Nevada Codifies Amendments For Non-Competes and Other Forms of Restrictive Covenants – Adopts “Blue Pencil” Standard, Imposes Consideration Requirements and Addresses Enforceability Issues
Nevada’s Assembly Bill 276, which became effective on June 3, 2017 (the “NV Law”), articulates new rules and requirements for employee restrictive covenants, some of which fundamentally alter the State’s prior practices. The NV Law addresses consideration generally in non-competition covenants and in circumstances where employees are terminated as the result of a reduction of force, reorganization or other restructuring. Limitations on customer non-solicitation are also codified. Finally, the NV Law reverses course on state common law developments that had prohibited courts from modifying or “blue penciling” overly broad restrictions.
Pursuant to AB 276, a non-competition agreement will be found to be void and unenforceable unless:
(1) It is supported by valuable consideration;
(2) It does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
(3) It does not impose any undue hardship on the employee; and
(4) It imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.
Notably, the phrase “valuable consideration” is not defined by the statute. It remains to be seen if at-will employment at the time of hire, continuing at-will employment, or something else will be required depending on the nature and extent of the limitation(s) imposed by the covenant.
The enforcement of non-competes in the specific context of a reduction of force, reorganization or similar restructuring is also addressed by the NV Law. In such circumstances, the non-competition covenant is only enforceable during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation, including severance pay.
The Nevada Legislature addressed customer non-solicitation provisions, stating that employers may not restrict former employees from providing service to a former customer or client if:
(1) The former employee did not solicit the former customer or client;
(2) The customer or client voluntarily chose to leave and seek services from the former employee; and
(3) The former employee is otherwise complying with the limitations in the covenant as to time, geographical area and scope of activity to be restrained, 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.
Of note, the Legislature identifies these restrictions as a non-competition covenant (as opposed to a non-solicitation covenant) but, in contrast to the non-compete restrictions discussed above, it does not directly address what, if any, consideration is required to support these restrictions.
Enforcement and Blue Pencil:
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”). Until the NV Law, Nevada had opposed any form of “blue penciling” practice, with the Supreme Court recently holding that where “the work exclusion term is unreasonable, the agreement is wholly unenforceable, as we do not modify or ‘blue pencil’ contracts.” See Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151, 153 (2016). However, so long as they are supported by “valuable consideration,” going forward Nevada Courts “shall revise” overbroad restrictive covenants that impose a greater restraint than is necessary to protect the employer’s interests and impose an undue hardship on the employee. The Court’s 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.