Judicial Update – Noncompete Agreements

Judicial Update – Noncompete Agreements

Summer is a busy time for the various appellate courts, both federal and state. Although the Supreme Court of the United States has completed its summer term, the Alabama appellate courts are continuing to issue decisions. One recent Alabama Supreme Court decision directly impacts real estate licensees, specifically focusing on noncompete clauses of independent contractor agreements.

The Alabama Supreme Court recently issued its decision in Amanda Howard Real Estate, LLC v Lee and JRHBW Realty, Inc. In this case, a real estate licensee was promoted to Director of Sales after having worked for a particular brokerage for 7 years. At the time the licensee was promoted, her and her broker signed a document entitled “Addendum 1,” which contained the licensee’s job description and compensation agreement. Six months later, the licensee signed two additional documents related to her promotion. The first, entitled “Employee Position Agreement,” stated the full promotion agreement was comprised of that document itself, along with two addendums. The second, entitled “Addendum 2,” contained both a confidentiality agreement and a noncompete agreement. The broker did not sign either of these additional documents at the time that the licensee signed them.

Nearly two years later, the licensee resigned from her position at the brokerage. The same day that she resigned, her broker signed both the “Employment Position Agreement” and “Addendum 2.” Three days after that, the licensee started work as managing broker for a new brokerage. In response, the first brokerage sued the licensee and her new brokerage, arguing that she had violated the terms of her noncompete agreement. The case was appealed all the way to the Alabama Supreme Court.

Ultimately, Alabama Supreme Court sided with the real estate licensee, finding that the non-compete clause was invalid. The Court’s reasoning started with the premise that Alabama strongly disfavors noncompete agreements – with only a few exceptions, they are prohibited under Alabama law. So, when the Court must make decisions about those exceptions, the decisions will be made with a strict eye.

Alabama law does allow noncompete agreements for employees, but for them to be valid, they must meet several requirements.  Specifically, the law requires that any employee noncompete agreement be “reduced to writing, signed by all parties, and supported by adequate consideration.” See Alabama Code § 8-1-192 (emphasis added).

In Amanda Howard Real Estate, LLC v Lee and JRHBW Realty, Inc., the broker had a few different arguments as to why the Court should consider the noncompete to be valid, despite the fact that it was not signed until after the licensee stopped working for the brokerage. In rejecting each of the broker’s arguments, the Court made clear that any attempts to circumvent the signature requirement will face heavy scrutiny. 

The case highlights the principle that Alabama law strongly disfavors noncompete agreements and the need for brokers who wish to put noncompete agreements in place to be sure to consult legal counsel first. A broker should always ensure that all contracts have been executed fully and properly. When it comes to noncompete agreements specifically, all three requirements – 1) written agreement, 2) signed by all parties, and 3) supported by adequate consideration – must be followed strictly. To that end, best practices are:

  • Consult legal counsel. Real estate brokers and agents are not attorneys and should not draft legal documents, including noncompete agreements, from scratch. (See both Article 13 of the REALTOR® Code of Ethics and Alabama Code § 34-3-1.) However, real estate brokers and agents may fill out a form or contract that was drafted by an attorney.
  • Put all of the details in writing. Anything that is discussed out loud but not included in a written agreement will be considered invalid.
  • Ensure that all parties timely sign the agreement. Although the law’s requirement that noncompete agreements be signed by all parties does not include a specific time frame during which the signing must occur, this case demonstrates that there is a point when it is too late to sign. Therefore, the best practice is for all parties to sign immediately after one another, or as close to that as possible.
  • If you’re concerned about “adequate consideration,” consult your legal counsel. Making sure on the front end that your noncompete agreements are valid could save you ample money and time in court later!