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New Law in Granite State Affecting Non-Compete and Non-Piracy Agreements in the Workplace.
Posted on Jun 18, 2012.
In late May, Governor Lynch signed into law HB 1270, an act requiring employers to provide a copy of any “non-compete and non-piracy agreements” to applicants and certain employees. This new law, which will be effective July 14, 2012, will amend RSA 275 (often referred to as “[Employee] Protective Legislation”) and will require employers to prospectively provide copies of certain employment agreements to new hires prior to the actual job offer and to employees prior to a “change in job classification.” The law provides that failure to disclose such agreements “prior to or concurrent with” the underlying offer will render the agreements unenforceable. While this requirement may seem to be a mere formality, one which some employers already observe as a matter of standard practice, this could be a significant change for many other employers. It also signals yet another legal and legislative narrowing of the scope and enforceability of these restrictive covenants or provisions.
While courts in New Hampshire have for several years dealt with non-competition, non-solicitation and non-disclosure agreements, and in doing so have continued to narrow the scope and enforcement of these agreements, this law constitutes the New Hampshire legislature’s first regulation of non-compete agreements between private companies and individuals. The intended scope of the law, however, does not supplant the Court’s traditional role in refereeing disputes of these types of agreements.
A review of the law’s legislative history confirms that some Representatives and Senators were concerned that applicants and employees who are presented with these agreements after they are offered a new job do not truly enter into these agreements voluntarily or without duress. The employment relationship, as one legislator put it “is like a marriage” and “presenting one of these agreements to someone who has already accepted a job offer without knowing about the restriction is like presenting your new bride with a pre-nuptial agreement when you return home from the honeymoon.” These agreements, by design, restrict a person’s ability to work, or fully function, in their chosen field, and as is usually discovered when the agreements are sought to be enforced, employees often claim they didn’t read the agreement or fully understand the terms or implications when they signed the agreement. Legislators and legal commentators have speculated that most employees don’t want to make waves or put their job in jeopardy by questioning these agreements, especially at the outset of employment.
The scope of this new law has obvious repercussions for New Hampshire businesses as failure to follow these requirements could cause the agreement to be unenforceable. Also, if an employer handles the presentation of these agreements in a uniform manner, if one agreement is deemed unenforceable the employer may lose the ability to enforce the same agreement against other former employees.
This new law seems pretty straight-forward but a few problems have already been identified. First, the law does not define what constitutes a “non-compete and non-piracy” agreement. Thus, HB 1270 begs the question: What kinds of employment agreements are subject to its disclosure requirements? Second, how far in advance of an offer must an employer provide copies of any relevant agreements? Third, what degree of change in an existing employee’s job duties and/or salary triggers an employer’s duty to provide copies and does HB 1270 require re-disclosure of existing employment agreements?
As mentioned above, the terms “non-compete and non-piracy” are not defined under HB 1270, the related legislative history, or other New Hampshire statues. A “non-compete” agreement or provision is commonly understood to include covenants which, for a specified period of time, restrict a person from competing with his/her current or former employer either by working for a competitor or setting up a competing business. These agreements often include a non-solicitation provision, in addition, or as an alternative, to non-competition covenants. Non-solicitation agreements typically provide that, for a specified period of time after the person’s employment ends, he or she cannot solicit clients, customers, or employees of his/her former employer to end their relationship, in whole or in part, with that former employer and instead form a new association with that person or a new entity. Finally, these agreements often include non-disclosure provisions which usually keep current and former employees from disclosing a former employer’s trade secrets, confidential and proprietary information to other individuals or entities without the former employer’s express authority or permission. Those provisions are usually not limited in duration meaning the employer can protect this confidential business information for as long as it remains a trade secret or it is truly confidential and protected.
Courts have disfavored non-competition agreements and over recent years consistently narrowed the scope and duration of these provisions principally because they keep people from working. Courts have also limited the scope of non-solicitation agreements in duration and as to the individuals or entities with whom the departing employee had meaningful contact in the months before the employment terminated. Finally, courts have examined whether information sought to be kept confidential under non-disclosure agreements should be afforded that protection. This new law doesn’t help with those definitions or distinctions. Further, other jurisdictions that have had occasion to interpret this phraseology have determined that non-competition, non-solicitation, and other anti-piracy agreements are distinct from non-disclosure agreements. Again, this law makes no such distinction, so employers in New Hampshire are most likely required under HB 1270 to affirmatively provide copies of all covenants not to compete, non-solicitation agreements, and other anti-piracy agreements that would have the net effect of restraining the employee’s ability to earn a living after separation from that employment. While the law doesn’t specifically mention non-disclosure agreements, a prudent approach would be to treat those agreements or provisions the same way. In short, best practice necessitates full employer disclosure of any incidental employment agreements during the recruitment process but before extending the actual job offer.
The New Hampshire legislature originally envisioned HB 1270 as protecting certain employees who were offered new employment, left their previous job or turned down other opportunities based on those assurances, and were presented with a “non-compete and anti-piracy agreement” on their first day or shortly after commencing the employment. Amendments to the bill extended these protections to an offer of change in job classification. Testimony by the bill’s sponsor indicates that the law was tailored narrowly to remedy these “duress” situations. Accordingly, employers should provide copies of agreements prior to, or contemporaneous with, an offer of change in job classification to a current employee or offer of employment to a future employee.
The degree of change in an existing employee’s job duties that would constitute a “change in job classification” is unclear from the face of the new law. This ambiguity is partially resolved by statements of Rep. William Infantine of the House Labor, Industrial, and Rehabilitative Services Committee in connection with amendments to HB 1270. In its original form, the law applied only to “offers of employment.” The amendment expanded the law’s scope beyond new hires to include “internal promotions subject to a non-compete or non-piracy agreement.” H.C. 18, 1071 (N.H. 2012). The legislative history suggests that an “offer of change in job classification” does not encompass scheduled salary increases for any given employee. It also suggests that HB 1207’s duties are only triggered when an existing employee moves into a position that requires a “non-compete and anti-piracy agreement” from a position that did not require it. This interpretation of the law is supported by the testimony of the bill’s sponsor, expressing respect for the role of the courts in resolving disputes over employment agreements and the narrow scope of the law. Hearing on HB 1270 Before the H. Comm. On Labor, Indus., and Rehabilitative Services, 162nd Gen. Court (N.H. 2012) (testimony of Keith Murphy, Rep.) (“I would advise against using this bill as a vehicle to legislate non-compete agreements in all aspects. The bill is intentionally very narrowly tailored to address only cases of duress”).
Again, employers who fail to provide applicants or employees advance copies of these agreements should not expect that any agreement, signed well after an initial job offer or dated after a written offer of a job change, to be enforceable under the new law.
Finally, because the timing of the presentation of these agreements could be important to a post-employment enforcement action, employers would be wise to have applicants and employees who receive these agreements to sign an acknowledgment of receipt of the document. The language of that receipt should include something like:
I ______________________________ [name] acknowledge the receipt of _______________________________ [title of the document] presented to be today ______________________ [date] by ______________________ [name] of ___________________________ [employer]. I understand that I need to read this document before signing it and if I have any questions about the terms of this document, I will ask ____________________ [name] before signing the document.
This is just the most recent development in an ever-changing area of workplace law. What this new law confirms is that, especially in challenging times, courts and legislatures frown on, and therefore restrict and limit, the application, scope and enforcement of agreements that limit a person’s ability to work, or fully function, in their chosen profession. As this law is tested in the courts, there will likely be more definition and guidance on these provisions.
Article contents provided by Jim Reidy from Sheehan Phinney Bass + Green