NON-COMPETE AGREEMENTS IN ALABAMA,FLORIDA, SOUTH CAROLINA AND TENNESSEEJennifer A. AdlerRobins, Kapl

NON-COMPETE AGREEMENTS IN ALABAMA,FLORIDA, SOUTH CAROLINA AND TENNESSEEJennifer A. AdlerRobins, Kaplan, Miller & Ciresi L.L.P.2600 One Atlanta Plaza950 East Paces Ferry Road, N.E.Atlanta, Georgia 30326-1119COVENANTS NOT TO COMPETE IN ALABAMAI.INTRODUCTIONCovenants not to compete are disfavored in Alabama as restraints on trade whichtend to “deprive the public of efficient service†and to “impoverish the individual.â€James S. Kemper & Co. v. Cox and Associates, 434 So.2d 1380 (Ala. 1983); KeystoneAutomotive Industries, Inc. v. Stevens, 854 So.2d 113 (Ala. Civ. App. 2003). However,Alabama also has a public policy of enforcing contracts freely entered into between theparties. See, Puckett, Taul & Underwood, Inc. v. Schreiber Corp., 551 So.2d 979, 983(Ala. 1989).A court examining a covenant not to compete makes the ultimatedetermination as to whether it is adverse to the public interest by balancing these twopolicy interests. See, e.g. Diamond Talent, Inc. v. Smith, 653 So.2d 290, 291 (Ala.1995).Restrictive covenants in Alabama are governed under Alabama Code § 8-1-1,which states, in part:(a)Every contract by which anyone is restrained fromexercising a lawful profession, trade, or business of anykind otherwise than provided by this section is to thatextent void.(b)One who sells the good will of a business may agree withthe buyer and one who is employed as an agent, servant oremployee may agree with his employer to refrain fromcarrying on or engaging in a similar business and fromsoliciting old customers of such employer within aspecified county, city or part thereof as long as the buyer orany person deriving title to the good will from him, oremployer carries on a like business therein.(Part (c) of the statue refers to partnerships)Both non-competition covenants and non-solicitation covenants are subject to the statute. In order to be enforceable, a restrictivecovenant must fall within one of the exceptions set forth in Ala. Code § 8-1-1(b). ClarkSubstations, L.L.C. v. Ware, 838 So.2d 360 (Ala. 2002).In 2006, the Supreme Court of Alabama held that a non-solicitation/non-hireagreement between employers may be valid as to individual employees, even where novalid employer-employee agreement exists. Ex parte Howell Engineering and Surveying,Inc., 2006 Ala. LEXIS 346, *24 (Ala. 2006). In other words, a non-hire agreementbetween the corporate employers may validly restrain an individual employee, where theagreement is reasonable and does not prevent the employee from practicing in his or hertrade or profession. Id.II.FACTORS CONSIDERED WHEN DETERMINING ENFORCEABILITYA party seeking to enforce a covenant not to compete has the burden of showing itis not void under § 8-1-1, which governs contract law. Benchmark Medical Holdings,Inc. v. Rehab Solutions, LLC, 307 F.Supp.2d 1249 (M.D.Ala. 2004); King v. Head StartFamily Hair Salons, Inc., 886 So.2d 769 (Ala. 2004); Ware, 838 So.2d at 363; See also,Keystone, 854 So.2d at 115; Construction Materials v. Kirkpatrick Concrete, Inc., 631So.2d 1006 (Ala. 1994). Alabama courts examine four factors in determining whether acovenant is enforceable:(a)(b)(c)(d)The employer has a protectable interest;The restriction is reasonably related to that interest;The restriction is reasonable in time and place; andIt places no undue hardship on the employee.See, Systrends, Inc. v. Group 8760,959 So.2d 1052, 1080 (Ala. 2006);Benchmark Medical Holdings, Inc. v. Rehab Solutions, LLC, 307 F.Supp.2d 1249, 1264(M. D. Ala. 2004); King, 886 So.2d at 771; Nobles-Hamilton v. Thompson, 883 So.2d1247, 1249 (Ala. Civ. App. 2003); Clark v. Liberty Nat. Life Ins. Co., 592 So.2d 564(Ala. 1992); DeVoe v. Cheatham, 413 So.2d 1141, 1142 (Ala. 1982).The party seeking to enforce the covenant has the burden of showing that theagreement is valid under the circumstances of the case. In Jones v. Wedgeworth PestControl, Inc., 763 So.2d 261 (Ala. 2000), an injunction preventing a pest controlemployee from competing was reversed where counsel for the parties offered notestimony concerning the enforceability of the covenant.(a)Protectable Interest of Employer:An employer has a sufficiently protectable interest in restricting an employeefrom “appropriating valuable trade information and customer relationships to which hehad access during the course of his employment.†See, James S. Kemper, 434 So.2d at1384. The employer must have a “substantial right†in its business that is sufficientlyunique to warrant protection. Id. at 1384; Keystone, 854 So.2d at 115-16. Such asubstantial right exists where an employee has access to confidential information,“secret†lists or has had an opportunity to develop confidential customer relationships.James S. Kemper, 434 So.2d at 1384. In Thompson, 883 So.2d at 1250, the plaintiffhealth food store had a protectable interest in limiting competition where the defendanthad a “long history†of maintaining relationships with many of its customers. See also,Clark, 592 So.2d at 566 (former employee’s “close and special relationship†with thepolicyholders constituted a protectable interest of the employer).Future business opportunities may also constitute a protectable interest.Benchmark, 328 F.Supp.2d at 1260. Even if an employee builds client relationshipsindependently of the employer, where he is able to “nurture, maintain, and furtherdevelop†those relationships during his employment, the employer may have aprotectable interest in those relationships. Keystone, 854 So.2d at 115-16. However, a“simple labor skill†is not a protectable interest of the employer. Thompson, 2003 Ala.883 So.2d at 1250; Sheffield v. Stoudenmire, 553 So.2d 125, 127 (Ala. 1989)(Information obtained by former employee of insurance company was not a protectableinterest where employee did not develop close relationships with policyholders, and didnot take information with him)(b)Reasonable Relation To The Employer’s Interest:Where restrictions are “in the line of the former employer’s business,†they have areasonable relation to the employer’s business. Central Bancshares of the South Inc. v.Puckett, 584 So.2d 829, 831 (Ala. 1991); Cullman Broadcasting Co. v. Bosley, 373 So.2d830, 835 (Ala. 1979).(c)Reasonableness of Time and Place:The reasonableness of time and place is dependent on the nature and extent of thebusiness and the surrounding circumstances. See, Parker v. Ebsco Industries, 282 Ala.98, 209 So.2d 383 (Ala. 1968). Courts examine the type of business involved and thescope of the former employee’s work. Booth v. WPMI Television Co., 533 So.2d 209,211 (Ala. 1988)(upholding a restriction from sales for one year within a 60 mile radiusfor a former salesman of a television station) A two year time limitation has been heldreasonable for a former employee of a property and casualty insurance brokeragecompany. James S. Kemper, 434 So.2d at 1384. With respect to territorial restrictions, anon-compete agreement may properly include Alabama, all of Alabama or more than theState of Alabama, depending on the circumstances. Systrends, 959 So.2d at 1280 ; Seealso, Central Bancshares; 584 So.2d at 830 (territorial restriction in the entire state ofAlabama held to be reasonable); James S. Kemper, 434 So.2d at 1385.Solicitation of specific customers may be validly substituted for a specificterritorial limitation.Digitel Corp. v. Delta Com, Inc., 953 F.Supp. 1486, 1496(M.D.Ala. 1996); Clark, 592 So.2d at 564.In King v. Head Start Family Hair Salons, Inc., 886 So.2d 769 (Ala. 2004), theAlabama Supreme Court reversed an injunction issued against a former employee of ahair salon which prohibited her from working within a two (2) mile radius of any locationof her former employer. The court found the restriction was unreasonably broad andimposed an undue hardship on the employee, because the employer had over thirtylocations in the relevant area, making it impossible for the employee to find work as ahairdresser.It remanded with instructions to blue-pencil the agreement to precludecompetition within a two mile radius of the location where the former employee worked.Id. Under markedly different circumstances, the court in Benchmark, 328 F.Supp.2d at1266, upheld a restriction within seventy-five miles of any of the plaintiff’s currentlyexisting clinics within the state of Alabama, finding that defendant’s contacts extendedthroughout the state, in Georgia and into Chattanooga, Tennessee.(d)Undue Hardship On The Employee:Alabama courts will find an undue hardship on the employee where he isprohibited in engaging in “the only trade he [knows] and by which he [can] supporthimself.†Chavers v. Copy Products Co., 519 So.2d 942, 945 (Ala. 1988); King, 2004Ala. LEXIS 6 at * 5-6. Undue hardship will generally exist where a restriction:Imposes on the employee a greater restraint than isreasonably necessary to secure the business of the employer. . .regard being had to the injury which may result to thepublic from restraining the breach of the covenant, in theloss of the employee’s service and skill and the danger ofhis becoming a charge on the public. Clark, 592 So.2d at567.In Chavers, a restriction preventing a copier repairman from working for twoyears within the entire copier service industry within a geographic area of seventy-five(75) miles of his former employer imposed undue hardship where the employee was notskilled in any other line of work. Id. at 944; See also, Calhoun v. Brendle, Inc. 502 So.2d689, 693-94 (Ala. 1986)(non-compete unenforceable where enforcement would deprivethe employee of his livelihood.)By way of contrast, in Clark, 592 So.2d at 566-67, there was no undue hardshipon an insurance salesman who was prohibited from soliciting or accepting replacementpolicies from his former employer’s policyholders. The employee was not prohibitedfrom selling all insurance, or from soliciting new customers. Id.III.CONSIDERATION NECESSARY FOR A RESTRICTIVE COVENANT INALABAMAWhere an employee signs a covenant not to compete at the beginning of hisemployment, his employment is sufficient consideration. Clark, 592 So.2d at 567; Seealso, Digitel Corp., 953 F.Supp. at 1495.Even where a non-compete covenant isexecuted after employment begins, the promise of continued employment and paymentreceived constitutes adequate consideration. Daughtry v. Capital Gas Co., 229 So.2d480, 483 (Ala. 1969). Employment at will, is also adequate consideration for a restrictivecovenant. See, Affiliated Paper Co. v. Hughes, 667 F.Supp. 1436 (N.D.Ala. 1987).A covenant that is signed prior to inception of an employee/employer relationshipis unenforceable.Pitney Bowes, Inc. v. Berney Office Solutions, 823 So.2d 659 (Ala.2001). The employer/employee relationship must exist at the time the agreement isexecuted. Clark, 838 So.2d at 364.IV.WILL AN ALABAMA COURT “BLUE PENCIL†AN OVERBROADCOVENANT?Alabama courts have the discretion to “blue pencil†overbroad non-competecovenants. Systrends, 959 So.2d at 1280;Benchmark, 328 F.Supp.2d at 1264;Thompson, 883 So.2d at 1251; King, 886 So.2d 769. As stated by the Alabama SupremeCourt: “A court of equity has the power to enforce a contract against competitionalthough the territory or period stipulated may be unreasonable, by granting an injunctionrestraining the [employee] from competing for a reasonable time and within a reasonablearea.â€Mason Corp. v. Kennedy, 286 Ala. 639, 244 So.2d 585, 590 (Ala. 1971);Thompson, 883 So.2d 1251 (affirming “blue penciling†of geographic limitations ofagreement); Dobbins v. Getz Exterminators of Ala. Inc., 382 So.2d 1135, 1138 (Ala.Civ. App. 1980)(affirming modification of territorial limitation in agreement.)V.RELIEF AVAILABLECOVENANTFORABREACHOFARESTRICTIVETrial courts in Alabama may issue an injunction for breach of a restrictivecovenant. Ormoco Corporation v. Johns, 869 So.2d 1109 (Ala. 2003); Sheffield, 553So.2d at 125. The party seeking an injunction must show: (1) without an injunction theplaintiff will suffer immediate and irreparable injury; (2) plaintiff has no adequateremedy at law; (3) plaintiff has at least a reasonable chance of success on the merits; and(4) the hardship imposed on the defendant does not unreasonably outweigh the benefit tothe plaintiff. Pirtek, USA LLC v. Whitehead, 2006 U.S. Dist. LEXIS 45666, * 6 (S.D.Ala. 2006); Ormoco, 869 So.2d at 1113; Seymour v. Buckley, 628 So.2d 554, 557 (Ala.1993).A rebuttable presumption of irreparable injury exists where an employeeallegedly breaches such a covenant. Ormoco, 869 So.2d 1117. The employer mustshow: (1) that a valid agreement exists; (2) that it has a protectable interest; and (3) thatthe former employee is actively competing with the former employer in the samegeographic area in violation of the agreement. Id. at 1119. The employee may then rebutthis presumption.Damages may also be recoverable. In a breach of contract action in Alabama, themeasure of damages is “an amount sufficient to return the plaintiff to the position hewould have occupied had the breach not occurred.†Systrends, 959 So.2d at 1280;Aldridge v. Dolbeer, 567 So.2d 1267, 1269 (Ala. 1990); See also, Clark, 592 So.2d at567; Buckley v. Seymour, 679 So.2d 220, 225 (Ala. 1996). As with all breach ofcontract actions, the plaintiff has the burden of proving the amount of damages sustainedfrom a breach of restrictive covenant, and damages may not be speculative. Clark, 592So.2d at 567; Systrends, 959 So.2d at 1280. Where there are no substantial damages,nominal damages are recoverable. See, James S. Kemper, 435 So.2d at 1385. The grantor denial of injunctive relief has no bearing on whether a plaintiff can recover damages.See, Cullman Broadcasting Co. v. Bosley, 373 So.2d 830, 837 (Ala. 1979).VI.CHOICE OF LAWParties in Alabama are generally free to determine which state’s law should applyto their contracts. Where there is no choice made, Alabama follows the Restatement (2d)of Conflicts §§ 187 and 188, which provides that the law of the state with the “mostsignificant relationship†to the transaction will apply.However, similar to Georgia, where the law which would ordinarily be applicableviolates the public policy of Alabama, the parties’ choice of law is not given effect.Crown Castle USA, Inc. v. Howell Engineering and Surveying, Inc., 2005 Ala. Civ. App.LEXIS 474, *12 (Ala. Civ. App. 2005)(reversed on other grounds by Ex parte HowellEngineering and Surveying, Inc., 2006 Ala. LEXIS 346, *24 (Ala. 2006); Benchmark,307 F.Supp.2d at 1262.A court will not enforce a covenant in Alabama against anAlabama resident where it is void under Alabama law. Id.; See also, Cherry Bekaert &Holland v. Brown, 582 So.2d 502, 506 (Ala. 1991); Buckley, 679 So.2d at 220.COVENANTS NOT TO COMPETE IN FLORIDAI.INTRODUCTIONCovenants not to compete in the State of Florida are governed by statute. See,F.S.A. §542.335. The statute applies to all covenants that became effective on or afterJuly 1, 1996. The previous statute, F.S.A. §542.33 is still effective for all covenantseffective prior to July 1, 1996. See, Scarbrough v. Liberty National life Ins. Co., 872So.2d 283 (Fla. App. 1 Dist. 2004); North American Products Corp v. Moore, 196F.Supp.2d 1217, 1228 (M. D. Fla. 2002)(enforceability of a covenant not to competegoverned by statute in effect at the time the agreement was entered into).Accordingly, three different sets of rules apply to non-compete covenants inFlorida: (1) Contracts effective before June 28, 1990; (2) Contracts effective on or afterJune 28, 1990 but before July 1, 1996, and; (3) Contracts effective on or after July 1,1996. American Residential Servs., Inc. v. Event Technical Servs., Inc., 715 So.2d. 1048(Fla. App. 3 Dist. 1998); Cooper v. Thomas Craig & Co., LLP, 906 So. 2d 378 (Fla. App.2 Dist. 2005).II.FACTORSTOBEENFORCEABILITYCONSIDEREDWHENDETERMININGFSA § 542.335(1) provides that covenants restricting competition are valid “solong as such contracts are reasonable in time, area, and line of business.†Such contractsmust be in writing and signed by the party against whom enforcement is being sought.F.S.A. §542.335(1)(a). In order for an enforceable covenant to exist, two additionalrequirements must be met. First, there must be a “legitimate business interest†of theemployer which justifies such a covenant. F.S.A. §542.355(1)(b); Advantage DigitalSystems, Inc. v. Knaus, 870 So.2d 111 (Fla. App. 2003). Second, the restraint within thecontract must be “reasonably necessary to protect the legitimate business interest orinterests justifying the restriction,†F.S.A. §542.355(1)(c).When considering the enforceability of a covenant, a court must hear evidence asto the reasonableness and scope of the covenant at issue. Whitby v. Infinity RadioHoldings, Inc., 965 So.2d 145 (Fla. App. 4 Dist. 2007)(reversing trial court ruling onenforceability of covenant where court did not hear evidence as to reasonableness andscope)(a)Legitimate Business Interest:FSA §542.355(1)(b) (1-5) lists five protected business interests under Florida law,but expressly provides that this it is not an exclusive list:(1)(2)(3)(4)(5)Trade secrets;Confidential business or professional information (nototherwise a trade secret);Substantial relationships with prospective or existingcustomers or clients;Customer goodwill associated with a certain practice,geographic location or marketing area; andSpecialized training.The mere desire to avoid competition is not a legitimate business interest. PirtekUSA, LLC v. Wilcox, 2006 U.S. Dist. LEXIS 41569 (M.D. Fla. 2006). With respect tocustomer relationships, Florida courts have held that the proper inquiry focuses on therelationship between the employer and its prospective and existing customers, not on therelationship between the employee and customers. Milner Voice & Data, Inc. v. Tassy,377 F. Supp. 2d 1209, 1218 (S.D. Fla. 2005).Where the plaintiff is no longer in business at the time it attempts to enforce thecovenant, it has no legitimate business interest to protect. Wolf v. Barrie, 858 So.2d 1083(Fla. App. 2d Dist. 2003).Additionally, where the employer seeks to protectinformation that is not confidential and is commonly known in the industry, no legitimatebusiness interest exists. Pirtek, 2006 U.S. Dist. LEXIS 41569, *11; Colucci v. Kar KareAutomotive Group, 918 So.2d 431 (Fla. App. 4 Dist. 2006); Anich Industries, Inc. v.Raney, 751 So.2d 767 (Fla. App. 5 Dist. 2000)(where employee did not have asubstantial relationship with the customers, was given little training, had no access totrade secrets or confidential information, and customers were commonly known in theindustry, there was no legitimate business interest)However, a legitimate business interest exists where the employee has access toconfidential and proprietary business information. AutoNation v. O’Brien, 347 F.Supp.2d 1299, 1304 (S.D. Fla. 2004); See, North American Products, 196 F.Supp.2d at1228 (legitimate business interest existed where employee gained knowledge of formeremployer’s customers and their purchasing history, needs and specifications); Balasco v.Gulf Auto Holding, Inc., 707 So.2d. 858, 860 (Fla. App. 2 Dist. 1998)(employer hadlegitimate business interest in “specialized training†where it invested time and money intraining sales people in a certain manner); Milner, 377 F. Supp. 2d at 1218)(relationshipwith customers and specialized training given to employee was legitimate businessinterest).The statute provides substantial relationships with “specific prospective orexisting customers†is a legitimate business interest. In The University of Florida v.Sanal, 837 So.2d 512 (Fla. App. 1st Dist. 2003), where the plaintiff could not identify anyspecific prospective patients with whom the doctor had interfered, it failed to establish alegitimate business interest. However, in Advantage Digital Systems, Inc., 870 So.2d at114,where the employer proved it had a specific customer base, has a legitimatebusiness interest. See also, JonJuan Salon, Inc v. Acosta, 922 So.2d 1081, 1084 (Fla.App. 4 Dist. 2006)(customer relationships were legitimate business interest); Litwinczukv. Palm Beach Cardiovascular Clinic, 939 So.2d 268 (Fla. Ct. App. 4 Dist. 2006)(wheredoctor began practicing a few blocks from clinic and saw 49 of clinic’s prior patients,temporary injunction enforcing non-compete was affirmed).In order to be protected, information gained by an employee during his or heremployment does not have to constitute a “trade secret.â€It is sufficient that theinformation is confidential. See, F.S.A. §542.335(1)(b)(2); American Residential Servs.,Inc., 715 So.2d. at 1049 (holding that employer had a legitimate business interest in“[v]aluable confidential business or professional information that otherwise [did] notqualify as trade secrets.â€)(b)Reasonably Necessary Restraint:Under the statute, restraints on competition must be reasonably necessary toprotect the employer’s legitimate business interests. The statute outlines presumptivelyreasonable periods of time for non-compete covenants. Each of these presumptions isrebuttable. F.S.A. §542.335(1)(d).Where the covenant applies to a former employee, agent or independentcontractor (not involving sale of a business), the court presumes reasonableness of acovenant 6 months or less and unreasonableness of a covenant longer than two (2) years.F.S.A. §542.335(1)(d)(1).A covenant involving a distributor, dealer or franchise (again not involving sale ofa business) will be presumed reasonable if less than one year, and unreasonable if greaterthan three years. F.S.A.§542.335(1)(d)(2).A covenant involving the sale of a business will be presumed reasonable if lessthan three years, and unreasonable if greater than seven years. F.S.A. §542.335(1)(d)(3).In Balasco, 707 So.2d. at 860, examining a covenant under the parameters set upby the statute, the court found a three year restrictive period presumptively invalid. Id.When the employer did not rebut this presumption, the court modified the time restrictionto two years, as provided under the statute. Id.Florida courts have held that a non-compete period may be equitably extended toallow for “what was intended in the bargain.†Michele Pommier Models, Inc. v. MichelePommier Diel, 886 So.2d 993 (Fla. App. 3 Dist. 2004). In other words, where anemployee violates a valid non-compete agreement, the court may extend the restrictionfor a period contemplated in the agreement to begin from the date of its holding ratherfrom the termination of employment.The Southern District of Florida recentlyreaffirmed that the court has discretion to equitably extend the time of the non-competerestrictions. See, Sunbelt Rentals, Inc. v. Dirienzo, 487 F.Supp.2d 1361, 1363 (S.D. Fla.2007)(holding that the equitable nature of preliminary injunctions and the Supreme Courtof Florida’s decision in Calepouto permit, but do not require, a court to equitably extend apreliminary injunction to run from the time of entry of the preliminary injunction).Courts have reasoned that employers are “entitled†to the agreed upon “competition-freeâ€period.Capelouto v. Orkin Exterminating Co., 183 So. 2d 532, 535 (Fla. 1966).However, where an employer does not file suit until after the expiration of the noncompete agreement, the time period may not be equitably extended. Michele Pommier,886 So.2d at 995.The 1996 statute does not specify parameters for reasonable geographicrestrictions, giving trial courts discretion to address whether such restrictions arereasonable. See, e.g. Dyer v. Pioneer Concepts, Inc., 667 So.2d. 961 (Fla. App. 2 Dist.1996). The court considers whether the restriction is so broad that it is “oppressive†onthe employee’s ability to support himself. Availability, Inc. v. Riley, 336 So.2d. 668(Fla. App. 2 Dist. 1976)(reversing the lower court’s determination that a geographicrestriction was too broad; the employee was “otherwise well able to support himself andhis familyâ€). If a geographic restriction is overbroad, or lacking altogether, the court hasdiscretion to determine under the facts of the case what a reasonably limited geographicarea would be, and enforce the covenant within that area. Kofoed Public RelationsAssociates, Inc. v. Mullins, 257 So.2d 603, 605 (Fla. App. 4 Dist. 1972); See also, OrkinExterminating Co., Inc. v. Girardeau, 301 So.2d. 38 (Fla. App. 1 Dist. 1974), cert. denied,317 So.2d. 75 (Fla. 1975) (modifying a covenant containing a geographical restrictionwhich included a larger area than the employee’s former work area).(c)Other… 

 

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