The State-by-State Smackdown Keeps On Rolling: Alabama Refuses to Enforce Noncompete Clause Based on the Timing of the Employee’s Signature
An interesting ruling is hot off the press from the U.S. District Court for the Southern District of Alabama. Earlier this week, a federal judge in Dawson v. Ameritox, Ltd. denied Ameritox’s motion for a preliminary injunction seeking to enforce its noncompete agreement with Eric Dawson, a former employee of Ameritox. Ameritox had been seeking an injunction to prevent Dr. Dawson from taking a position as the National Director of Clinical Affairs with Millennium Laboratories, Inc., one of Ameritox’s direct competitors.
The court held that Ameritox’s noncompete agreement was void as against the public policy of Alabama under state law; we unpack exactly how the court reached that conclusion – and what lessons all of us can draw from this ruling.
First, the facts: Ameritox is a nationwide provider of medication testing, monitoring, and laboratory and other services to health care providers; Dr. Eric Dawson is a pharmacist who was hired by Ameritox to be its Assistant Director of Medical Science and Health Outcomes Research on April 11, 2011. Id. at 1. During the hiring process, on April 7, 2011, Dr. Dawson signed a two-page Confidentiality and Noncompetition Agreement that, inter alia, prohibited him from working for a competitor of Ameritox for the period of one year after his employment ends anywhere in the United States. Id. at 2.
Although the Confidentiality and Noncompetition Agreement specified that it was to be governed by Maryland law, because Dr. Dawson was seeking employment that would otherwise violate the agreement in Alabama, he was able to bring a lawsuit in that state seeking to invalidate the clause as against the public policy of Alabama – even though the clause might well have been enforceable in Maryland. Id. at 5 & n.1.
Alabama, like the majority of U.S. states, follows the traditional LBI (“legitimate business interests” test) that we’ve previously discussed for other jurisdictions. (See, e.g., our discussion of LBI in Missouri, and in Connecticut.) Specifically, Alabama will enforce a noncompete clause if (1) the employer has a protectable interest; (2) the restriction is reasonably related to that interest; (3) the restriction is reasonable in time and space; and (4) the restriction imposes no undue hardship on the employee. James S. Kemper & Co. v. Cox & Assocs., 434 So.2d 1380, 1384 (Ala. 1983). This operates as an exception to Alabama’s general statutory ban on contracts that restrain trade, § 8-1-1 of the Alabama code. (“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.”)
And here’s where the wrinkle develops. As you might notice from the fact summary, Dawson signed his non-compete four days before he began his first day on the job with Ameritox. As such, Dawson was not an employee “at the time the agreement is executed,” making the agreement void under Alabama law. See Pitney Bowes, Inc. v. Berney Office Solutions, 823 So.2d 659, 662 (Ala. 2001); Slip Op. at 5. The court thus refused to enjoin Dr. Dawson from taking a job with Ameritox’s competitor.
There are two immediate implications. First, remember that Ameritox explicitly drafted its noncompete agreement with a choice-of-law provision that specified Maryland law – not Alabama or any other jurisdiction. Ordinarily, clients rely on such provisions to avoid precisely these sorts of situations. However, because noncompete clauses touch on matters of public policy, a choice-of-law provision won’t allow a national or multinational employer to avoid the consequences of adverse legal regimes in other jurisdictions. As a result, an employer seeking to draft and enforce covenants not to compete that could potentially apply in multiple jurisdictions (such as the nationwide noncompete drafted by Ameritox) needs to be advised as to the underlying law in all of the potentially applicable jurisdictions. Had Ameritox simply required Dr. Dawson to re-sign the noncompete after he had been hired, this outcome could likely have been avoided.
Second, employers and employees need to be aware that noncompete clauses are being scrutinized in ways that other contracts aren’t. This case reminds me of a similar case in Illinois that we discussed a few months ago, Fifield v. Premier Dealer Services, in which an Illinois appellate court held that an employee who had been fired and re-hired by his employer post-merger did not receive sufficient consideration for his signing a noncompete clause because he had not worked at the newly-organized entity for two years – even though he had been a long-standing employee of the prior entity.
These cases may seem counterintuitive to our everyday experiences; for example, we know that in the world of executives and other professionals, it is common for the search process to take a long time, and for an incoming executive to sign paperwork prior to his or her “start date.” Similarly, it is not uncommon for a post-merger entity to fire all of its employees and then immediately re-hire them subject to new agreements with the new entity – even though the firing is only “on paper” and does not disrupt the actual day-to-day operations of the employer or employee. Nevertheless, we’ve seen courts reach technical, letter-of-the-law rulings in these cases to invalidate contracts that common sense and everyday experience might otherwise suggest would be valid. That’s part of why we continue to label these cases the “State-by-State Smackdown” and draw them to your attention – our belief is that the winds of change are blowing across the country, and we want you to be out in front of those changes rather than caught up when they strike you.