A non-compete agreement is an effective way for a business to protect its intellectual property, client information, and other confidential information. It generally restricts an employee’s ability to work for a competitor or to start a competing business following that employee’s departure from his or her former employer.
For a non-compete agreement to be effective and serve its purpose, however, it must be enforceable. These agreements are generally governed by state law. In New Hampshire, the law that applies to non-compete agreements has evolved over time. Certain types of employer-friendly agreements (and the restrictions they contain) used to be enforceable in New Hampshire. But over the past 10-15 years, the law has trended in the other direction and become more employee-friendly.
This does not mean, however, that businesses cannot continue to protect their interests. They can certainly do so. They just have to ensure that they take certain steps to craft a non-compete agreement that adheres to recent trends. Below, I identify and explain 9 ways businesses can ensure their non-compete agreements are enforceable.
9 Ways Businesses Can Ensure Their Non-Compete Agreements Are Enforceable
1) The Non-Compete Agreement Should Generally Restrict the Employee From Soliciting Current Clients, Not Prospective Clients
New Hampshire courts generally disfavor non-compete agreements because they restrain free trade and markets. However, they will enforce these agreements if they protect a “recognized legitimate employer interest.” Courts have found that a legitimate interest that businesses may protect is their current client base. This makes sense because businesses should be able to prevent employees from taking advantage of the goodwill and relationships they develop with customers and clients.
Courts have drawn the line, however, when a business – through a non-compete agreement or non-solicitation agreement – seeks to restrict a former employee from soliciting the business’s prospective clients when that employee did not have contact with prospective clients while at his or her former employer. Courts have concluded that this kind of restriction is unenforceable.
2) The Current Clients Against Whom a Former Employee is Restricted From Soliciting Should Be Clients With Whom that Employee Had Contact
Even if the non-compete agreement is limited to restricting a former employee from soliciting current clients, the restriction should be written to preclude soliciting only those clients with whom the employee had contact. The restriction should not ban soliciting all of the business’s clients or customers if the employee did not have contact with all those clients or customers.
3) A Restriction From Soliciting Prospective Clients Can Be Included in Limited Circumstances
Businesses can likely implement a restriction against soliciting prospective clients, but only with former employees who had contact with prospective clients.
For example, an employee’s primary job duty might be to actively solicit prospective customers for a sales representative. In this situation, the only activity such an employee engages in is reaching out to prospective customers. Here, a restriction against that employee contacting those same customers if he or she joins a competitor would likely be enforceable because, unlike an employee who has no contact with prospective customers, this employee’s primary focus was on such customers.
4) The Geographic Restriction in a Non-Compete Agreement Should Prohibit the Former Employee From Working Only Within the Geographic Area in Which the Employee Worked
Every non-compete agreement usually contains a prohibition on working within a specific geographic area, such as a 50- or 75-mile radius. For example, an agreement may restrict a former employee from working within 25 miles of his or her former employer.
Rather than adopting a bright-line threshold for what kind of geographic restriction is appropriate, courts have instead focused on ensuring these restrictions are aimed at prohibiting an employee from working for a competitor within the same geographic area in which he or she worked for his or her former employer. Thus, if a former employee sold a product to customers only in Massachusetts, a prohibition from working for a competitor in New Hampshire would likely be too broad.
Businesses should ensure the geographic restrictions they include in their non-compete agreements are narrowly tailored to the specific areas in which their employees generally work, rather than prohibit competition within a widespread area.
5) The Non-Compete Agreement’s Time Restriction Should Not Be More Than Two Years
Every non-compete agreement usually contains a time restriction, which prohibits a former employee from working within the above-referenced geographic area for a specific period of time. For example, an agreement may restrict a former employee from working within 25 miles of his or her former employer for a period of 18 months or two years.
This time restriction, however, should last no longer than is necessary for a former employee’s replacement to demonstrate his or her effectiveness to a business’s customers. Courts look at the duration of time that is necessary for the connection between a former employee and an employer to be “obliterate[d] in the minds of the public.” Courts have generally concluded that two years is more than enough time for this association to be severed.
It would be risky for a business to include a longer time restriction in its agreement.
6) The Non-Compete Agreement Can and Should Restrict the Former Employee From Using Confidential Information or Trade Secrets
Courts will generally not quarrel with a business’s interest in protecting its confidential information or trade secrets. Businesses have every right to protect this information and restrict an employee’s later use of it in a new job with a competitor. Thus, a business should include such a restriction in its agreement.
7) Do Not Adopt a One-Size-Fits-All Approach
When drafting a non-compete agreement, a business should ensure the language of the agreement is narrowly tailored to the specific employee who is signing the agreement. A business – particularly a large business with many different types of employees – should not draft one agreement and present it to every employee. Rather, a business should draft several versions of its non-compete agreement: one for each specific category of employee.
For example, as demonstrated above, a prohibition against soliciting all of a former employer’s current customers may be enforceable for one type of employee (one who had contact with all those customers), but not enforceable for another employee (one who had minimal contact with those customers). A business should recognize the differences between its employees’ duties and work requirements and create and tailor a different version of its non-compete agreement for each class of employee.
(A business should then ensure that a given employee signs the right agreement.)
8) Present the Non-Compete Agreement at the Right Time
Even if a non-compete satisfies all the requirements and guidelines above, a business might still risk invalidating it if it does not present the agreement to an employee at the right time. Many businesses remain unaware that a new law became effective in New Hampshire in July 2012, and was then amended in 2014, that requires an employer to provide a copy of a non-compete agreement to a potential employee either before or concurrently with an offer of employment. Under the new law, a non-compete agreement that is not provided according to these requirements will be void and unenforceable.
For a New Hampshire business, this law means all employers need to provide prospective employees with an actual copy of the non-compete agreement that the individual will be required to sign at or before the time the employer makes the offer of employment to the prospective employees. It is no longer sufficient for employers to simply advise prospective employees in an offer letter or orally that they will be required to sign a non-compete when they start employment.
An employee cannot waive this requirement. If he or she does, or if an employer successfully obtains a waiver, the waiver will be unenforceable.
Businesses should keep this requirement in mind if they have an interest in enforcing non-compete agreements and protecting their interests and client information.
9) A Business Must Act in Good Faith When Attempting to Enforce a Non-Compete Agreement
Even when a non-compete agreement may not be enforceable in its entirety, a court can enforce those portions of the agreement that it deems enforceable. This practice is known as “blue-penciling.”
Courts will not take this step, however, if a business has not acted in good faith when it attempts to enforce the agreement. If a court does not engage in “blue-penciling,” it will invalidate the entire agreement.
Courts generally consider whether the agreement is too broad in determining whether a business has acted in good faith. For example, if a former employee had no contact with prospective customers, and a business nevertheless seeks to enforce a non-compete agreement against that employee that restricts the employee from soliciting prospective clients (despite clear law to the contrary), a court will likely find that the business has not acted in good faith because it should have known better than to attempt to enforce such a restriction.
Businesses should be very careful and ensure the non-compete they seek to enforce is narrowly tailored to the specific employee against whom they will seek to enforce it.
The guidelines above demonstrate that New Hampshire law is constantly evolving. Businesses should update their non-compete agreements on a regular, periodic basis so they can ensure their agreements do not contain unenforceable restrictions – and potential hazards when filing an action to enforce them. As always, a business should consult an experienced attorney for guidance when undertaking this task.