Last month, Nevada Governor Brian Sandoval signed Assembly Bill No. 276 into law that changed Nevada law regarding non-compete provisions in employment agreements. Nevada employers may recall that last summer the Nevada Supreme Court, in the case Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 1151, ruled that a non-compete provision in an employment agreement that was overbroad for the employer’s necessity of protecting its business, was wholly unenforceable. The Nevada Supreme Court also ruled that a district court in considering such an agreement had no authority to “blue pencil” – or revise – the proposed agreement to make it more reasonable. While Assembly Bill No. 276 does not necessarily overrule the Golden Road case, it does address some of the issues that face the Nevada Supreme Court in connection with the use of non-compete provisions in employment agreements.
Assembly Bill No. 276 adds an entire new section to Chapter 613 of the Nevada Revised Statutes that generally govern the employment relationship. To begin with, the new law holds that all non-compete provisions are void and unenforceable unless a non-compete provision satisfies the following elements: (1) it is supported by “valuable consideration,” (2) it does not impose a broader restriction than is necessary to protect the employer’s business, (3) it does not impose an “undue hardship” on the employee, and (4) the restriction must be commensurate with the value of the consideration.
Of course, this new language will likely require some litigation to get guidance from the courts as to how some of the terms will be interpreted. For instance, what exactly is “valuable consideration” that would be sufficient to support a non-compete? Is the promise of continued employment if the employee signs the non-compete provision sufficient? Furthermore, employers could be faced with challenges from employees arguing that any non-compete imposed on them will result in an “undue hardship” on them from pursuing their occupation. Employers should consult with legal counsel before using any non-compete provisions to ensure that they comply with the new law. Also, counsel should analyze whether the new law will apply only to agreements signed after the enactment date of June 3, 2017; or could it be applied to the enforcement of non-competes that were entered prior to that date.
Assembly Bill No. 276 also adds language to Chapter 613 clarifying that a non-compete provision may not restrict a former employee from doing business with the former employer’s customers: if (1) the former employee did not solicit the customer’s business, (2) the customer voluntarily chose to leave the former employer’s business and seek out the employee, and (3) the employee, who is otherwise complying with any geographic and time restrictions, has not instigated contact with the client at his or her new place of business.
The new law provides some protection for employers by providing that an employer who “negotiates, executes or attempts to enforce” a non-compete covenant that is void under the new law is not guilty of a violation of NRS 613.200, which provides for the imposition of certain criminal and administrative penalties for certain unlawful employment practices.
The new Chapter 613 also provides that; to the extent an employee’s employment is terminated as the result of a reduction in force, reorganization or similar restructuring, then the employer may only enforce the non-compete covenant during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation, such as severance pay. An employee whose employment has ended as the result of such a reduction in force or restructuring is then generally free to compete after the employer has stopped those payments under the new law.
Finally, Assembly Bill No. 276 restores the authority to Nevada courts to “blue pencil” or otherwise rewrite an overbroad non-compete agreement. Thus, if a Court finds that the non-compete provision is supported by valuable consideration but is be too broad; “the court shall revise the covenant to the extent necessary and enforce the covenant as revised.” The new law clarifies that such revisions need to make sure that the “time, geographical area and scope of activity to be restrained” are reasonable and no greater than necessary to protect the employer’s business.
As mentioned above, Nevada employers should consult with their legal counsel about this new law and the impact it may have on any current or prospective agreements containing non-compete provisions with their employees.