Are Non-Compete Agreements Enforceable?

First, a valid non-compete agreement must be reduced to writing –verbal agreements will not suffice. Second, it must be signed by the parties – that means both parties. A non-compete agreement signed only by the employee at the time of hire, and stuck in the employee’s file, is not going to prove enforceable. It must be signed by both the employee and an authorized representative of the employer. Third, it must be supported by adequate consideration. This means the employee must be provided something of value in exchange for signing the agreement. Examples of such might include a bonus or a pay raise, or if the agreement is being executed contemporaneously with the employee’s hire, the initial hiring is adequate consideration. If the employee is already employed at the time of the execution of the agreement, current Alabama law says that the employee’s “continued employment” is adequate consideration. However, the better practice is the give new consideration and state it in the agreement.

Perhaps most importantly, the non-compete agreement must be necessary to preserve a “protectable interest” of the employer. “Protectable interests” include, but are not limited to, such things as trade secrets, customer lists, customer relationships, marketing plans, business models, software, specialized training, etc. As an employer, it is not enough that you have an employee who you want to prevent from going to work with a competitor. You must have a valid business reason why the employee should not be allowed to go to work with a competitor. In essence, you must be able to prove that your business will somehow be damaged if the employee goes to work for a competitor.

Lastly, the agreement must be reasonably limited in time and territory. The statute says that limitations not to compete of 2 years or less are considered reasonable, while limitations not to solicit of 1 ½ years are considered reasonable. These time periods may be increased if supported by the evidence. The territorial limitations must be related to the areas where the employer actually does business. Thus, if the employer does business only in Auburn/Opelika, I would not advise that the Agreement bar the employee from the entire state of Alabama. Likewise, if the employer does business throughout Alabama, I would not advise that the agreement bar the employee from the entire southeast.

Keep in mind, each state has its own law(s) governing non-compete agreements. This article discusses Alabama law only. If your employer is located in another state, you may be subject to that other state’s laws regarding non-compete agreements, even though you work in Alabama. (The language of the agreement would control this).

Tips for the Employer: If you have an employee who has “the keys to the kingdom” so to speak – they know the trade secrets, they know the marketing plan, they have developed close customer relationships which they could take with them to a competitor, etc., you would likely benefit from a closely tailored non-compete/non-solicitation agreement designed to preserve your unique protectable interests should your employee decide to work elsewhere. Also, if you currently have employees who have signed non-compete agreements, it may be time to review them to ensure their compliance with Alabama law. Beware- there are many “non-compete agreements” floating around on the internet that would not be enforceable under Alabama law.

Tips for the Employee: Don’t just automatically sign a non-compete agreement. Consider the consequences. Negotiate the consideration. Negotiate the terms. And if you have already signed an agreement, review it to determine if it meets the standards discussed herein. Specifically, ask the question whether your employer has a protectable interest in preventing you from working at the proposed new employer. It is not enough that you intend to work for “a competitor,” but rather, the question is whether the work you will be doing for the competitor negatively impacts a protectable interest of the original employer. If your work at the new employer does not negatively impact a protectable interest of the original employer, even if the new employer is considered a “competitor,” the new employment may still be allowed.