Time to Take a Closer Look at Your Non-Compete Agreements?

By Bryan K. Gould and James D. Christon

[This article originally appeared in the Retail Merchants Association of New Hampshire’s Newsletter, April/May/June 2013.]

The New Hampshire Superior Court’s Business and Commercial Dispute Docket (BCDD) in Concord is New Hampshire’s only “business court.” The BCDD continues to be a valuable source of written opinions that provide guidance to the state’s businesses and their lawyers. Recently, the BCDD decided two cases regarding non-compete agreements. The first decision invalidated a non-compete agreement and the second found the manager of a limited liability company (LLC) to be bound personally under a non-compete agreement that thought he had signed only on behalf of the LLC. Both supply important lessons for closely-held corporations and LLCs in New Hampshire.

In Granite Investment Advisors, Inc. v. Timm (March 28, 2013), the BCDD considered a non-compete agreement that imposed restrictions on competing employment within a 75-mile radius over a period of two years. While acknowledging that reasonable non-compete agreements are enforceable under New Hampshire law, the BCDD ruled in this case that the non-compete agreement was unenforceable because it was unilaterally imposed on the employee during his employment and reduced his compensation. As a result, the court concluded that the agreement had not been entered into in good faith. (N.H. RSA 275:70, which became effective on July 14, 2012, did not apply to the non-compete agreement in the case because the relevant events took place before the statute’s effective date, but this statute now requires employers to present non-competes prior to or concurrent with a job offer or a change in job classification.) The BCDD also found that the non-compete was unreasonable because of its broad restrictions on the employee’s solicitation of business, explaining that employers only have a legitimate interest in restricting former employees from seeking business from the employer’s current customers. The employer has no valid interest in preventing a former employee from soliciting business from the employer’s prospective customers.

In the second decision, the BCDD addressed two issues of significance to small businesses in New Hampshire. In Brian’s 1:1 Fitness, LLC v. Woodward (April 5, 2013), the parties had entered into a non-compete in the context of an independent contractor relationship. The agreement restricted the independent contractor from competing against Brian’s 1:1 Fitness within a twenty-five mile radius and for two years after termination of the independent contractor agreement. Brian’s 1:1 Fitness sought to enforce the non-compete agreement against Woodward personally. Woodward contested whether the non-compete bound him personally and argued that the agreement bound only Highpoint Fitness, LLC, the entity through which he had provided personal training services at Brian’s 1:1 Fitness. The BCDD held that Woodward was personally bound even though the named party in the non-compete was Highpoint Fitness.

In holding that the non-compete obligated Woodward, the BCDD relied upon the following factors:

1. While the named contracting party was Highpoint Fitness, LLC, the non-compete was signed by Woodward without an express notation that he was signing as the LLC’s manager;
2. The language of the non-compete was ambiguous because it gave Woodward’s residential address as the address of the LLC and LLCs do not “reside” anywhere; and
3. The personal training services business model relied on Woodward and his individual relationships.
The BCDD determined that each of these characteristics demonstrated that the non-compete agreement was intended to bind Woodward personally, as well as the LLC.

The BCDD then turned to the application of non-compete agreements in the light of the parties’ independent contractor relationship. The New Hampshire Supreme Court has never addressed this issue, so the BCDD relied on decisions from other states to conclude that, to be enforceable, non-competes with independent contractors must be narrower than non-competes with employees. Among the factors contributing to that conclusion is the fact that independent contractors have less access to an employer’s confidential information and, therefore, employers are exposed to less risk with independent contractors than with employees with respect to their practices, secrets, and know-how.

These decisions underscore the need for careful draftsmanship and the use of proper procedures when entering into non-compete agreements. To ensure that the agreement is enforceable, it must be presented on or before the date that the employment or independent contractor offer is made or there is a change in “job classification.” The agreement may not restrict an employee from soliciting business from the pool of the employer’s prospective customers, and if the agreement is entered into in the context of an independent contractor relationship, it must be tailored to protect only against the contractor’s use of proprietary or confidential information to which the contractor has access. Finally, formation of an LLC or a closely-held corporation is of limited utility if officers or managers sign agreements on their behalf without making it clear that the signature is made in a representative capacity and not personally.