The Nevada Supreme Court recently issued a ruling that should have all Nevada employers asking an attorney to review the non-compete clauses they require their employees to sign. In Golden Road Motor Inn Inc. d/b/a Atlantis Casino Resort Spa v. Islam, 132 Nev.Adv.Op. 49 (July 21, 2016), the Nevada Supreme Court ruled a non-compete clause was unenforceable and, more importantly, the entire agreement was therefore wholly unenforceable.
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Generally, Nevada courts will uphold a non-compete agreement unless it is “unreasonable,” which is defined as a restraint of trade that “is greater than required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.” In the context of an employer’s non-compete agreement, there is no formula for deciding reasonableness, but courts will look at several factors, including the time and territory covered in the agreement. For example, Nevada courts have ruled that a five-year restriction was too great a hardship for the employee and was not necessary to protect the employer’s interests, and was thus unenforceable. Another non-complete clause which restricted an employee’s future employment anywhere “within fifty miles of any area which was the ‘target of a corporate plan for expansion’ was unreasonable” and unenforceable.
In Golden Road, Sumona Islam (“Islam”) was employed as a casino host at Atlantis Casino Resort and signed an agreement with her employer that, among other things, she would refrain from any employment, affiliation, or providing of services to any gaming establishment located within 150 miles of Atlantis Casino Resort, for one year. She subsequently left her employment, taking with her handwritten copies of Atlantis’ confidential and proprietary information, which she took with her and used in her new position as casino host at Grand Sierra Resort (“GSR”). The Nevada Supreme Court ruled the non-compete provision of her agreement with Atlantis Casino Resort was unreasonable because the type of work it prohibited Islam from seeking extended beyond what was necessary to protect Atlantis’ interests and was an undue hardship on Islam. The court argued that, under the terms of the non-compete as drafted, Islam could not have even sought employment as a custodian at a gaming establishment within 150 miles of Atlantis, even though such employment would surely not harm Atlantis’ interests.
So far, the ruling is not particularly noteworthy (unless, of course, you’re Atlantis). But then the Court’s ruling takes a turn that should cause all employers to pay attention. The Court then ruled that because the non-compete provision was unenforceable, the entire non-compete agreement was wholly unenforceable. The Court refused to take what is known as the “blue pencil” approach, which in some states would allow a court to reform the agreement to make it enforceable by either striking out the unreasonable language and enforcing the remainder of the agreement, or by actually reforming the terms of the contract. For example, in Golden Road, some state courts (and Nevada’s dissenting justices) would have simply modified the provision to apply to only employment as casino host within 150 miles of Atlantis, for one year, and then enforced the non-compete agreement against Islam. The Nevada Court strongly stated its disagreement with this approach, arguing that the Court should not “trample” the intent of the parties to the agreement and should be interpreting, not drafting, agreements. As a result, Islam was not liable for breach of contract against Atlantis.
The Court also went on to make a few general points of emphasis about policies regarding non-compete clauses in the employment context. The Court stated that “a good-faith presumption benefiting the employer is unwarranted” because the employer drafts the agreement and is in a superior bargaining position – indeed, the Court argues that most employees will sign and adhere to even unreasonable non-compete provisions without seeking advice of counsel. For that reason, “[a] strict test of reasonableness is applied to restrictive covenants in employment cases because the economic hardship imposed on employees is given considerable weight.”
What Does This Mean For Nevada Employers?
First and foremost, employers need to exercise extreme care in drafting non-compete agreements. As discussed above, employers need to be aware that Nevada courts will not give them the benefit of the doubt and will be applying a “strict” test of reasonableness. This is particularly challenging for employers, as the rules and requirements of that “test” are not set in stone and will vary based on the particular facts of each agreement. For example, while it may be reasonable for some employers to include a geographical limitation of 150 miles in their non-compete agreements, other employers may find their agreements voided for including a 50 mile limitation if the court finds it is unreasonable for protecting that employer’s particular interests. Courts will look at the type of work the employee did for the contracting employer, the type of future work in which the employee is restricted from engaging, as well as any geographical or time restraints, in determining reasonableness.
It is exceedingly clear that if a Nevada employer misses the seemingly moving target on any one element of a non-compete agreement, the entire agreement will be voided. Employers should not only be extremely cautious, then, of assessing the reasonableness of each and every clause drafted, but should also be drafting these as stand-alone agreements. For example, based on Nevada’s strict approach, employers would be wise to have any agreements with employees regarding proprietary and trade secret information separated from the non-compete agreements, to remove any risk of the court throwing out the baby with the bath water. Employers should seek the assistance of counsel in drafting non-compete agreements, to increase their odds of passing the Court’s strict, yet at times unclear, “test” of reasonableness.