Tectonic Shift Affecting Enforcement of Noncompetition Agreements Emanates from the 2017 Nevada Legislative Session and Passage of AB 276

Nevada noncompetition law has historically had few seismic shifts, which changed in 2016 when the Nevada Supreme Court issued its opinion in Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151 (Nev. 2016).  That case sent shockwaves affecting noncompetition agreements employers already had in place, especially with respect to whether their agreement’s restriction had any limits on the scope of work restricted at a competing entity or whether the restriction effectively prohibited an employee from working for a competitor in any capacity – even “as a custodian.”

Under Golden Road, when an employee’s noncompetition agreement contains no such limits on the work restricted, that agreement, as a matter of law, is more restrictive than necessary to protect the employer’s interest.  Golden Road also held that when a noncompetition agreement extends beyond what is necessary to protect the employer’s interest, that agreement is “wholly unenforceable” and courts may not modify or “blue pencil” the contract to make it reasonable.  Nevada was an all-or-nothing jurisdiction.

During the 2017 Legislative Session, the Nevada Legislature passed AB 276, which was signed into law and made effective on June 3, 2017.  This new statute represents yet another seismic shift affecting noncompetition agreements, including a shift away from the Nevada Supreme Court’s prohibition of “blue penciling.”

The new law first codifies that a noncompetition covenant will be 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. 

The first three of these requirements were essentially already present to some measure under existing case law.  But the fourth requirement will require some employers to re-evaluate their noncompete agreements once again.  Continued employment has historically been held to be sufficient valuable consideration for an at-will employee’s post-hire noncompetition agreement in Nevada.  But under this fourth requirement, more appears to be required now.  Under the new law, a noncompetition covenant requires more than just the support of “valuable consideration.” The valuable consideration supporting the noncompetition covenant must also be measured against the noncompetition covenant’s restriction for a determination of appropriateness—a balancing of the cost to the employee (the restriction) and the benefit (the consideration, such as a raise).

The takeaway for employers is that the consideration supporting their noncompetition agreements they are using may be insufficient, especially if their agreements contain broad restrictions and the consideration is only the at-will employee’s continued employment.  In other words, the broader the geographic area, scope of activity, and duration restrictions in a noncompetition provision – even if necessary to protect the employer – the more valuable the consideration may arguably be required. 

The ground may stop shaking for some employers considering this new law’s additional provision impacting “blue penciling,” a practice that had been shut down by Golden Road.  This law states that if a noncompetition agreement is challenged and a court finds that it imposes restraints greater than are necessary for the employer’s protection and imposes undue hardship on the employee, the court is required to “blue pencil” the agreement and revise the covenant to the extent necessary to make it not more restrictive than is necessary for the employer’s protection.  Hence, employers using noncompetition agreements that may have overbroad restrictions, if challenged, can take some solace in the court being required to modify the agreement to its liking and then enforce it as modified. 

The new law provides other notable developments.  While many noncompetition agreements state that the restrictions will be enforced regardless of how the employee ends up leaving the employer (i.e., whether by resignation or termination), under the new law, if an employee subject to such an agreement loses their job through a reduction-in-force, reorganization or restructuring, the covenant will only be enforceable during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation, including severance pay.  In other words, if you want to hold an employee you are laying off to his or her noncompetition agreement, it may be a good idea to have him or her sign a severance agreement that continues their pay during the duration of the restriction. 

The new law also impacts noncompetition provisions that have non-solicitation restrictions preventing an employee from providing service to a former customer or client.  Such a restriction now cannot be imposed if: (a) the former employee did not instigate contact with and solicit the former customer or client; (b) the customer or client voluntarily chose to leave and seek services from the former employee; and (c) the former employee is otherwise complying with the noncompetition agreement’s restrictions.

Even with the new mandate on “blue penciling,” employers should take a hard look at their noncompetition agreements.  Taking care to avoid time, scope of activity, and geographic restrictions that are more restrictive than necessary will help employers avoid having their noncompetition agreements balked at as unenforceable, requiring them to enforce the agreement in court and subject them to the court’s blue pencil. 

Employers can also no longer operate under the assumption that continued employment alone will be sufficient consideration for a noncompetition agreement and must now consider whether the employee is getting an appropriate benefit for the bargain, in relation to the level of restriction that is being imposed. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.