A new era in non-compete agreements

Companies thinking about asking employees to sign non-competition agreements have restrictive laws they must follow


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Q. Jim is the owner of a small startup company that sells software developed by him and his partner in his garage. He would like to hire one employee to assist with research and development and a couple of others to do business development and sales. Jim is very focused on protecting his intellectual property as well as his customer relationships and would like to have employees sign non-competition agreements and other restrictive covenants. Are there any particular concerns about which Jim should be aware?

A. Any company thinking about asking current or prospective employees to sign non-competition, non-solicitation or anti-piracy agreements -- all sometimes referred to as restrictive covenants -- has many factors to consider before placing a document in front of someone and asking for a signature.

The law surrounding the enforceability of restrictive covenants has been in flux for many years in New Hampshire. The law also varies widely from state to state and country-to-country, so companies employing workers to perform services outside of New Hampshire have additional concerns.

The New Hampshire Supreme Court has issued opinions providing guidance as to when and under what circumstances such agreements might be deemed unenforceable, and employers have taken these guidelines to heart. Employers are wisely taking more care to make sure the terms of such agreements are reasonable and that the circumstances of execution are more formal so as to avoid later challenges. The Legislature has now also quietly but forcefully weighed in on the issue.

One of the few bills that survived the current legislative session with bicameral support is House Bill 1270, which adds to current state law: "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 the employment agreement to the employee or potential employee. Any contract that is not in compliance with this section shall be void and unenforceable." This seemingly simple and straightforward provision -- which became effective July 14 -- is likely to have significant effect on the onboarding processes of many companies.

Someone like Jim, who is venturing into the area of restrictive covenants for the first time, may have an easier time navigating this process than most. He should work closely with his attorney to craft an agreement or agreements that meet the needs of his business. The agreement to be signed by a sales representative is likely to be quite different than one to be signed by an employee responsible for research and development. As has always been the case, Jim should seek to have his prospective employees sign agreements narrowly tailored to protect the legitimate business interests of his company.

Murkier waters under the new law, however, he needs to provide a copy to the prospective employee at the time he makes the offer of employment. The reasoning behind this requirement is sound: No one would think it fair for an applicant to quit a lucrative job in California, sell his house and move his family to New Hampshire only to have him arrive on his first day of work and be presented with an agreement that is unduly burdensome and be left with no choice but to sign it.

While existing case law would almost certainly have rendered such an agreement unenforceable, this statute now makes that a certainty. Best practice suggests that Jim should send the employee an offer letter stating that execution of the restrictive covenant is a condition of employment and a copy of the agreement itself. The signed offer letter will then serve as evidence that the agreement was provided at the time of the offer. Assuming the terms of the agreement are appropriate and enforceable, Jim should be in good shape.

Things become less clear, however, when an employer asks a current employee to sign a non-competition agreement. The statute states that the employee must be given the agreement at the time of "an offer of change in job classification." Yet the term "job classification" is not defined. It is likely safe to assume that a promotion or a change to a department with a different client or trade secret exposure would be a qualifying change.

It gets even more murky when an employer that has never asked employees to sign non-competition agreements decides to begin utilizing them, or when a company wants to update the agreements it has had in place for many years to reflect recent changes in the law or the nature of its business.Typical practice to this point has been for employers to offer some consideration, such as a bonus or salary increase. Questions are now likely to arise as to whether agreements executed under these circumstances are enforceable or whether the new law even applies to them.

In addition, the statute specifically refers to non-compete and anti-piracy agreements. Questions therefore remain as to whether the law applies to other forms of restrictive covenant, such as non-solicitation or non-disclosure agreements, which are not mentioned. 


 

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