Alabama’s Restrictive Covenants Statute: New Insight on Retroactivity, Employee Training, and the Blue Pencil Rule

Alabama’s new restrictive covenant statute became effective on January 1, 2016. Recently published committee comments clarified certain provisions of the law. The following briefly summarizes the final committee comments relating to three significant provisions of the new law.    

Impact on Existing Restrictive Covenant Agreements

The validity of agreements signed before January 1, 2016, will be determined under the prior bare bones statute and case law. The comments provide that the new law will not be applied retroactively and “is not meant to void or cast doubt on agreements” signed before January 1, 2016. This is significant because the new law decreased the length of time for which certain restrictive covenants can be enforced, which means that some agreements signed before January 1, 2016 may conflict with the new law. 

New Rules on Protectable Interests

The new statute provides a specific list of items on which employers can rely to demonstrate that a protectable interest exists, which is a requirement for the enforcement of a restrictive covenant in Alabama. One of the changes from prior protectable interest case law is that the current law restricts an employer’s ability to rely on employee training as the basis for forming a protectable interest. The new statute states that “specialized and unique training involving substantial business expenditure” may constitute a protectable interest provided that it is “specifically set forth in writing.” The final committee comments provide that, in order to be effective, the agreement “must specifically set forth in writing the exact training and anticipated expense” of the specialized training. If these two conditions are not met, a restrictive covenant containing “generalized statements” about specialized training will be insufficient to demonstrate the existence of a protectable interest. Therefore, any agreement that relies on training to satisfy its protectable interest requirement must be carefully and individually drafted to be enforceable. The final comments reinforce the statute’s message that an agreement based solely on specialized training will receive extra judicial scrutiny.

The Blue Pencil Rule

The new statute provides that if a court is dealing with “overly broad” or unreasonably long restrictive covenants, it may void the restriction in part and reform it to preserve the protectable interest.  However, there is an outer limit to the blue pencil rule, and the statute provides that if the agreement does not come within the six restrictive covenant exceptions (which include non-solicitation and noncompetition agreements), then the agreement may be voided “in its entirety.”

The final comments ease any lingering concerns that Alabama’s strong, traditional blue pencil rule has been compromised by the new statute. The final comments state that covenants that cannot be reformed by blue penciling include agreements that are “designed to coerce the payment of a debt” and agreements that “reduce the redemption price of company stock.” These types of agreements are well beyond the six exceptions and well beyond the scope of existing Alabama law interpreting the prior restrictive covenant statute. By mentioning only these two types of agreements, the final comments suggest that an agreement based on one of the six exceptions can be judicially reformed even if substantially overbroad. The final comments strongly suggest that only when agreements contain covenants well outside Alabama restrictive covenant standards will the blue pencil rule be unavailable to reform such agreements.

Unanswered Questions

Although the statute’s final committee comments provide useful guidance on several points, there are still several questions about the new statute that remain unanswered:

• Does the new statute apply to independent contractors?
• Does the new statute exclude employees of nonprofit employers?
• Do the new non-solicitation provisions apply to prospective customers or do they only apply to current customers?
• Does the new statute continue Alabama’s prior practice of requiring an individual to be employed at the time the agreement is signed?

While we wait for clarification on these issues, employers should consider how these open questions may impact their agreements and what steps they can take to protect themselves in these uncertain areas.