Recent case law may render non-compete provisions unenforceable | Sponsored Content

In a July 2016 opinion, Golden Road Motor Inn, Inc. v. Islam (“Golden Road”), the Nevada Supreme Court pronounced a new legal rule regarding the enforceability of overbroad non-compete provisions in Nevada. In light of Golden Road, it would be prudent for any entity conducting business in the State that relies on non-compete provisions to reevaluate the scope of such agreements to ensure they remain enforceable.

A non-compete provision is a contractual clause that prevents an employee from joining a competitor following the termination of employment. Non-compete provisions are important to businesses that use sensitive information such as proprietary client lists or similar trade secrets. These provisions also protect a business’s investment in training and retaining quality employees, while deterring competitors from luring valuable workers.

Non-Compete Provisions can be Overbroad in Timeframe or Geographical Scope Restrictions

Typically, the state’s laws in which the employee works will govern a non-compete provision. Non-compete laws vary widely from state to state as to enforceability and overbreadth. For instance, in California, under most circumstances a non-compete provision is unenforceable and cannot restrict an employee from joining a competitor. The primary exception to this being that when a business is sold, the selling entity and its employees can be restricted from competing. Many other states, including Nevada, allow non-compete provisions generally (both in the normal course of business and while a business is being sold) so long as the scope is reasonable and germane to the organization’s interests.

States that enforce non-compete provisions do not allow businesses to restrict employees in an unreasonable manner. These states, such as Nevada, mandate that non-compete agreements be limited to a timeframe and geographical scope that is necessary to protect the business’s interests. As a general rule, most courts will enforce a restriction that an employee not join a competitor within a one- to two-year timeframe. Any restriction beyond this runs the risk of being overbroad.

Whether a geographical restriction is overbroad requires a more fact-intensive analysis. For example, in the 1979 opinion Ellis v. McDaniel, the Nevada Supreme Court held that a non-compete provision restricting a physician from practicing within five miles of Elko was overbroad. The Court reasoned that such a restriction was unreasonable because the physician was the only doctor who could provide orthopedic medical services in the city, and preventing him from practicing in the area would be detrimental to the community. However, in other contexts, restrictions encompassing even up to a 40- to 50-mile radius from where a business operates are considered reasonable.

Overbroad Non-Compete Provisions are Wholly Unenforceable in Nevada

Nevada law also provides that a business cannot restrict an employee from being employed by a competitor in a substantially different position. In Golden Road, a casino host had signed a non-compete agreement that restricted her from working at any other casino within 150 miles of the Atlantis for a one-year period. The agreement also restricted her from being employed, in any form, by another casino in the area. The casino host became dissatisfied with her job at the Atlantis. As a result, she appropriated proprietary information regarding VIP players and then quit. She began working as a casino host at the Grand Sierra Resort (“GSR”), and used the stolen information from the Atlantis for the benefit of the GSR.

Under these facts, all seven Justices on the Nevada Supreme Court agreed that the non-compete agreement was overbroad because it restricted the casino host from working—in any capacity—at a different casino in Reno. For example, the casino host could not be a janitor at competing casino for a one-year period. The Court reasoned that the Atlantis did not have a substantial interest in restricting the casino host in such a way.

However, the Justices did not agree regarding whether the non-compete agreement’s overbreadth should be modified to render it enforceable. The Court split 4-3 on this issue. The majority, reasoning that courts generally do not modify contracts in Nevada, held that the non-compete agreement was wholly unenforceable. Thus, the casino host did not violate any contract when she began working for the GSR.

The dissent disagreed on this point, citing the importance of enforceable non-compete agreements to businesses in the State. The dissent also reasoned that the parties’ intent was clearly to prevent the casino host from working in the same position at a different casino, so the contact was not really being modified, only narrowed. The dissent would have modified the non-compete agreement to only restrict the casino host from being employed by a competing entity as a casino host. If the contract was modified in such a manner, it would have been enforceable, and the casino host’s conduct would have been in breach of the agreement.

Although the dissent clearly had valid concerns, it is now the law in Nevada that overbroad non-compete provisions are invalid. Any non-compete agreement that restricts an employee in an unreasonable and overbroad fashion will be void in its entirety. Businesses in the State that rely on such agreements must ensure that the agreements are not overbroad. If an agreement is overbroad, state courts will not modify the agreement—rather, an employee will be allowed to join a competitor without being held in breach of the provision.

Updating Overbroad

Non-Compete Provisions

Before businesses rush to redraft overbroad non-compete provisions and have employees sign them, there is one additional hurdle to consider for employees that can only be fired for “just cause.” When a non-compete provision is signed at the start of employment, there is sufficient legal consideration between the parties to support the agreement. The employee will provide services, and the employer agrees to pay a certain wage. However, during the course of employment, when an employee is required to sign an updated non-compete provision, a court may again require that the agreement be supported by consideration. For example, a bonus or slight raise would be sufficient to make an updated non-compete provision binding. Otherwise, the contract might be held unenforceable for lack of consideration. However, the Nevada Supreme Court has ruled that, in an at-will employment context, the promise of continued employment constitutes sufficient consideration to uphold a subsequently signed non-compete agreement. Accordingly, when an employee can only be terminated for cause during a specific term, consideration must be provided to that employee for an updated non-compete provision to be enforceable.

Keep in mind that this article generalizes many of the legal issues pertinent to non-compete agreements. If you are concerned that your business’s non-compete agreements are unenforceable, contact an attorney. There are many additional pitfalls that are beyond the scope of this article that require tailored legal services.

Will Wagner joined Allison MacKenzie Law Firm in 2016. He is a native Nevadan and University of Nevada, Reno graduate. Will pursued and obtained his law degree from the Sandra Day O’Connor College of Law at Arizona State University where he graduated cum laude. Upon graduating from law school, he served as a law clerk to Justice James W. Hardesty on the Supreme Court of Nevada. He was admitted to practice law in Nevada in 2015, and California in 2016. Will’s areas of legal practice include Business, Real Estate, Employment, Appellate, and Administrative Law.