Recent Developments in Nevada Law Relating to Restrictive Covenants and Non-Compete Agreements

By XobeeAdmin on September 6, 2017 in Legal Update

On June 3, 2017, Assembly Bill 276 was approved by Nevada Governor, Brian Sandoval, and signed into law. The bill amended NRS 613.200 to change Nevada’s stance on restrictive covenants and noncompetition agreements.

Previously, Nevada law merely stated that it is not unlawful for an employee to enter into a restrictive covenant of noncompetition with an employer that is supported by valuable consideration and is otherwise reasonable in its scope. Now however, the law includes specific requirements for a restrictive covenant to be valid, prohibitions on enforceability, and court authority to “blue-pencil” unreasonable agreements.

Specifically, the amendment provides that a noncompetition covenant is void and unenforceable unless the covenant:

  1. Is supported by valuable consideration;
  2. Does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
  3. Does not impose any undue hardship on the employee; and
  4. Imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.

Additionally, a noncompetition covenant may not restrict a former employee of an employer from providing services to a former client if the former employee did not solicit the former customer or client, the customer or client voluntarily chose to leave and seek the services of former employee and the former employee is otherwise complying with the covenant.

The new law also limits the enforceability of a covenant not to compete if an employee is terminated due to reduction in force, reorganization or similar restructuring. In these situations, the covenant may only be enforced during the time in which the employer is paying the employee’s salary, benefits, or equivalent compensation including severance pay.

The biggest modification however, is the authorization, and requirement, of the courts to “blue pencil” unreasonable agreements.  Such an authorization expressly rejects the Supreme Court of Nevada’s ruling to the contrary in Golden Road Motor Inn Inc. d/b/a Atlantis Casino Resort vs. Islam and Grand Sierra Resort, 132 Nev. Adv. Op. 49, 376 P.3d 151 (2016).

In Golden Road, the Nevada Supreme Court refused to “blue pencil,” i.e. strike or modify unreasonable or overbroad clauses in a non-compete agreement and then enforce the revised version. The Court stated that it was inappropriate for the Court to rewrite private contracts and held that an unreasonable clause in a noncompetition agreement rendered the entire agreement unenforceable.

In May, SHLC had a motion to dismiss granted in the Second Judicial District Court on these grounds for a corporate Defendant. The case concerned the alleged breach of a restrictive covenant by a former employee of Plaintiff. The non-competition agreement at issue was intertwined with a non-solicitation agreement and the Court found it to be impermissibly overbroad. In accordance with Golden Road, the Court refused to “blue pencil” the agreement and held the entire agreement to be unenforceable.

Nevada’s new law however, states that if an employer brings an action to enforce a covenant not to compete and the court finds the covenant includes unreasonable limitations and imposes a greater restraint than is necessary for the protection of the employer, the court “shall revise the covenant to the extent necessary and enforce the covenant as revised.”

Due to the drastic changes, employers should consider revising their restrictive covenant agreements to comply with Nevada law and consult with qualified legal counsel to ensure compliance prior to enforcing any such agreement.

View the full text of AB 276 here.

View the Second Judicial District Court decision here:  Order Granting Motion to Dismiss.