Non-Competition Agreements Become More Difficult to Enforce in New Hampshire

Monday, July 30, 2012

Employers in New Hampshire need to be aware—your non-competition agreements may not be enforceable.  New legislation in New Hampshire limiting the enforcement of "non-compete" and "non-piracy" agreements became effective on July 14, 2012.  Under the new law, in order for such agreements to be enforceable, the employer must provide a copy of the agreement before or at the time an offer of employment, or change in job classification, is made.

Restrictive covenants have long been disfavored in New Hampshire.  The New Hampshire Supreme Court has consistently ruled that restrictive covenants are enforceable only to the extent reasonable.  Furthermore, although the New Hampshire courts have the authority to partially enforce a restrictive covenant that is deemed unreasonable (so-called "blue penciling"), the courts will not reform an overbroad covenant if the employer acted in bad faith.  Bad faith has been found when an employee had no notice that he/she would be required to sign a non-competition covenant until after he/she commenced working for the employer.

The new statute follows the direction of the New Hampshire Supreme Court, but goes a step further. Failure to follow the statute renders the agreement unenforceable, whether the restrictions were reasonable or not.  And, notice is not enough—an actual copy of the agreement must be provided no later than at the time an offer is made.

The new statute ups the ante and at the same time creates a number of unanswered questions. 

First, the terms "non-compete" and "non-piracy" are not defined in the statute and thus the breadth of the new law is unclear.   The term "non-compete" is shorthand for a number of different types of restrictive covenants, such as non-solicitation agreements, non-disclosure agreements, and confidentiality agreements.   There is no generally accepted meaning of what constitutes a "non-piracy" agreement. 

Second, employers wanting existing employees to sign a non-compete agreement have historically been able to do so by providing additional consideration, such as a bonus or salary increase.  It is unclear whether or not such consideration would be sufficient to render a non-competition agreement signed by existing employees enforceable under this new law. 

Third, it is not clear what it means to make an "offer of change in job classification."  A casual conversation between a manager and subordinate could suddenly be labeled an "offer."  Employers need to be careful not to have informal discussions with employees about promotions, or risk the loss of the opportunity to require a non-compete as part of the promotion.

Fourth, the new law does not address its effect on existing agreements.  It is unclear whether or not existing agreements that were not entered into in conformity with the law’s requirements are now unenforceable.

Finally, multi-state employers will need to consider whether or not they have any employees subject to this new law.  An employee living in New Hampshire, but working in another state, may argue that he/she is protected by this new law.  This may be true even if the employer does not have any operations in the state. 

Bottom Line:  Employees have been given another weapon in their arsenal to avoid legitimate and reasonable non-competition restrictions.   Employers should take the following steps to maximize the enforceability of their non-competition agreements:

    • Revise offers letters to include a copy of any non-competition agreements (including confidentiality and non-disclosure policies) the employee may be asked to abide by;
    • Institute a process/policy for making formal job changes to ensure that a copy of any non-competition agreement is provided to an employee before an offer is made; and
    • Record-keeping is going to be more important than ever.  Employers will need to be able to prove that a copy of the agreement was provided to the employee/applicant at the time of offer or earlier or risk the agreement being rendered unenforceable.
125 Years