Recent legal developments highlight just how critical it is for businesses to understand restrictions on non-compete agreements
Despite the difficulties created by the developments, non-competition agreements should not be abandoned by N.H. businesses
Non-competition agreements are vital tools for businesses to protect their confidential information and customer relationships from misappropriation by departing employees and competitors. Admittedly, employees have a countervailing interest — to ensure that they are not required to sign contracts that unreasonably restrict their ability to secure alternative gainful employment in their fields of expertise.
Courts have balanced these perpetually competing interests by requiring businesses seeking to enforce non-competition agreements to prove that the agreements are narrowly tailored to protect only their legitimate interests.
Three recent legal developments highlight just how critical it is for businesses that use non-competition agreements to understand and comply with the restrictions applicable to such agreements.
The first development is a statute that invalidates all non-competition agreements signed after July 14, 2012 (the effective date of the law), if the agreement is not signed in conjunction either with a job offer to a new employee or an offer of a new job to an existing employee, or if the agreement is not given to the new or existing employee before or with the offer.
The unintended consequences of the statute have created unwarranted difficulties for companies seeking to implement non-competition agreements in a variety of legitimate business situations.
For example, an employer that renews an employment contract containing a non-competition agreement with an existing employee, but is not moving the employee into a new job, may be surprised to later discover that the non-competition agreement (and, potentially, the entire employment contract) is invalid. Similarly, when one company purchases another, the buyer cannot require that the seller’s owners and employees sign non-competition agreements, even if the buyer pays them to sign the agreements.
This new statute has required businesses to take extreme care when implementing new non-competition agreements with existing employees, and has limited even legitimate situations in which businesses can use such agreements.
The other two developments were cases decided by New Hampshire’s Business Court in March and April.
One case involved a non-competition agreement that prohibited the employee (an investment advisor) from soliciting or providing services to “any client or prospective client” of the company. The employee, however, only managed existing clients’ portfolios, and did not develop new clients or work with prospective clients.
The court ruled that the agreement was invalid, because the company had no legitimate right to prevent the employee from soliciting prospective clients after the employee left the company.
The outcome in this case highlights just how important it is for businesses to ensure that their non-competition agreements are tailored to the specific circumstances of each particular employee. Unfortunately, modifying such agreements to tailor them to existing employees’ circumstances can be problematic in light of the statute, as discussed above.
The other case involved a non-competition agreement between a personal fitness business and one of its independent contractor trainers. New Hampshire had not previously addressed the enforceability of these agreements with contractors. The court recognized that the legitimate protectable interests of an employer seeking to enforce a restrictive covenant against an independent contractor may be considerably limited as compared to enforcement against an employee.
For example, it is (or should be) inherent in the nature of the independent contractor relationship that the contractor provides similar services to other businesses, which may be competitors, whereas employees cannot simultaneously work for competing businesses. Also, independent contractors typically (should) have less access to confidential information than employees.
As a result, according to the court, a business must tailor its non-competition agreement to the “nature of the transaction” with the independent contractor for the agreement to be enforceable.
When drafting non-competition agreements, businesses should ensure that the language of the agreements is narrowly tailored to protect only the companies’ legitimate interests with respect to the specific employees or independent contractors who are signing the agreement. The interests that businesses are legitimately entitled to protect with non-competition agreements include the following:
• Businesses can use non-competition agreements to prevent employees and independent contractors from taking advantage of the goodwill, rapport and relationships that they develop with customers.
• Businesses may use non-competition agreements to prevent employees and independent contractors from performing later work that will entail their use of the companies’ confidential information and trade secrets.
Similarly, businesses that want to sign new non-competition agreements with existing employees should take care that the agreements are implemented with offers of a new job.
Non-competition agreements should not be abandoned by New Hampshire businesses, despite the difficulties created by these recent legal developments – protecting confidential information and customer relationships is just too important. Care and precision are all that are necessary to create smart and enforceable non-competition agreements.
Cameron Shilling is a shareholder at McLane, Graf, Raulerson & Middleton and a member of the Litigation Department and the Employment Law Group. He can be reached at 603-628-1351 or firstname.lastname@example.org.