Labor, Employment, & Immigration I AUGUST 14, 2017

New Nevada Law Imposes Significant Changes That Affect The Enforceability of Non-Compete Agreements

Three women talking at conference table

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:

a.    Be supported by valuable consideration (continued employment is probably sufficient);
b.    Not impose any restraint that is greater than necessary for the protection of the employer for whose benefit the restraint is imposed;
c.     Not impose any undue hardship on the employee; and
d.    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:

a.   The former employee did not solicit the former client or customer;
b.   The client or customer voluntarily chose to leave and seek services from the former employee; and
c.   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.

Bottom Line

AB 276 is a big victory for employers, to the extent that they can risk litigating non-competes in court, because agreements that were void under Golden Road, can now be revised and enforced. 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 modified. 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.

Additionally, 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.