On June 3, 2017, Nevada Governor Brian Sandoval recently signed Assembly Bill 276 (“AB 276”), which articulates new rules and requirements for non-compete agreements, some of which fundamentally alter the State’s prior practices. The following is a synopsis of the new law.
New Requirements for a Non-Compete Agreement to be Enforceable
AB 276 amends NRS Chapter 613 to require that a covenant not to compete must:
- Be supported by valuable consideration (continued employment is probably sufficient);
- Not impose any restraint that is greater than necessary for the protection of the employer for whose benefit the restraint is imposed;
- Not impose any undue hardship on the employee; and
- Impose restrictions that are appropriate in relation to the valuable consideration supporting the non-compete covenant.
Restructuring or Reductions In Force may Invalidate a Non-Compete Agreement
The new amendments state that, if an employee’s termination is the result of a reduction in force, reorganization, or “similar restructuring,” a non-compete agreement is only enforceable during the period in which the employer is paying the employee’s “salary, benefits or equivalent compensation,” such as severance pay. This restriction may vastly reduce the ability of Nevada employers to use non-compete agreements when executives, managers, or other employees are let go due to downsizing or other restructuring.
Non-Solicitation of Customers
AB 276 provides that a non-compete agreement may not restrict a former employee from providing service to a former client or customer of the employer if:
- The former employee did not solicit the former client or customer;
- The client or customer voluntarily chose to leave and seek services from the former employee; and
- The former employee is otherwise complying with the limitations in the covenant as to time, geographical area, and scope of activity to be restricted, other than any limitation on providing services to a former customer or client who seeks the services of the former employee without any contact instigated by the former employee.
Confidentiality and Non-Disclosure Agreements
The new law does not prohibit agreements to protect an employer’s confidential and trade secret information if the agreement is supported by valuable consideration and is otherwise reasonable in scope and duration.
Courts are now Required to “Blue Pencil” Non-Compete Language that is Overbroad
Representing a dramatic departure from Nevada’s established precedent against “blue penciling” restrictive covenant agreements, this practice is now explicitly required. Generally speaking, courts across the country have adopted one of three approaches when addressing over-broad restrictive covenants – rejecting the restrictive covenant in its entirety (“no blue penciling”), striking only the overbroad terms (“strict blue penciling”), or revising the restriction to make it reasonable under the circumstances (“general blue penciling” or “red penciling”). The new law supersedes the recent holding in Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151, 153 (2016), which prohibited any form of “blue penciling.” Now, as long as a non-compete is supported by “valuable consideration,” Nevada’s courts are obligated to “revise” overbroad restrictions that impose a greater restraint than is necessary to protect the employer’s interests and impose an undue hardship on the employee. The revisions must cause the limitations (e.g. time, geographical area, and scope of activity to be restrained) to be reasonable and no greater than necessary to protect the interest of the employer.
What About Non-Compete Agreements that were Executed Before AB went into Effect?
The text of AB 276 does not state that it is to be applied to non-compete agreements that were signed before June 3, 2017. Therefore, judges will likely analyze such non-competes pursuant to the Nevada Supreme Court’s holding in Golden Road. In Golden Road, a casino host entered into a non-compete agreement that prevented her from working for a competitor in any capacity within 150 miles of her former employer for one year. The Court found that the non-compete was unreasonable because it prevented the employee from working for a competitor in any position—even as a custodian. The Court, therefore, concluded that when a non-compete extended beyond what was necessary to protect the employer’s interest, the agreement was wholly unenforceable and courts were not permitted to modify its terms to make it reasonable.
AB 276 is a big victory for employers going forward, because if their non-compete agreements contain terms that are unreasonable and/or overbroad, courts are now required to revise and enforce them; whereas under Golden Road, those same agreements would have been non-modifiable and unenforceable. Under AB 276, the worst thing that could happen, short of an agreement being declared null and void, is that some contractual terms might be changed. For example, if a non-compete states that an employee cannot work in any capacity for a competitor in Las Vegas for a period of two years, the court might simply re-write the agreement to prohibit the employee from competing in the same or substantially similar job position, while concluding that the time and geographic restrictions are enforceable as written.
On the other side of the coin, AB 276 is a tremendous win for employees with respect to non-solicitation. The law clears up what has always been a big question mark: What exactly is “solicitation?” Now former employees and their new employers know for certain that although they cannot initiate contact with employees’ former customers, they can accept calls, inquiries, and business from former customers.
Robert L. Rosenthal concentrates his practice is labor, employment, and business litigation. He serves as partner in charge of Howard & Howard’s Las Vegas office’s labor and employment group.