New state law could muddy non-compete picture

On May 15, Governor Lynch signed into law House Bill 1270, an act requiring all New Hampshire employers to disclose non-compete and non-piracy agreements prior to making an offer of employment or an offer of change in job classification.This bill — which is only two sentences long — will require employers to give both applicants and current employees being promoted notice of any non-competition obligations that accompany the job. Some lack of specificity in the wording of the law may leave employers questioning how and when to comply.Many New Hampshire companies rely on non-competition agreements to protect their investments in hiring and retaining employees, and in developing relationships with customers, vendors, and other third parties. New Hampshire courts already construe non-competition agreements narrowly because they are constraints on trade and competition. Companies seeking to protect their goodwill and intellectual property already need to avoid impermissibly broad non-competition provisions by tailoring the agreements to restrict competition only to limited geographical areas, periods of time, or customers.This new law will require employers to follow the additional step of disclosing any non-competition and non-solicitation agreements at the time of the offer of employment or change of job classification. If introduced afterwards, these agreements will be void and unenforceable.The new law does not define either “non-compete” or “non-piracy.” And, while “non-compete” is the generally accepted shorthand for agreement restricting competition in a broad sense, “non-piracy” is not a commonly used term among employers or employment lawyers.This leaves one to wonder whether “non-piracy” is meant to refer to more specific aspects of competing, such as non-solicitation. By “non-piracy,” the Legislature could have meant something akin to an agreement restricting solicitation — as contrasted with competition in general — but it did not clarify whether this would include solicitation of current or prospective customers, vendors, or employees, or whether non-piracy could include a run-of-the-mill agreement to keep the employer’s proprietary information confidential.The new law also does not define “change in job classification,” which, in theory, could mean a promotion, demotion, horizontal transfer, or even just a title change with no additional responsibilities or pay.Going too far?While non-competition agreements can be required of employees if they are tendered prior to or concurrent with making an offer of change in job classification, existing law would suggest that non-competition agreements should not be offered to existing employees except in the context of a bonus, raise or promotion. With the new law, a change of job classification might include a demotion with a reduction in pay, which runs counter to the policy of existing law.The statute could go too far in other respects. It is not clear how a seller of a business would be impacted by the new law. On the one hand, under existing law, New Hampshire courts are more willing to enforce non-competition agreements against sellers because the selling price has already compensated them for the goodwill sold; allowing post-closing competition would allow the seller to take back what he or she already sold. On the other hand, under the new law, in some circumstances, the seller of a business – who stays on as an employee post-closing – could not be bound by a non-competition agreement.Finally, the statute provides that “any non-competition agreement or non-solicitation agreement that is not provided in compliance with this section shall be void and unenforceable.” This suggests that an employment agreement that contains salary, benefits and a term entirely satisfactory to an employee could be rendered unenforceable by the employee simply because the non-competition agreement was untimely under the statute.Since the consequences of failing to introduce non-competition agreements at the time of offer of employment or change of job classification are severe, companies in startup mode or expanding their workforce in New Hampshire will need to work with experienced legal counsel to draft non-competition agreement that will stand up to scrutiny by New Hampshire courts and can be delivered in the timely manner prescribed by the statute.The new law becomes effective on July 14, 2012. All New Hampshire employers must comply, and simply choosing the law of another state as the governing law for the non-competition agreement will not likely help employers avoid this statute.James Hatem is a partner and corporate attorney with Nixon Peabody LLP in Manchester. He is a corporate attorney specializing in transactions. Renee Jackson, a labor and employment associate with the firm, assisted in the development of this article.