N.H. noncompete deals subject to once-over
Published 05/13/05

New Hampshire employment covenants not to compete are valid only to the extent they prevent workers and former workers from appropriating assets that are legitimately the employers.

This legal standard was restated in the May 9, 2005 New Hampshire Supreme Court decision of Merrimack Valley Wood Products, Inc. v. Glen Near. In the Near case, the Court noted that to determine the reasonableness of a covenant not to compete ancillary to an employment contract, it applies a three-prong test: (1) whether the restriction is greater than necessary to protect the legitimate interest of the employer; (2) whether the restriction imposes an undue hardship upon the worker; and (3) whether the restriction is injurious to the public interest.

If any of these questions is answered in the affirmative, the covenant is unreasonable and unenforceable. The first step for the Court in determining reasonableness of a covenant not to compete is to identify the legitimate interest of the employer and to determine whether the restraint is narrowly tailored to protect those interests. The Court will look to what is defined in the covenant as prohibited competition, the geographical area of that restriction, and how long that restriction, after the employment terminates, is to survive.

In the Near case, the Court focused on what Merrimack Valley defined as prohibited competition. Merrimack Valley had its then worker, Near, sign a one-year non-competition agreement that was effective for one year after the date of his employment termination. Near signed a non-competition agreement that prohibited him from selling directly or indirectly or causing to be sold any materials to customers which Merrimack Valley had sold to within 12 months prior to the date of his employment termination.

The Court first noted that a worker's special influence over the employer's customers obtained during the course of employment is one of legitimate interest an employer may protect against competition.

When a worker is put in a position involving client contact, the Court noted that it is natural that some of the good will emanating from the client is directed to the worker rather than the employer and that the employer has a legitimate interest from preventing its workers from appropriating this good will to its detriment.

Therefore, a non-competition agreement for a one-year period under those circumstances may have been determined by the Court to be reasonable. However, in the Near case, Merrimack Valley had many more customers that it had sold to in the 12 months prior to Near's employment termination than those who Near had actual customer contact with and the Court noted that it would be unreasonable to hold him to such a restriction. The Court further upheld the trial court's decision that the entire non-competition agreement should have been struck down because the employer did not exercise good faith in regards to its signing.

The Court noted that Near had not been made aware that a non-competition agreement was required prior to his seeking and obtaining employment with Merrimack Valley and was only presented with it six months thereafter and was told that his ability to keep his job was contingent upon signing the agreement.

The Court found that the trial court's decision that the employer acted in bad faith was supportable by the trial evidence and therefore saw no reason to overturn the trial court's ruling that the entire non-compete was invalid and unenforceable without modifying it to a level that would protect the legitimate interest of the employer.

Lastly, the Court addressed the fact that Merrimack Valley had preliminarily before a final hearing obtained an injunction prohibiting Near from violating the non-competition agreement. Notwithstanding the fact that there was no bond required to be posted which is often required in such preliminary injunctions, the Court saw no reason to upset the trial court's determination that monetary damages should be assessed against the employer for a wrongful injunction in the amount of defendant's lost income of $17,463.20 and attorney's fees expended by Near in the amount of $73,372.39.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

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