Businesses, especially small and mid-sized businesses, have a significant interest in protecting not only their intellectual property but their investment in human capital. This is typically done through contracts with partners, employees, and independent contractors. Businesses expend many man-hours and dollars in training competent staff, especially management-level and c-suite employees. These employees gain access to the intellectual property of the company, customer lists, trade secrets, and business practices that are invaluable resources to the continued success of a company. Additionally, certain employees may have very specialized knowledge, skills, training, or experience that would harm the company if those assets were marshalled in service of a competitor. Therefore, businesses have a strong interest in preventing their employees from defecting to a competitor and taking valuable trade secrets with them. It is important for businesses to have a qualified contract attorney available to protect these interests. While it may be difficult to replace a qualified employee, nothing is worse than seeing one leave to serve a competitor using your intellectual property. Businesses can mitigate against the risk of harm from employees defecting to a competitor using a non-compete agreement or a non-compete clause within their business contracts.
Typically, legislatures and courts disfavor restraints on trade. See, NRS 613.200. A noncompetition covenant is a contractual restraint on trade where an employee agrees to not work for or provide services to another employer or other customers within a specific field and/or geographic area for a given period after ceasing employment with a company. Noncompetition covenants are governed by NRS 613.195 in Nevada. Pursuant to NRS 613.195(1), a noncompetition covenant is enforceable if it meets four requirements. First, the agreement must be supported by consideration. Second, the agreement must not impose a restraint on the employee that is greater that what is required to protect the employer’s legitimate interests. Third, the agreement must not impose undue hardship on the employee. Finally, the agreement must impose only restrictions that are appropriate for the consideration offered.
Consideration is a legal term of art that basically refers to a bargained for exchange between parties. Consideration can usually be anything of value to a party. In the context of a noncompetition covenant, courts have held that consideration for noncompetition covenant can be future or continued employment. See, Camco, Inc. v. Baker, 113 Nev. 512, 517, (1997). Therefore, it is permissible for an employer to include a noncompetition covenant or agreement within an employment contract because the offer of future employment, or even continued employment for current employees, is sufficient consideration to support the covenant. It is important to consult with a qualified business attorney, well verse in business law, who can discuss these matters with you, because in certain instances, there may be exceptions to this rule.
Certain classes of employees or members of certain professions are not permitted to enter noncompetition covenants. Hourly employees are specifically exempted from noncompetition covenants. NRS 613.195(3); See also, Assembly Bill 47 (effective Oct. 1, 2021). This exemption was imposed by the Nevada Legislature on policy grounds to ensure a robust supply of labor in Nevada. Owing to the general prohibition against legislatures to pass ex post facto laws, the prohibition against non-competition agreements as applied to hourly employees may not be applicable to agreements entered into prior to October 1, 2021. See generally, Richmond v. J.A. Croson Co., 488 U.S. 469, 513 (1989) (Justice Steven concurring in part). And under Rule of Professional Conduct 5.6, covenants to not compete are probably not enforceable against attorneys in their ability to practice law after separation from employment. State Bar of Nevada Standing Committee on Ethics and Professional Responsibility, Formal Opinion No. 56, *3-4.
Non-competition agreements do not restrict certain activities. For example, even in the presence of an enforceable non-competition agreement, no company may prohibit customers from choosing who to do business with. If the former employee does not solicit the former client, the choice of the former client to conduct business elsewhere is voluntary, and the employee is otherwise complying with the time, geographical limitations and scope of the restriction, the employer cannot act to restrain the activity of the former client and the former employee. NRS 613.195(2). Consultation with one of Hutchings Law Group’s qualified Las Vegas business attorneys can help you determine the range of persons and activities that non-competition agreements apply to.
For those employees or independent contractors whose activities are not outside the scope of non-competition agreements, the restraints imposed upon an employee must be reasonable, so they do not impose an undue hardship. Noncompetition covenants must be reasonable in time, scope, and geographical area. See, Shores v. Glob. Experience Specialists, Inc., 134 Nev. Adv. Op 61 (2018). Unfortunately, there is no bright-line test to determine when the time, scope, or geographic area restrictions of a noncompetition covenant are per se unreasonable. Rather, courts evaluate the reasonableness of restrictions on a sliding scale. This is generally determined during litigation, and for businesses this requires the assistance of a civil litigation attorney. For instance, if a noncompetition covenant has a longer term, then the scope of the restrictions must be narrower, and the applicable geographic area must be smaller. Or if the consideration is significant, the restriction may be greater than if the consideration is merely nominal. NRS 613.195(1)(d). Importantly, consultation with one of the experienced commercial litigation attorneys at Hutchings Law Group will help you to determine the reasonableness of your proposed restriction.
The reasonableness of restrictions is important to whether the noncompetition covenant will be enforceable. A noncompetition covenant may restrict an employee from working for companies that directly compete with the employer. However, a noncompete agreement that seeks to prevent an employee from working for any casino within 150 miles would be deemed too broad because it would apply to too many prospective employers. See, Golden Rd. Motor Inn, Inc. v. Islam, 132 Nev. Adv. Op. 49 (2016). A noncompetition covenant that is limited to companies in direct competition with the employer within a limited geographic area is likely enforceable. However, a restriction that prevents an employee from working for any company located within 50 miles of where a company intends to expand its operations is overbroad because it is speculative and presents an undue hardship on the employee. See, Camco, 113 Nev. 512 at 519-520.
The Nevada Supreme Court has deemed reasonable a covenant that spans two years and a five-mile radius. See, Ellis v. McDaniel, 95 Nev. 455 (1979). Similarly, a covenant that covered a duration of one year applicable to the entire City of Reno was also deemed reasonable. See Hansen v. Edwards, 83 Nev. 189 (1967). By contrast, a covenant that spanned two years and a geographic area of 50 miles was held to be unreasonable. See Camco, 113 Nev. at 519. Additionally, the Nevada Supreme Court deemed unreasonable a covenant that spanned five years and one hundred miles because it imposed an undue hardship on the employee. See Jones v. Deeter, 112 Nev. 291 (1996). As a rule, if an employee would be forced to relocate or wait a significant period of time to engage in their chosen profession (likely 3 years or more), courts will probably find that the covenant imposes an undue hardship on the employee and that its restrictions are unreasonable.
Pursuant to recent changes enacted by the Nevada Legislature, over broad non-competition agreements must still be enforced. Under NRS 613.195(6), the Nevada Legislature has directed the district courts to “blue pencil” or re-write noncompetition covenants deemed unreasonable, overbroad, or overly restrictive by altering either the scope, duration, or geographic area of the covenant. If a business finds itself in litigation over a noncompetition covenant and the court deems the covenant overly restrictive, the covenant is still enforceable subject to court revisions.
Remedies in the event of breach of non-competition agreements, while not expressly limited by statute, are likely limited to monetary damages, and do not include injunctive relief. This is because of the policy prohibiting restraints on trade and the courts’ inability to enforce non-competition agreements that result in an undue hardship on the employee. NRS 613.195(1)(c). As a matter of common sense, most actions that prohibit the employee from obtaining new employment after termination would result in an undue hardship. Jones v. Deeter, 112 Nev. 291, 294 (1996) (“While we do not agree that NRS 613.200 operates to render the covenant unenforceable, we agree that the district court erred in enforcing the restrictive covenant on the ground that the covenant is not reasonable under the test set forth in Hansen v. Edwards, 83 Nev. 189, 426 P.2d 792 (1967).). Most people do not have the luxury of remaining unemployed. With respect to enforcement of non-competition agreements, you may get more clarity by scheduling an appointment with one of Hutchings Law Group’s Las Vegas business attorneys.
Noncompetition covenants are business contracts that empower business owners to protect their economic interests and prevent competitors from poaching valuable employees that give them a competitive advantage. However, in Nevada, the law has evolved considerably in recent years, and there are still many questions regarding new statutory provisions that remain to be answered by courts. What is certain is that noncompete agreements must be supported by valuable consideration (typically an offer of employment is sufficient) and will be blue penciled by courts so that they are reasonable in the duration, scope, and the geographic area of the restrictions. But enforcement of noncompete agreements through injunctive relief, such as a prohibition on employment with a new employer, is debatable. Therefore, employers should consult with one of Hutchings Law Group’s Las Vegas business lawyers to draft or review noncompetition agreements to ensure they are valid, enforceable, and useful to business owners.
