Pinkie Promises and Restrictive Covenants

Do you remember the days when girls made pinkie promises and boys shook hands, rendering their playground agreements indestructible? Restrictive covenants, which encompass non-compete and non-solicitation contracts, are the grown-up version, except they may carry the added force of being legally binding and enforceable.

On January 1, 2016, Alabama enacted the new Restrictive Covenants Act, Ala. Code § 8-1-190, et seq., which governs all non-competition and non-solicitation agreements and other restrictive covenants. Generally, the Restrictive Covenants Act prohibits agreements that restrain trade (i.e., contracts that restrain people from exercising a lawful profession, trade, or business), with exceptions to the general prohibition, followed by related rules.

To avoid the possibility of litigation and blue-penciling by the courts, entrepreneurs should be cognizant of the components required to draft a legally enforceable restrictive covenant. First and foremost, a restrictive covenant must be in writing and signed. Verbal agreements are unenforceable and will not accomplish your goal of protecting your business’s confidential and proprietary information.

Second, the restrictive covenant must preserve a “protectable interest” of your business. Examples of a protectable interest, as defined by Ala. Code § 8-1-191, include: “(i) trade secrets; (ii) confidential information (i.e., pricing information and methodology, compensation, customer lists and data); (iii) commercial relationships or contracts with specific prospective or existing customers; (iv) customer, patient, vendor, or client goodwill associated with an ongoing business, franchise, commercial, or professional practice, or trade dress or a specific marketing or trade area; and (v) specialized and unique training … provided that such training is specifically set forth in writing as the consideration for the restraint.”

Note that job skills or special training, by themselves, are not considered protectable interests under Alabama law; these activities must have some specific connection with the business itself.

When drafting your restrictive covenant, ensure that the interest the restrictive covenant is intended to preserve is indeed “protectable” as it relates to that certain employee. If the only employee who has access to the company’s book of business is the CEO, then the hourly factory worker should not be subject to the same restrictive covenant.

Lastly, the restrictive covenant must follow one of the delineated restraints listed in the statute in order to be enforceable. These restraints are as follows:

1. An agreement between two or more people or entities to limit their ability to hire employees of the other who “hold a position uniquely essential to the management, organization, or service of the business”

2. An agreement between two or more people or entities or a person and a business to limit their commercial dealings to each other

3. An agreement between a person who markets the goodwill of a business and the buyer to refrain from engaging in or soliciting customers of similar businesses with reasonable geographic, time, and place restraints

4. An agreement between an entity and its agent or employee in which the agent or employee refrains from engaging in a similar business within a specified geographic area, subject to reasonable time and place restraints (this is your typical non-competition agreement)

5. An agreement between an entity and its agent or employee to refrain from soliciting current customers subject to reasonable time restraints

6. Upon dissolution of an entity, the partners, owners, or members may agree that they will not engage in similar commercial activity in the same geographic area as the dissolved entity

Takeaways:

1. Restrictive covenants must be in writing and signed by the employee.

2. Make sure to clearly describe the protectable interest that the restrictive covenant is intended to preserve.

3. Only implement restrictive covenants that are specifically approved by Alabama law.