Bar News - December 14, 2012
Business Law & Business Litigation: New Hampshire’s New Non-Compete Law
By: Cameron G. Shilling
RSA 275:70 states as follows: “Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee. Any contract that is not in compliance with this section shall be void and unenforceable.”The statute became effective July 14, 2012.
1. When must an employer give a prospective employee the non-compete?
While employers often make offers of employment to prospective employees in a written offer letter, it is also common for employers (particularly small employers) to make offers of employment less formally, including orally. In both instances, employers (both large and small) frequently have not given prospective employees a copy of the non-competesthat the employees will be required to sign until the employees’ first day of employment. Sometimes employers have notifiedprospective employees in the offer letters that they will be required to sign a non-compete on their first day of employment, however, it is equally common, if not more common, that employers simply do not give prospective employees any such warning.
The effect of RSA 275:70 is to require all employers to provide prospective employees with an actual copy of the non-compete that the individuals will be required to sign at or before the time that the employer makes the offer of employment to the prospective employees. It is no longer enough for employers to advise prospective employees in an offer letter or orally that they will be required to sign a non-compete when they start employment. The rationale for this rule is that individuals should have an opportunity to review all of the terms of their prospective employment, including the details of any non-compete, before they accept employment and, if applicable, before they leave their prior employment.
2. Does the law apply only to non-competes inemployment agreements?
An argument could be made that RSA 275:70 applies only to non-competes contained within or signed in conjunction with a formal employment agreement. This argument arises from the text of the statute, which states that employers must give employees or prospective employees a copy of the non-compete if it is “part of the employment agreement.”
The statute does not define the term “employment agreement,” and the legislative history does not shed any light on the intended meaning of the term. However, construing the law to apply only to non-competes within or signed with a formal employment agreement would be inconsistent with common law notions of employment, and would undermine the apparent remedial purpose of the statute. Specifically, under common law, the entire relationship between an employee and employer is referred to as the “employment agreement” between these parties, particularly in the context of at-will employment. See Monge v. Beebe Rubber Co., 114 N.H. 130, 132 (1974) (“the prevailing common law rule” is that “an employment contract for an indefinite period of time … is presumed to be at will.”) See also J&M Lumber and Constr. Co., Inc. v. Symyjunas, 161 N.H. 714, 725 (2011) (“Employment at will refers to an employment contract that is for an indefinite period of time and is terminable at will.”); Livingston v. 18 Mile Point Drive, Ltd., 158 N.H. 619, 624 (2009) (“The various good-faith obligations [include] termination of at-will employment agreements”); Centronics Corp. v. Genicom Corp., 132 N.H. 133, 139-40 (1989) (summarizing wrongful termination as follows: “an employer violates an implied term of a contract for employment at-will by firing an employee out of malice or bad faith in retaliation for actions taken or refused by the employee in consonance with public policy.”) But see Porter v. City of Manchester, 151 N.H. 30, 39 (2004) (because “a wrongful termination action is not designed to protect the employee’s interest in having promises performed,” but rather“to protect the employee from the harms that result from a wrongful discharge, … wrongful termination is a cause of action in tort,” not contract).Thus, while use of the term “employment agreement” in this statutory context was inartful, it seems likely that the legislature meant to encompassany employment relationship, including at will employment, not just an employment relationship that involves a formal employment agreement.
Moreover, construing the law to apply only to non-competes within or signed with a formal employment would undermine the remedial purpose of the statute by excluding the large number of situations (if not the majority of situations) in which employees and prospective employees are required to sign non-competes but are notoffered employment agreements. Construing the law in that manner also would incentivizing employers to refrain from offering employees and prospective employees employment agreements when the employers otherwise may have done so, just to avoid the effect of the statute.
3. What is a change in job classification?
RSA 275:70 does not define “job classification,” and the term has neither a commonlaw or commonly accepted meaning in the private employment context. The term is sometimes used in the public employment context. See e.g. RSA 21-I:42, XVI (requiring the New Hampshire Division of Personnel to develop and implement a “program [that] shall include a review and revision of the job classification process and testing process to ensure that they are free from either conscious or inadvertent bias.”); RSA 100-A:6 (disability benefits determined based on the compensation payable for the “jobclassification held at the time of disability” or the “jobclassification last held by the beneficiary prior to disability retirement.”) However, none of the statutes governing the rights of public employment define the term either.
The State has provided some limited guidance concerning itsjobclassificationsystem that could be helpful. For example, a “classification” is defined as an “orderly arrangement of all positions in the state classified service into separate and distinct classes so that each specific class contains those positions which involve similar duties and responsibilities.” See Definitions Pertaining to Classification (available at www.admin.state.nh.us/hr/comp.html). In addition, the New Hampshire Division of Personnel also has created a Class Specification Index (available at www.admin.state.nh.us/HR/classindex_a_d.htm), whichlist the numerous job titles and corresponding duties for public employees.
While RSA 275:70 does not define “job classification,” some assumptions and analogies to public law can be made. For example, an employer that uses a formal classification process similar to the process used in the public employment context should be able to rely on its job classification structure for purposes of the statute. For employers without such a structure, written job descriptions that involve legitimately different “duties and responsibilities” should be considered different job classifications under the law. Also, private employers without written job descriptions should be able to rely on the types of job classifications set forth in the State’s Class Specification Index to determine whether comparableprivate sector jobs constitute different “job classifications” for purposes of RSA 275:70.
Finally, although the legislative history for this statute is sparse, it does shed some light on the intended meaning of the phrase “change in job classification.” The House Bill initially only permitted the use of a non-compete if an employer gave a prospective employee a copy of the agreement before or with the offer of employment. The bill was amended before passage by the House to permit the use of a non-compete with an existing employee if employer gave the employee the non-compete before or with the offer of a change in job classification. The legislative history states that the amendment ensures that the statute will “apply to internal promotions” as well. See House Record, Vol. 34, No. 18 (March 2, 2012). Thus, employers should be able to cite this legislative history as evidence that typical employment promotions are the type of change in job classifications that satisfy RSA 275:70.
4. Can an employee waive the law?
RSA 275:70 was included in the “Protective Legislation” of RSA chapter 275. Because of the nature of that legislation, onepart of it states that “no provision of this subdivision may in any way be contravened or set aside by private agreement.”RSA 275:50, I. An argument could be made that this non-waiver provision only applies to the “subdivision” of the statute governing the payment of wages, RSA 275:42-55. However, the New Hampshire Supreme Court has stated that “a waiver of the … rights under RSA chapter 275 would be unenforceable under New Hampshire law, [since] RSA 275:50 … prohibits the waiver by private agreement of any provision of RSA chapter 275.” Fowler v. Town of Seabrook, 145 N.H. 536, 539 (2000). While the Court in Fowler was addressing an argument of waiver of one of the provisions of the subdivision governing the payment of wages, and therefore was not actually addressing whether the non-waiver provision governed more broadly than that subdivision (i.e., the language in Fowler was dicta), the language in the decision would expressly extend the non-waiver provision to all parts of RSA chapter 275, including new non-compete law. Thus, an employee’s waiver of RSA 275:70 probably would not effective under RSA 275:50.
5. Does the law apply retroactively or only prospectively?
RSA 275:70 does not specify whether it should be applied prospectively or retroactively. “When a statute is silent about whether it ‘should apply prospectively or retrospectively, [the] interpretation turns on whether the statute affects the parties’ substantive or procedural rights.’” Billewicz v. Ransmeier, 161 N.H. 145, 152 (2010), quoting, In re Donovan, 152 N.H. 55, 63 (2005).“There is a presumption of prospectivity when a statute affects substantive rights,” although that“presumption ... is reversed ... when the statute is remedial in nature or affects only procedural rights.”In re Kenick, 156 N.H. 356, 359 (2007).A statute thatinvalidates existing contract rights affects the substantive rights of the parties to the contract, and therefore cannot be applied retroactively without violating New Hampshire’s Constitution. See e.g. Cloutier v. State, 163 N.H. 445, 452 (2012); (“part I, article 23 of the State Constitution” prohibits the retroactive application of a law in a manner that “impairs a contract” in existence at the time the statute became effective); Appeal of White Mtn. Regional Sch. Dist., 154 N.H. 136, 139 (2006) (“An amendment to an existing law that affects existing contract rights is presumed to operate prospectively unless the language of the amendment or surrounding circumstances express a contrary legislative intent.”); Geldhof v. Penwood Assoc., 119 N.H. 754, 755 (1979) (holding that a statute could not be applied retroactively under part I, article 23 of the State Constitution to change the rules for payment of interest on deposits on existing lease agreements).
If RSA 275:70 applied retroactively to non-competes signed before its July 14, 2012 effective date, the statute would impair the substantive rights of the parties to those contracts in violation of part I, article 23 of the State Constitution. Thus, the new law should not be applied retroactively, but rather only prospectively to non-competes signed on or after July 14, 2012.
6. Does the law encompass non-solicit agreements?
Employers frequently require employees to agree both not to compete and not to solicit customers and other employees of the employer. While RSA 275:70 expressly covers “non-compete”and“non-piracy” agreements, it does not define either of those terms or expressly include “non-solicit” agreements. Nor does the statute use the term “restrictive covenant,” which is understood under New Hampshire common law to encompass both non-compete and non-solicit agreements. See e.g. ACAS Acquisitions (Precitech) Inc. v. Hobert, 155 N.H. 381, 385 and 389 (2007) (analyzing “Non-Competition” and “Non-Solicitation” provisions as “restrictive covenants”under common law); Syncom Indus., Inc. v. Wood, 155 N.H. 73, 75 and 79-80 (2007) (analyzing provision that prohibited employee from “solicit[ing] business from any of the Company’s customers” as a“restrictive covenant” under common law).
While “non-piracy” is not a term previously used by courts in New Hampshire, courts in other jurisdictions have explained the meaning of thatterm as follows:
There are two types of restrictive covenants: covenants not to compete and anti-piracy, or “hands off,” agreements. A covenant not to compete precludes former employees from working in the same business as the employers for certain time periods in specified areas. An anti-piracy agreement restricts the terminated employee from soliciting customers of his former employer or making use of confidential information from his previous employment.
Wood v. Acordia of West Virginia, Inc., 217 W.Va. 406, 412, 618 S.E.2d 415, 421 (2005), quoting, Hilb, Rogal and Hamilton Co. v. McKinney, 190 Ariz. 213, 216, 946 P.2d 464, 467 (1997) See Alpha Tax Serv., Inc. v. Stuart, 158 Ariz. 169, 171, 761 P.2d 1073, 1075 (1988) (“an antipiracy or hands-off agreement … is designed to prevent former employees from using information learned during their employment to divert or to steal customers from the former employer.”); Altman, Louis and Pollack, Malla, Callmann on Unfair Competition, § 16.30 (4th Ed. Aug. 2012) (“Some courts use the term ‘non-piracy,’ or ‘anti-piracy,’ or ‘hands off’ or ‘non-solicitation’ agreement, rather than ‘non-compete’ agreement, to designate employee covenants which restrict access only to confidential customer information and/or only to those customers who were customers of the employer at the time the employee’s employment is terminated, or who were customers of the employer within a designated time period preceding the employee’s termination, or whom the employee called upon as a prospective customer within a designated time period preceding the employee’s termination.”); Aspelund, Donald J. and Beckner, Joan E., Employee Noncompetition Law, § 10:24 (July 2011) (“anti-piracy clauses prohibit former employees from soliciting or attempting to induce employees to leave the employer.”); Id., §3:14 (“Anti-piracy agreements can also restrict the terminated employee from soliciting customers of the former employer or making use of confidential information from the previous employment.”)
In light of the foregoing, it seems likely that the New Hampshire legislature intended the term “non-piracy” in RSA 275:70 to cover agreements that preclude an employee from soliciting the employer’s customers or employees.
7. Does the law encompass confidentiality agreements?
RSA 275:70 does not expressly cover “confidentiality” or “non-disclosure” agreements, thus, such agreements would be encompassedonly if they are “non-piracy” agreements. Several authorities cited above state that confidentiality and non-disclosure” agreements can be a type of non-piracy agreement. SeeWood, 217 W.Va. at 412, 618 S.E.2d at 421; Aspelund, Donald J. and Beckner, Joan E., Employee Noncompetition Law, § §3:14 (July 2011). Thus, an argument can be made that RSA 275:70 encompasses confidentiality and non-disclosure agreements.
However, interpreting the term “non-piracy” to include confidentiality and non-disclosure agreementswould be inconsistent with accepted rules of statutory construction. Whereas the New Hampshire legislature has not addressed non-solicit agreements instatutory law, it has referenced and required use of “confidentiality agreements” in manycontexts. See e.g. RSA 21-M:16, VIII, RSA 126-R:4, VIII, and RSA 169-C:34-A, III (requiring members of a “incapacitated adult fatality review committee,”a “suicide fatality review committee,” and “multidisciplinary child protection teams” to “sign a confidentiality agreement that prohibits any unauthorized dissemination of information”); RSA 141-J:8, I (“Any person allowed access to individually identifiable health information … shall sign a confidentiality agreement”); RSA 361-A:5, VIII, RSA 399-A:16, VII, and RSA 399-D:25, VII (granting the banking commissioner the right to “share information pursuant to confidentiality agreements with [other] regulators.”) But see ACAS, 155 N.H. at 395-96 (assuming without deciding that the “three part test applicable to non-competition agreements applies to non-disclosure agreements ….”) Thus, if the legislature had intended to encompass confidentiality and non-disclosure agreements in RSA 275:70, it would have done so expressly, not by using the term “non-piracy.”
Moreover, reading “non-piracy” to include confidentiality and non-disclosure agreements is not necessary to effectuate the purpose of the statute. While an employer should be required to notify a prospective employee (at the time the employer extends the offer of employment) that the individual will be required to sign a non-compete, since such an agreement could impact the person’s decision to accept the offer, the prospective employee’s decision to accept the offer should not be affected by whether or not the employer requires the individual to refrain from disclosing its confidential information, since the prospective employee will have a common law duty to maintain the employer’s confidential information anyway, and requiring the prospective employee to refrain from disclosing the employer’s confidential information does not impair the individual’s employment mobility in the future.
Thus, while an argument can be made that the term “non-piracy” encompasses confidentiality and non-disclosure agreements, accepted rules of statutory construction and the purpose of the statute should lead to the opposite outcome.
8. What are some of the practical difficulties with the law?
Employers have historically faced, and undoubtedly will continueto face, the need to implement non-competes with existing employees. These situations frequently arise when an employer that has never used such agreements realizes it needs them to protect its customer goodwill and confidential information, and when an employee has assumed new or different job duties that expose the employee to customer goodwill or confidential information. Under the new law, employers can implement non-competes in these situations only by changing the job classifications of employees, and providing them with a copy of the non-competes in conjunction with offers of new job classifications. Without such changes in job classifications, employers cannot implement non-competes in these situations, even if the employers provide the employees with meaningful consideration in return for signing the non-competes.
Similarly, when one company purchases another, the buyer will frequently require the employees of the seller to sign non-competes (if the seller did not previously require them to do so) or to sign the non-competes used by the buyer. Where the buyer purchases the assets of the seller, it will be able to give a copy of its non-compete to the employees of the seller in conjunction with offers of employment with the buyer or a new entity. By contrast, where the buyer purchases the equity of the seller or merges with the seller, the employees of the seller will continue in their prior employment, and therefore the buyer will have no opportunity to implement non-competes (or its own non-compete) in the absence of job re-classifications. Such an arbitrary outcome is an unfortunate impact of the new law, which has a potential to negatively impact the manner in which corporate transactions are undertaken in New Hampshire.
Finally, employers frequently implement new employee benefits and equity ownership plans for existing employees, and employees often become eligible for such plan only after a defined period of employment. Because of the significant monetary benefits and ownership afforded by such plan, employers frequently include non-compete provisions in the plans. The new law, however, invalidates such non-competes unless the plans were presented to prospective employees before or with their offers of employment or to existing employees with offers of new job classifications. As a result, RSA 275:70 may have the effect of diminishing the employee benefits and ownership plans offered by employers, or the nature and amount of the benefits and equity offered by employers under those types of plans.
Cameron Shilling is a shareholder at McLane, Graf, Raulerson& Middleton, where he is a member of the Litigation Department and the Employment Law Group. He can be reached at 603-628-1351 or firstname.lastname@example.org.