Enforcement of Covenants Not to Compete: Cherry, Bekaert Holland v. J. Charles Brown

Introduction

The case of Cherry, Bekaert Holland v. J. Charles Brown (582 So. 2d 502) addressed the enforceability of a covenant not to compete within the context of a professional partnership agreement. The dispute arose when J. Charles Brown, a partner in Cherry, Bekaert Holland (CB H), withdrew from the firm and was subsequently subject to paragraph 15.9 of the partnership agreement. This paragraph was contested by Brown as an unenforceable restraint of trade under Alabama law. CB H filed for enforcement of this provision, leading to a legal battle that culminated in the Supreme Court of Alabama affirming the trial court's summary judgment in favor of Brown.

Summary of the Judgment

The Supreme Court of Alabama affirmed the trial court's decision to grant summary judgment in favor of J. Charles Brown regarding the unenforceability of paragraph 15.9 of the CB H partnership agreement. The court determined that paragraph 15.9 effectively operated as a covenant not to compete, which is void under Alabama Code § 8-1-1(a). Additionally, the court ruled that the parties' choice to apply North Carolina law to govern the agreement was invalid due to Alabama's strong public policy against enforceable covenants not to compete for professionals. Thus, CB H could not enforce paragraph 15.9, and Brown was not bound by its terms.

Analysis

Precedents Cited

The judgment extensively referenced prior cases to establish the court's stance on covenants not to compete and choice of law principles. Key precedents include:

GALBREATH v. SCOTT, 433 So.2d 454 (Ala. 1983): Confirmed that the mere pendency of a similar case in another state does not deprive Alabama courts of jurisdiction.
Blalock v. Perfect Subscription Co., 458 F. Supp. 123 (S.D. Ala. 1978): Held that Alabama public policy against covenants not to compete overrides the parties' choice to apply another state's law.
THOMPSON v. WIIK, REIMER SWEET, 391 So.2d 1016 (Ala. 1980) and ODESS v. TAYLOR, 282 Ala. 389, 211 So.2d 805 (1968): Established that exceptions to § 8-1-1 do not apply to professionals.
Mann v. Cherry, Bekaert Holland, 414 So.2d 921 (Ala. 1982): Reinforced the disfavor of covenants not to compete for professionals under Alabama law.

These precedents collectively affirmed Alabama's stringent stance against enforceable non-compete clauses for professionals, emphasizing the protection of public policy over contractual agreements that seek to restrain trade.

Legal Reasoning

The court's legal reasoning centered on the interpretation of Alabama Code § 8-1-1, which broadly prohibits covenants not to compete unless specific exceptions apply. Paragraph 15.9 of the CB H partnership agreement was scrutinized and deemed to operate as an indirect covenant not to compete by imposing financial penalties on Brown for soliciting clients after withdrawal.

Although CB H initially attempted to design paragraph 15.9 as a "buy/sell agreement" to circumvent the prohibition, the court found that its operational effects were tantamount to a non-compete. Furthermore, the court examined the choice of law clause specifying North Carolina law, which CB H argued would govern the agreement. However, invoking Blalock v. Perfect Subscription Co., the court held that Alabama's public policy against covenants not to compete took precedence, rendering the choice of North Carolina law inapplicable.

The court also addressed Brown’s cross-appeal regarding tortious interference, finding insufficient evidence that CB H's actions constituted intentional interference with business relations.

Impact

This judgment reaffirms Alabama's strict policy against enforceable covenants not to compete for professionals, particularly accountants in this context. It underscores that contractual agreements attempting to restrict trade beyond the permissible scope under § 8-1-1(a) are void. Additionally, the decision clarifies that choice of law provisions cannot override fundamental public policies of the forum state. Consequently, professionals in Alabama can rely on this precedent to challenge overly restrictive non-compete clauses, ensuring their right to practice without undue restraint.

Complex Concepts Simplified

Covenant Not to Compete

A covenant not to compete is a contractual agreement where one party agrees not to enter into or start a similar profession or trade in competition against another party. In this case, paragraph 15.9 of the partnership agreement was designed to financially penalize Brown for competing, thereby restricting his ability to practice accounting post-termination.

Choice of Law

"Choice of law" refers to the provision in a contract that specifies which jurisdiction's laws will govern in the event of a dispute. CB H attempted to apply North Carolina law to their agreement, potentially allowing the enforcement of non-compete clauses. However, Alabama law, which has stronger restrictions against such covenants for professionals, prevailed due to overriding public policy considerations.

Tortious Interference

Tortious interference occurs when one party intentionally damages another party's contractual or business relationships. Brown alleged that CB H interfered with his business relations through the enforcement of paragraph 15.9. However, the court found no evidence of intentional interference, leading to the dismissal of this claim.

Conclusion

The Supreme Court of Alabama's decision in Cherry, Bekaert Holland v. J. Charles Brown highlights the state's resolute position against enforceable covenants not to compete for professionals. By invalidating paragraph 15.9 as an unenforceable restraint of trade and rejecting the chosen application of North Carolina law, the court reinforced the protection of public policy over contractual stipulations that seek to limit professional practice. This judgment serves as a critical reference for future cases involving non-compete agreements and emphasizes the precedence of Alabama's legal standards in matters of professional competition and contractual freedom.