the beginning of his or her employment, the employment itself is sufficient consideration. However, a covenant that is signed prior to the inception of the employee/employer relationship is unenforceable. In order to correct this, the employee should sign a new agreement that makes continued employment the consideration for the non-compete clause.
It is worth noting that in Alabama courts have discretion to “blue pencil” an overly broad non-compete covenant. This means that instead of throwing out the whole agreement due to it being unreasonable in time and place, the court can, on its own initiative, or at the request of a party to the action, reduce the scope and enforce it based upon its new parameters.
It is strongly recommended that employees have an attorney review any non-compete agreement prior to execution. Likewise, it is very important for employers to have non-compete clauses reviewed by counsel prior to submitting to an employee. A properly drafted restrictive covenant can greatly reduce the chances of litigation occurring after the departure of an employee.