The Silver State Grips the Blue Pencil

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As we have previously blogged about, in 2016 the Nevada Supreme Court refused to adopt the “blue pencil” doctrine and held that Nevada courts could not modify over-broad restrictive covenants. The following year, we alerted readers that the Nevada legislature amended Nevada Revised Statute 613, governing non-competition agreements. Among other things, the amendment granted courts the authority to “blue-pencil” non-competition agreements, overturning the Nevada Supreme Court’s 2016 decision in Golden Road Motor Inn, Inc. v. Islam.

Now, the Nevada Supreme Court chimed in again on the “blue pencil” doctrine. In Duong v. Fielden Hanson Isaacs Miyada Robison Yeh, Ltd., two doctors signed noncompetition agreements in 2016 in exchange for continued employment subsequent to a merger. The agreements prohibited the doctors from working at certain facilities upon termination of their employment relationship. The agreements notably contained an express blue-penciling provision stating that if any provision were found to be unreasonable by a court, “any such portion shall nevertheless be enforceable to the extent such court shall deem reasonable, and, in such event, it is the parties’ intention . . . and request that the court reform such portion in order to make it enforceable.”

Two years later, the doctors quit and began providing services elsewhere in violation of their agreements. Litigation over the enforceability of the agreements and the blue pencil provision ensued. The doctors challenged the overbreadth of the agreements, argued that they were thus unenforceable under Golden Road, and were not governed by the amendment to N.R.S. 613 as the agreements were entered into before the amendment’s effective date. Despite that argument, while the trial court agreed that the agreements were overbroad, it nonetheless blue-penciled the agreement, and issued a preliminary injunction. The doctors appealed to the Nevada Supreme Court, again arguing that the agreements were unenforceable under Golden Road because they predated NRS 613.195’s effective date.

The Nevada Supreme Court held that the doctors’ reliance on Golden Road was misplaced. The court determined that Golden Road did not prohibit a court from blue-penciling an unreasonable restrictive covenants where the parties’ agreement authorized such modification; rather, it only prevented the trial court from blue-penciling agreements on its own, without a contractual provision authorizing the same. Because the agreements at issue contained express provisions requesting such blue-penciling, there was no abuse of discretion in blue-penciling the agreement and enforcing the revised agreement. The Nevada Supreme Court declined to address the retroactivity of NRS 613.195, since its “holding that blue-penciling provisions within a noncompetition agreement are enforceable is dispositive.”

This decision is useful for employers with non-compete agreements in states that allow courts to “blue-pencil” or revise overbroad restrictive covenants. In addition to careful drafting of non-compete agreements, employers should include a provision expressly permitting courts to revise geographical, temporal, or scope of activity restrictions they find to be unreasonable. This boots-and-suspenders approach helps to ensure that an overbroad, but otherwise enforceable, agreement will be enforced.

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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