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An Update on Alabama Law on Trade Secrets and Restricted Covenants

An Update on Alabama Law on Trade Secrets and Restricted Covenants. Last Chance Seminar Huntsville Madison County Bar Association December 8, 2016. Presented by: Harold Stephens. THE NEW ACT. The General Rule

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An Update on Alabama Law on Trade Secrets and Restricted Covenants

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  1. An Update on Alabama Law on Trade Secrets and Restricted Covenants Last Chance Seminar Huntsville Madison County Bar Association December 8, 2016 Presented by: Harold Stephens

  2. THE NEW ACT The General Rule Section 1(a) Every contract by which anyone is restrained from exercising a lawful profession, trade or business of any kind otherwise than is provided by this section is to that extent void. • Historical starting point disfavoring agreements in restraint of trade

  3. THE NEW ACT Protectable Interest Section 1(b) Except as otherwise prohibited by law, the following contracts are allowed to preserve a protectable interest. • To be enforceable the contract must preserve a “protectable interest” • What is a “protectable interest”?

  4. THE NEW ACT Protectable Interest Section 2(a) defines “protectable interest” to include the following: • Trade secrets as defined in Ala. Code §8-27-2 • Confidential information (including pricing, compensation, customer lists, financial information, marketing plans, business models and strategy, computer software, etc.) • Customer, landlord, patient, client or other commercial relationships (prospective or existing)

  5. THE NEW ACT • Customer, vendor, patient or client goodwill of any ongoing business, franchise, professional practice or trade or for any specific marketing or trade are • Specialized and unique training involving substantial business expenditure provided such training is set forth in writing as consideration for the restraint

  6. THE NEW ACT Protectable Interest Section 2. (b) Job skills in and of themselves, without more, are not protectable interest. • Job skills alone are no longer sufficient to show a protectable interest

  7. THE NEW ACT Enforceable Agreements Section 1(b)(1) No Hire Agreements • A contract between two or more persons or businesses or a person and a business limiting their ability to hire or employ the agent, servant or employee of a party to the contract is permitted where the agent, servant or employee holds a position uniquely essential to the management, organization or service of the business.

  8. THE NEW ACT Enforceable Agreements (Con’t) • Allows enforcement of “no-hire” agreements in certain instances • Limited to those employees who are “uniquely essential” to the operation of the business • Will likely only be enforced as to certain key employees

  9. THE NEW ACT Enforceable Agreements Section 1(b)(2) Exclusive Dealing Agreements • An agreement between two or more persons or businesses or a person and a business to limit commercial dealings to each other. • Allows enforcement of exclusive dealing, exclusive provider, output or requirements contracts

  10. THE NEW ACT Enforceable Agreements Section 1(b)(3) Sale of Good Will of Business • One who sells the good will of a business may agree with the buyer to refrain from carrying on or engaging in a similar business and from soliciting customers of such business within a specified geographic area so long as the buyer or any entity deriving title to the good will from that business, carries on a like business therein, subject to reasonable time and place restraints. Restraints of one year or less are presumed to be reasonable.

  11. THE NEW ACT Enforceable Agreements (Con’t) • Continues prior Alabama law (buyer of a business may enforce non-compete against seller) subject to: • Must be a specified (and reasonable) geographic area • Buyer must be carrying on a like business in the geographic area, and • Restraint must be “reasonable” as to time and place (with one year or less presumed reasonable)

  12. THE NEW ACT Enforceable Agreements Section 1(b)(4) Non-Compete Agreements • An agent, servant or employee of a commercial entity may agree with such entity to refrain from carrying on or engaging in a similar business within a specified geographic area so long as the commercial entity carries on a like business therein, subject to reasonable restraints of time and place. Restraints of two years or less are presumed to be reasonable.

  13. THE NEW ACT Enforceable Agreements (Con’t) • Non-compete agreements are enforceable in Alabama subject to: • Must be current (not prospective or former) agent, servant or employee • Must be carrying on a like business in the geographic area, and • The restriction must be “reasonable” as to time and place (with two years or less presumed reasonable)

  14. THE NEW ACT Enforceable Agreements Section 1(b)(5) Customer Non-Solicitation Agreements • An agent, servant or employee of a commercial entity may agree with such entity to refrain from soliciting current customers, so long as the commercial entity carries on a like business, subject to reasonable times restraints. Restraints of 18 months or for as long as post-separation consideration is paid for such agreement, whichever is greater, are presumed to be reasonable.

  15. THE NEW ACT Enforceable Agreements (Con’t) • Non-solicitation agreements of CURRENT customers are enforceable in Alabama subject to: • Must be current (not prospective or former) agent, servant or employee • Must be carrying on a like business, and • Subject to “reasonable” time restraints (with 18 months or time period for payments, whichever is longer presumed reasonable)

  16. THE NEW ACT Enforceable Agreements Section 1(b)(6) Dissolution of Business • Upon or in anticipation of a dissolution of a commercial entity, partners, owners or members, or any combination thereof, may agree that none of them will carry on a similar commercial activity in the geographic area where the commercial activity has been transacted.

  17. THE NEW ACT Enforceable Agreements (Con’t) • Broadens prior “partnership” dissolution provision to cover all commercial entities, and • Agreement enforceable as to the geographic area where the entity transacted business

  18. THE NEW ACT What does it take to have an enforceable restrictive covenant in Alabama today? • Must have a “protectable interest” (Section 2) • Must be in writing (Section 3) • Must be “signed by all parties” (Section 3) • Must be supported by adequate consideration (Section 3) • If a restraint is overly broad or unreasonably long, a Court may reform the agreement (Section 4)

  19. An Update on Alabama Law on Trade Secrets and Restricted Covenants

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