Covenant not to compete is valid if it passes 3 tests
Published 09/17/98

Requests to employees to sign a covenant not to compete are becoming more and more commonplace. In order to enhance the likelihood of the covenant being enforced, the employer in requesting such a covenant should tailor the language so that it is focused to protect its legitimate business interests without preventing former employees from earning a livelihood. While New Hampshire public policy encourages free trade and discourages covenants not to compete, our Courts uphold limited restraints if they are reasonable for the circumstances of the parties. In an action by the employer to enforce the covenant, the courts in New Hampshire will generally modify an invalid, unreasonable restraint to make it reasonable. However, if the covenant is so abusively over broad as to be a bad faith action by the employer, the Court may just rule the restraint invalid in total.

The New Hampshire Supreme Court has held that a restraint on employment is reasonable only if:

• it is no greater than necessary for the protection of the employer's legitimate interests;
• it does not impose undue hardship on the employee; and
• it is not injurious or alien to the public interest.

If the covenant fails on any of these three referenced points, it is unenforceable. However, even an otherwise unenforceable covenant may still be valid to the extent that it prevents employees from appropriating the employer=s assets or good will.

The Court in examining the reasonableness of a covenant will look at the duration, the geographical limitations, and the parameters of the business that is sought to be restricted. Covenants not to compete that have been found by New Hampshire Courts to be reasonable include restricting an employee from engaging in activity competitive to the employer while still working for the employer, prohibiting a former employee from soliciting or diverting business from the employer, competing for accounts and personnel which became known to the former employee through their work for the employer, and prohibiting the employee from influencing or attempting to influence the employer=s customers or their personnel not to do business with the employer.

In a recent New Hampshire Supreme Court decision, Concord Orthopaedics P.A. vs. Forbes, the Court found that Concord Orthopaedics possessed a legitimate business interest in prohibiting Dr. Forbes from competing for existing patients but not new patients. The employer had argued that new patients were generated through referral physicians whom Dr. Forbes had worked with and developed while being an employee of the Concord Orthopaedics. The Court found that a restriction on referrals of new patients went against the principal of narrowly tailoring covenants not to compete to encompass only the legitimate interests of the employer. The Court further found that such an expansive interpretation of a legitimate interest would not foster the public good, in allowing patients to obtain good medical care.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, PA whose legal practice includes counseling businesses and business persons on a variety of legal issues and advocating on their behalf. Attorney Marr is also an adjunct professor at Daniel Webster College where he teaches business law. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

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