Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Alabama
Alabama law makes any contract that restrains anyone in a lawful profession, trade or business void with some specific exceptions. One such exception is when an employment relationship ends. The former employee may be restricted from engaging in a similar business or soliciting customers of the former employer within a specific geographic area. Because “professions” are not considered to fall under the exceptions, courts have specifically determined that non-competition agreements are not enforceable for physical therapists, accountants, medical professionals or veterinarians.
Factors considered when determining reasonableness of such agreements include:
- whether the employer has certain legitimate interests such as customer relationships or trade secrets,
- whether the restriction is reasonably related to that interest,
- whether the restriction is reasonable in time and place and
- whether the restriction places an undue hardship on the former employee.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Alabama courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. The same is true for an agreement signed after the employment relationship has begun and when the terms of the relationship change such as when a new compensation agreement is provided.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee’s ability to work.
Examples of non-compete agreements that Alabama courts have found to be reasonable include:
- A 3-year, 5-mile-radius restriction on a former employee of a health food store. The court reduced the geographic restriction from “anywhere.”
- A 2-year restriction with no specified geographic restriction on a former telephone equipment sales and long distance services company employee from soliciting former or prospective customers with whom the employee had contact. The court reasoned that this term necessarily limited the geographic area to customers and prospective customers to three states.
- A 2-year, 6-county restriction on a former independent contractor of a paintless car-dent-removal business.
The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:
- A 1-year, 25-mile-radius restriction against a urologist.
- A 2-year restriction against a former pest control technician from competing within 21 counties in southeastern Alabama because of the lack of a protectable interest in customer lists.
- A 3-year restriction against a withdrawing partner of an accounting firm because accounting is a profession and does not fall into the exceptions for permissible non-competition agreements.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.