Several years ago, in the July 2007 edition of Good Company, I highlighted for employers ten common mistakes that threaten the enforceability of non-compete agreements. One of those common mistakes — Failing To Update Your Agreements To Comport With Changing Laws — prompts me to remind employers of a new change in the law. Additionally, in light of more recent case law and reflection on the topic, I highlight two additional mistakes for the unwary and offer best practices for avoiding related trouble.
RSA 275:70, an important change in the law
In the 2007 article, employers were encouraged to adopt sound implementation practices and to update non-compete agreements when an employee’s job changed in some significant way. As we mentioned in Sheehan’s Business Law Insights Blog, effective July 14, 2012, a new statute requires New Hampshire employers to comply with the following notice provisions when entering into non-compete agreements with employees:
(1) Provide a copy of the agreement before or at the time an offer of employment is made; and
(2) Provide a copy of the agreement before or at the time an offer of change in job classification is made.
While there remain murky areas of the new law, particularly as concerns existing employees who do not yet have non-compete agreements and what constitutes a change in job classification, it is clear that the new law imposes strict notice requirements on employers who intend to rely on non-compete agreements to protect their vital business interests.
BEST PRACTICES: (a) Give prospective employees a copy of the non-compete agreement with the initial offer letter and make sure it is signed and returned prior to new employees commencing work; and (b) Give existing employees a new agreement to review and sign each time the employee’s job changes in any significant way, ensure that the existing employee has several days to review the agreement prior to the job change, and obtain the signed agreement prior to the employee beginning work in the new position. If you are uncertain about whether a job change is significant, err on the side of providing a new agreement (even if the terms remain unchanged) and contact your attorney for guidance.
Other Traps for the Unwary
Mistake: Failing to include a tolling provision in your non-compete agreement
Suppose your key sales employee leaves for a competitor company and immediately begins soliciting the customers with whom he interacted while your company employed him. Suppose further that you don’t learn about his violations until three months after he begins to breach the one-year non-solicitation covenant in his Agreement. Are you stuck with an injunction for only the nine months remaining on the restrictive period plus money damages, or do you get your money damages and the full twelve-month breach-free period for which you bargained?
The answer is that it very likely depends on whether or not your Agreement contains what is known as a “tolling provision.” These provisions typically extend the restrictive time for all periods of breach to ensure that the employer receives the full breach-free period for which it bargained. Although the New Hampshire Supreme Court has not yet decided a tolling case in this context, courts in other jurisdictions have, including EMC Corp. v. Arturi, 655 F.3d 75 (1st Cir. 2011) in which retired U.S. Supreme Court Justice David Souter (serving the First Circuit Court of Appeals in Boston as a specially assigned justice) instructed employers that they could (and should) include a tolling provision in their agreements if they wished to receive the benefit of a full restrictive period free from a former employee’s breach. Without such, Justice Souter made clear that employers were left with a claim for money damages and an injunction for whatever time remained on the restrictive period.
BEST PRACTICE: Have your attorney confirm that your non-compete agreements contain a simple tolling provision, such as the following:
“Should Employer have to commence legal proceedings to enforce rights arising out of this Agreement, the period of restriction shall be extended for all periods of time in which Employee is in breach of his obligations [not to compete].”
Mistake: Not referencing non-compete agreements in separation agreements
There are two important reasons why employers must be mindful of non-compete agreements when entering into separation agreements with departing employees. First, because employers typically provide severance and other benefits as part of the separation agreement, it is a good idea to use that additional consideration to fortify the pre-existing non-compete agreement. Second, separation agreements often include what are known as “integration clauses,” which eviscerate all other agreements, oral and otherwise, that might exist between employee and employer, unless specifically referenced in the separation agreement. An employer who ignores the non-compete agreement in the separation agreement may be surprised to learn later than it has unwittingly allowed the integration clause to destroy the non-compete agreement.
BEST PRACTICE: Incorporate into separation agreements non-compete agreements (and all other agreements you wish to survive, such as confidentiality agreements) by referencing it or even making it a specific exhibit to the separation agreement.