Time to Review Covenants Not to Compete

On June 11, 2015 Governor Robert Bentley signed into law House Bill 352 which updates and specifically repeals section 8-1-1 of the Alabama Code. The new law will become effective on January 1, 2016. For those who are not familiar with it, section 8-1-1 is Alabama’s prohibition against (and exceptions to) contracts restraining trade (aka “covenants not to compete”). The new law seeks to codify approximately 70 years of Alabama case law concerning the enforceability of covenants not to compete.

Business owners should take note of a few key changes to section 8-1-1 to ensure covenants not to compete, particularly those drafted after January 1, 2016, are valid. They should pay careful attention to the language regarding protectable interests, time restraints, and a slight shift in burden of proof requirements.

The new law specifically states that job skills are not a protectable interest. However, “specialized and unique training” directed at a particular individual which involves a substantial business expenditure is a protectable interest. Business owners should determine whether the training they provide to employees is merely a job skill or specialized individual training and review contract language to ensure they are describing their protectable interests in accordance with the new law. The specialized training must be specifically listed as part of the consideration for the non-compete.

One of the most important aspects of the new law is that it establishes presumptively reasonable windows of time for restraining competition. Restraints of 18 months, or as long as post-separation consideration is paid, are considered presumptively reasonable for an agreement restricting an employee from the solicitation of current customers. Restraints of two years or less are considered presumptively reasonable for restricting an employee from engaging in a similar competing business. Restraints of one year or less are presumptively reasonable for restricting a seller of the goodwill of an entity from engaging in a similar business and from soliciting the entity’s customers. Business owners should review their covenants not to compete to ensure the time restraints they contain meet the presumptions set forth in the new law and are specific as to the type of individual and activity being restrained.

As to burden of proof, the new law states the enforcing party must prove each element of reasonableness when seeking to enforce a covenant not to compete. However, the burden to prove undue hardship, if raised as a defense, now rests on the defending party.

Campbell, Guin, Williams, Guy & Gidiere, LLC remains dedicated to its clients and will be happy to help review, analyze, and update any current non-compete contracts to ensure they comply with the new statute and have the best chance to survive a challenge. If you have any questions or concerns about how the new law may impact your business, contact Hannah Lansdon at 205-633-0279 or hannah.lansdon@campbellguin.com.