Employers Just Get No Satisfaction: NH Enacts Law Restricting Use Of Non-Compete Agreements

by Downs Rachlin Martin PLLC
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Employers in New Hampshire now must comply with further restrictions on their ability to enforce non-compete and anti-piracy agreements.  Venturing further into the already murky area of the enforceability of such agreements, New Hampshire recently enacted  N.H. R.S.A. 275:70, which  requires employers to provide non-compete and non-piracy agreements to applicants and employees experiencing a change in job classification prior to extending the offer of employment or making the classification change.  The legislation, signed into law in July 2012, applies to all New Hampshire employers, regardless of the entity’s state of incorporation or origination.

Background

New Hampshire already places restrictions on employers to limit non-competition agreements with respect to geographic scope, length of time, and customers.  RSA 275:70 expands the restriction in an attempt to allegedly protect employees from entering into such agreements involuntarily or under duress.  The new legislation supposedly aims to prevent situations where employees enter into an employment relationship, only to be surprised on the first day of work by the employer forcing the employee to sign a non-compete or non-piracy agreement.

In its entirety, RSA 275:70 is a full two sentences in length.  Such brevity creates room for confusion and compliance questions among employers.  For example, the terms “non-compete,” “non-piracy,” and “change in job classification” lack definitions in the new legislation.

For many employers, “non-compete” refers to agreements limiting the ability of the employee to pursue similar employment after the employee separates from the company.  Non-compete agreements frequently incorporate non-solicitation clauses, seeking to protect the intellectual property of the employer against competitive actions by employees after the separation of employment.

Employers use “non-piracy” less frequently.  It may be construed to include non-solicitation clauses but could also reference trade and proprietary information of the employer, such as customer lists or vendor agreements.

Vague Definition

What is not clear under RSA 275:70, is what constitutes a “change in job classification.” Promotions, demotions, lateral transfers, and changes in pay scale may all be areas covered by the legislation.  But it is not entirely clear.  Legislative history suggests that the law intends to cover situations where an employee is moving into a position previously not held to a restrictive agreement or where a job applicant may otherwise experience possible duress when entering into the agreement.  This interpretation may, however, be challenged in the courts in the future.

Prior to this new legislation, New Hampshire courts have disfavored non-compete and non-piracy agreements as restrictions on trade and competition.  Agreements found to be non-compliant with RSA 275:70 will be deemed automatically void and unenforceable.

The law does not specify how the New Hampshire courts will address the enforceability of non-compete and non-piracy agreements in place prior to the effective date of the law, though it seems reasonable, given the intent of the legislation, that only agreements entered into after the effective date of the law will be bound by the new requirements.

Take Away

Employers are encouraged to maintain a written and signed acknowledgement of the receipt of any non-compete or non-piracy agreements given to an applicant or employee, so that they can later prove that the agreement was agreed to by the employee before he or she accepted the job.  Employers will not be in compliance if the agreement is just verbal or if the agreement is provided after extending the employment offer.  Startup companies or employers experiencing an expansion in workforce are especially encouraged to seek the assistance of counsel to ensure compliance.

Elizabeth Rattigan is a litigation and employment law partner in the Lebanon, New Hampshire office of Downs Rachlin Martin PLLC

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