David McElhinney
In 2016 the Nevada Supreme Court issued its decision in Golden Road Motor Inn, Inc., d/b/a Atlantis Casino Resort v. Islam and Grand Sierra Resort, wherein the Court identified what would be deemed unreasonable and overbroad restrictions in non-compete agreements going forward and also limited the effect of blue-penciling provisions in a restrictive covenant.
Nearly a year later, as we were beginning to get our hands around the Atlantis case requirements, along comes Assembly Bill 276 (AB 276), signed into law on June 3, near the close of the Nevada Legislature’s 2017 session. The new bill significantly changed Nevada’s law on restrictive covenants of non-competition and is now the controlling law of the state.
Up until the passage of AB 276, Nevada statutes were largely silent in the area of non-competes, stating only in NRS 613.200(4) that it is not unlawful for an employee to enter into a restrictive covenant of non-competition with an employer that is supported by valuable consideration and is otherwise reasonable in its scope and duration.
The new statute says the requirements for a valid and enforceable restrictive covenant of non-competition in Nevada require that they be evaluated by a new and different standard. It also rejects the Nevada Supreme Court’s holding in Atlantis regarding blue-penciling.
Under the changes brought forward in AB 276, businesses with restrictive covenants should be aware of the following for their agreements:
Ensure that valuable consideration is being given in exchange for, and simultaneously with, the employee agreement to the restrictive covenant.
Does the agreement specifically identify the consideration being given by the employer in exchange for the employee entering into the covenant (continued employment and a percentage of employee’s compensation, for example)?
Are the geographic and time limitations reasonable? The geographic scope should not be larger than what is needed to protect the employer’s interests in light of the position held by the employee and consideration given. Imposing reasonable limitations on the employee will likely protect against a claim of undue hardship by the employee.
Include a clause explaining that the restrictive covenant agreement is only enforceable during the time the employer is paying the employee benefits, compensation or severance when the employee is terminated without cause due to a reduction in force, reorganization or similar restructuring by the employer.
Does the agreement specifically define the business and/or scope of activity of the company that is being protected?
Language prohibiting an employee from providing services to a client of the employer where the client seeks out the employee for services and the employee is otherwise complying with the restrictive covenant.
Include a blue-penciling provision that allows a court to reform the restrictive covenant if it determines the covenant is a restraint greater than required for the protection of the employer or imposes an undue hardship on the employee. The provision should explain that it is the intent of the parties that the restrictive covenant be enforced to the maximum extent allowed by law.
While these highly significant changes to the law have yet to be interpreted by the courts, employers utilizing restrictive covenant agreements may benefit from reviewing the document language with counsel to ensure compliance with the law.
David McElhinney is an employment and commercial litigation partner with Lewis Roca Rothgerber Christie LLP, with 37 years of experience, working primarily out of the firm’s Reno and Denver offices. He has represented numerous clients in a variety of litigation and administrative matters, including enforcement of non-compete and non-solicitation agreements, Title VII, ADA, FMLA and USERRA actions.
