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Should a Non-Compete be Signed Before or After Employment Begins? Answer: It Depends in Alabama and Elsewhere
Monday, January 20, 2014

The variation among states when it comes to non-compete law is a source of frustration for many employers.  And sometimes, similar facts can lead to the opposite results under depending on the jurisdiction.  A recent decision from the Southern District of Alabama, holding that a non-compete can only be signed after employment begins, shows how Alabama law differs from states like Minnesota and Oregon, which require a restrictive covenant to be signed before the inception of employment in order for the employment itself to constitute consideration.

In Dawson v. Ameritox, Ltd., No. 13-0614-KD-M (S. D. Ala. Jan. 6, 2014), the Court denied a motion by Ameritox to enjoin its former employee, Dawson, from working for a competitor.  Dawson, a pharmacist, signed a non-compete with Ameritox on March 29, 2011 in connection with an offer to start employment on April 11, 2011.  In denying the injunction, the court signaled that the non-compete was not enforceable under § 8-1-1 Alabama Code 1975. Subsection (a) of Section 8-1-1 states that “Every contract by which anyone is restrained from exercising a lawful profession, trade or business otherwise than is provided by this section is to that extent void.  The court held that pharmacy was a “profession,” and refused enforcement on that ground.

But the court also held that the non-compete was not saved by section (b) of Section 8-1-1 which states in part, “one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city or part thereof so long as the . . . employer carries on a like business therein.” (Emphasis added.) Relying on the holding from the Alabama Supreme Court in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So.2d 659 (Ala. 2001), the Court held that subsection (b) does not apply “unless the employee-employer relationship exists at the time the agreement is executed.” That certainly tracks with the plain language of the statute which refers to “one who is employed.”

By contrast, in Minnesota (which does not have a statute on non-competes), case law has evolved such that mere continuation of employment is not considered sufficient consideration to support a non-compete, but an offer of employment will suffice. E.g. Sanborn Manuf. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993).  Strictly construing this principle, Minnesota courts have held, for example, that a non-compete signed on the first day of employment is not enforceable (absent other specific consideration, such as money). See Cannon Services, Inc. v. Robinson Outdoors, Inc., No. 04-1597 ADM/AJB (D. Minn. April 30, 2004) (Plaintiff did not show likelihood of success to enforce non-compete signed on first day of defendant’s employment).

In Oregon, a non-competition agreement between an employer and employee will be deemed void and unenforceable unless: (a) the employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a non-competition agreement is required as a condition of employment; or (b) the employer and employee enter into the non-competition agreement upon the subsequent bona fide advancement of the employee.  See ORS 653.295(1).  Note, however, that the foregoing statutory provision does not apply to non-solicit and non-service agreements or confidentiality agreements.  See ORS § 653.295(4)(b).

In Alabama, therefore, employers are generally advised to have non-competes signed on or after the first day of employment and continued employment may be considered adequate consideration. In Minnesota, however, employers must be careful to have non-competes signed before the first day of employment (often with the offer letter, as occurred in the Dawson case in Alabama) so that the offer of employment can serve as consideration.  And in Oregon, non-competes must be provided at least two weeks before employment begins. Employers must continue to mindful of state law variances, not only in the content of restrictive covenant agreements, but in the manner in which they are implemented.

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