New Hampshire Enacts Non-Compete and Non-Piracy Legislation Effective July 14, 2012

New Hampshire has joined the ranks of numerous other states with non-compete statutes. On July 14, 2012, New Hampshire’s non-compete and non-piracy law became effective and aims to ensure that advance notice will be provided to employees who will be required to sign a non-compete or non-piracy agreement as a condition of their employment or change in job position:

Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of an employment agreement to the employee or potential employee.  Any contract that is not in compliance with this section shall be void and unenforceable.

Under the new law, an employer is prohibited from sandbagging a new employee by presenting him/her with a non-compete or non-piracy agreement on his/her first day of work after he/she has already accepted the offer, particularly in situations where the employee has quit a job to begin work with the new employer only to learn of the “surprise” agreement at that time.  Now, not only must the employee be informed that a non-compete or non-piracy agreement will be a term of his/her employment should he/she accept an offer, but also the employee must be provided with a copy of the actual agreement itself.  The employee then has an opportunity to review and consider the agreement and the impact thereof, and decide whether to accept the offer and the agreement and if employed, quit his/her current job.  This same analysis applies in the case of an employee who is offered an internal job change (e.g., lateral move, promotion, etc.) which will require him/her to sign a non-compete or non-piracy agreement.

New Hampshire courts will continue to handle “traditional” disputes as to the reasonableness of the geographic scope and duration of non-compete agreements and whether the employer has a legitimate protectable interest.  But, after July 14, those same courts will undoubtedly be asked to decide and handle a variety of debacles arising as a result of the new law and the questions it leaves unanswered, such as whether non-solicitation, non-recruitment, and/or nondisclosure agreements constitute “non-piracy” agreements.  That said, as the penalty for noncompliance with the new law is steep – i.e., invalidation of the entire agreement – employers would be wise to act conservatively and avoid any missteps by ensuring reasonable advance notice is provided, written acknowledgment of the notice is given by the employee, and non-solicitation, non-recruitment, and non-disclosure agreements are treated as non-piracy agreements subject to the new law.

 

Specific Limitation on Soliciting Class of Persons May Substitute for Territorial Limitation

Though disfavored in Tennessee, non-compete agreements can be enforced if an employer has a legitimate business interest to be protected and the time and geographical limitations are reasonable.

Non-compete agreements are not analyzed in the abstract, but in the context of the specific circumstances under which they are to be enforced. The question is whether the employer has a legitimate business interest to be protected by the non-compete agreement. Tennessee courts hold that there is no “legitimate interest in protection from competition, only from unfair competition.”  An employer must show special circumstances over and above ordinary competition creating an unfair advantage for the former employee without the non-compete agreement.

Hence, only if a court first finds the non-compete agreement protects the employer from unfair competition by a former employee, will it determine whether the non-compete agreement is reasonable. The time and geographic limitations of the non-compete agreement must not be greater than necessary to protect the employer’s interest against unfair competition.

A non-compete agreement may lack a geographic limit which, in some cases, is fatal to the agreement.

However, Tennessee courts have held a requirement prohibiting former employees from soliciting the employer’s customers and this can substitute for a geographic limitation.

In the most recent case examining this issue, the non-compete agreement lacked a geographic limitation, but prohibited the former employee from soliciting the same type of business for one year from any of the employer’s current customers, customers with whom the employee did business on behalf of the employer, and prospective customers with respect to whom the employee acquired confidential information from the employer. The employee argued that the agreement’s lack of any geographic limitation rendered it unenforceable.

The court held because the non-compete agreement prohibited the former employee from soliciting the same business from the employer’s customers, the agreement was enforceable even without a geographic limitation. The court reasoned that as the specificity of the class of persons with whom contact is prohibited increases, the need for a geographic limitation decreases. Additionally, the restriction on who the former employee may contact, rather than where the former employee may work, gives the former employee greater freedom to practice her profession in the same area as her former employer.

A non-compete agreement which omits a geographic limitation, but prohibits soliciting the same business from the employer’s customers, satisfies the threshold requirement of protecting the employer’s legitimate interest against unfair competition without imposing an undue restraint on trade. The risk, however, of not having a geographic limitation is that the former employee may directly compete for the employer’s potential customers which fall outside of the parameters of the agreement.

In some instances, the former employee could use specialized training received from the employer to compete for those potential customers. Therefore, careful consideration should be given when substituting a restriction against solicitation for a geographic limitation.

For more information on non-compete agreements and their state requirements contact Burr Forman for more insights on the enforceability of non-compete clauses.