The Competition over Revising and Enforcing Noncompete Agreements in Nevada

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The Nevada Legislature and Nevada Supreme Court have not always seen eye-to-eye in the interpretation of noncompetition covenants.  Historically, the two bodies have parried back and forth in trying to decide where Nevada will draw the line in enforcing restrictive covenants.1  In many cases, the Nevada Supreme Court opted for a strict stance and invalidated noncompetition agreements the court viewed as overly broad.  In response, the Nevada legislature pushed back with a mandate that the court should broadly modify, or “blue-pencil,” these agreements to make them enforceable.  Despite these efforts, this conflict and the overall discretionary nature of injunctive relief enforcement continue to create challenges in drafting strongly reliable noncompetition agreements in Nevada. 

Historical Judicial Interpretations

While noncompetition agreements are generally enforceable in Nevada,2 the Nevada Supreme Court’s precedents were somewhat muddled as to the practice of blue-penciling, that is, revising such agreements to make them enforceable.  The practice began in the seminal 1967 case of Hansen v. Edwards,3 where the Nevada Supreme Court found a noncompetition covenant’s geographic scope and duration unreasonable.  But instead of treating the agreement as wholly unenforceable, the Nevada Supreme Court modified and reduced the geographic scope and duration from a 100-mile radius around Reno, Nevada with an unlimited duration down to the city limits of Reno with a one-year duration.4  Similarly, in the 1979 case of Ellis v. McDaniel, the court declined to enforce a health clinic’s preliminary injunction based on a noncompete agreement that prohibited an employee-doctor from practicing his specialty of “orthopedic surgery” because none of the clinic’s doctors was an orthopedic specialist.5  The court, however, modified the restriction to prohibit the doctor from engaging in the broader “general practice of medicine” in order to protect the “good will” of the clinic. These changes did not merely require the court to strike portions of the agreement to make it reasonable, but to actually modify the sections deemed unreasonable.

Even with this precedent of modification, however, the Nevada Supreme Court did not always opt to modify the agreements.  The court would modify noncompetition agreements in some scenarios and render them unreasonable without modification (and, therefore, invalid) in others.7  For example, in Jones v. Deeter, despite citing Hansen, the court made no modification and found a five-year duration “per se unreasonable and therefore, unenforceable.”8  It was not until the Nevada Supreme Court’s 2016 decision in Golden Road Motor Inn, Inc. v. Islam9 that the court drew a clear (if more controversial) line as to when modification is appropriate.

The Nevada Supreme Court’s New View under Golden Road v. Islam

In Golden Road, the Nevada Supreme Court, in a 4-3 split, held that when a noncompetition agreement extends beyond what is reasonably necessary to protect the employer’s interest, the agreement is wholly unenforceable, and courts may not modify the contract to make it reasonable.10  The majority struck the noncompetition agreement at issue and took a sharp stance against modification.

Specifically, the majority stated that “we have long refrained from reforming or ‘blue penciling’ private parties’ contracts”11 and cited to three cases that discussed blue-penciling although, notably, not in the context of noncompetition agreements.12  In support of its reasoning, the court distinguished its prior cases where it made modifications by stating that “the cases do not allow for the court’s modification of a noncompetition agreement,” but instead “provide for modification of a preliminary injunction rather than the original contract.”13  The Nevada Supreme Court therefore asserted that it was acting in conformance with its prior decisions, as the Golden Road case was not an appeal of a preliminary injunction, but of a final judgment.14  

The dissent criticized the majority’s distinction of prior blue-penciling in Ellis and Hansen, and noted that such a wholesale invalidation of the prior rule would produce unduly harsh results.  Further, the dissent noted that blue-penciling, which had been adopted by the majority of jurisdictions, was an appropriate equitable remedy under the facts present, where the former employee had stolen trade secrets and committed theft.  Nevertheless, the majority rejected such reformation through blue-penciling and put employers on notice that overly broad terms could invalidate their noncompete agreement.

Essentially, after Golden Road, if any terms of a noncompetition agreement were found to be unreasonable on appeal from a final judgment, the entire agreement was unenforceable, and the court could not edit or narrow the noncompetition agreement in any manner.  As a result, Golden Road presented a considerable challenge to employers in enforcing noncompetition agreements by taking away the potential for blue-penciling of imperfect restrictive covenants.

The Legislature’s Response to Golden Road

The Golden Road decision controlled noncompetition agreements only briefly, as the Nevada legislature passed AB 276 (later enacted as Nevada Revised Statutes § 613.195) in 2017.  While codifying the court’s previous decisions defining reasonableness, the statute mandated blue-penciling, stating that, if an employer brings an action to enforce a noncompetition agreement, and the court determines the agreement is unreasonable, “the court shall revise the covenant to the extent necessary and enforce the covenant as revised.”15  The Nevada legislature effectively voided the precedent set by Golden Road by requiring courts to revise unreasonable noncompetition agreements.  Thus, while Golden Road had shut down the practice of blue-penciling or reformation, NRS § 613.195 specifically requires it.

Since Golden Road and the enactment of NRS § 613.195, the Nevada Supreme Court has decided only one case concerning a noncompetition agreement.  In Shores v. Global Experience Specialists, Inc.,16 the Nevada Supreme Court reversed the district court’s grant of a preliminary injunction, finding that a noncompetition agreement was unreasonable as to its geographic scope.  However, in a footnote, the court stated that it did not modify the agreement because the parties did not request modification.  The court made no mention of NRS § 613.195, as the statute was codified after oral arguments occurred in Shores.

Practical Takeaways

With NRS § 613.195, employers likely have a better chance at enforcing their noncompetition agreements than they did in the Golden Road era.  Even if a court finds that the scope of an employers’ noncompetition agreements is unreasonable or greater than necessary, the court is required to modify the agreement to be reasonable and enforceable under NRS § 613.195.

NRS § 613.195 is already having an impact where most of these cases are decided – at the district court level.  For example, even though NRS § 613.195 was enacted in 2017, one Nevada state district court judge recently held that the statute can still apply to noncompetition agreements that were executed before the effective date of the statute.  Another Nevada state district court judge cited both NRS § 613.195 and Golden Road to find a noncompetition agreement reasonable despite arguments that it was overly broad.17  NRS § 613.195 offers employers a stronger foundation to enforce their noncompetition agreements against former employees.

Even so, until a case applying the statute reaches the Nevada Supreme Court, it is unclear as to whether the Nevada Supreme Court will acknowledge and adhere to NRS § 613.195, or continue to push back with exceptions to the revision mandate.  With that in mind, employers should narrowly tailor agreements to strengthen their arguments for enforceability and to be better positioned for any threat of appeal upon a granted injunction.  To do so, Nevada employers should consider limiting the geographic scope of the restriction to the smallest area necessary; setting the post-termination duration to the amount of time necessary to protect business interests; and narrowing any post-termination position restrictions to the same or similar services that the employee provided. 

Noncompete litigation often carries high stakes and departing executives or critical employees can severely damage their former company by moving to a competitor.  An employee’s move to a competitor can also involve the theft of confidential information or trade secrets, solicitation of customers, or employee raiding.  Employers that proactively examine or revise their noncompetition agreements in light of these legal developments may enhance their chances to enforce noncompete agreements and, ultimately, protect their valuable interests.

 

Footnotes

1 See, e.g., Jones v. Deeter, 112 Nev. 291, 913 P.2d 1272 (Nev. 1996); Ellis v. McDaniel, 95 Nev. 455, 596 P.2d 222 (Nev. 1979); Hansen v. Edwards, 83 Nev. 189, 426 P.2d 792 (Nev. 1967). 

2 See Nev. Rev. Stat. § 613.200.

3 Hansen, 426 P.2d at 794. 

4 Id. 

5 Ellis, 596 P.2d at 225.

6 Id. 

7 Compare Ellis, 596 P.2d at 225, with Jones, 913 P.2d at 1275.

8 Jones, 913 P.2d at 1275.

9 376 P.3d 151 (Nev. 2016).  

10 Id. at 156. 

11 Id.

12 Id. 

13 Id.

14 Id.

15 Nev. Rev. Stat. § 613.195(5) (emphasis added). 

16 422 P.3d 1238 (Nev. 2018). 

17 See, e.g.SSA Architecture, Small Studio Assocs., LLC v. Hillyer, No. 18A771578, 2018 WL 5729032, at *1 (Nev. Dist. C. Sept. 28, 2018). 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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