In July 2016, the Nevada Supreme Court held that when a non-compete agreement extends beyond what is necessary to protect the employer’s interest, the agreement is wholly unenforceable and courts may not modify or “blue pencil” the contract to make it reasonable. Golden Rd. Motor Inn, Inc. v. Islam, 132 Nev. Adv. Op. 49 (2016). This means that if any terms of a non-compete agreement are found to be unreasonable, the entire agreement is unenforceable and the court will not edit or narrow the non-compete agreement in any manner.

Reasonableness

When evaluating a non-compete agreement, Nevada courts evaluate the reasonableness of the duration, geographic scope, work exclusion, and other restraints imposed by the agreement. As the Nevada Supreme Court reiterated in its recent opinion “[t]here is no inflexible formula for deciding the ubiquitous question of reasonableness.” Islam, 132 Nev. Adv. Op. 49 (citing Ellis v. McDaniel, 95 Nev. 455, 458–59, 596 P.2d 222, 224 (1979)). That said, Islam provides guidance on the evaluation of “reasonableness” for employers to consider.

In Islam, the non-compete agreement provided as follows:

In the event that the employment relationship between Atlantis and Team Member ends for any reason, either voluntary or non-voluntary, Team Member agrees that (s)he will not, without the prior written consent of Atlantis, be employed by, in any way affiliated with, or provide any services to, any gaming business or enterprise located within 150 miles of Atlantis Casino Resort for a period of one (1) year after the date that the employment relationship between Atlantis and Team Member ends.

To evaluate the reasonableness of this provision, the Court in Islam looked to its prior decisions in Jones v. Deeter, wherein it held that a five-year time restriction was unreasonable, and Camco, Inc. v. Baker, wherein it held that a geographic restriction of 50 miles from any area which was the “target of a corporate plan for expansion” to be unreasonable. The Court reasoned that if such restrictions were unreasonable, then prohibiting an employee “from employment, affiliation, or service with any gaming business” is also unreasonable. As the Court explained, the non-compete agreement as written prohibited the employee from working as a custodian within a 150-mile radius of the employer. In such a scenario, of course, it is unlikely that the employee would be luring customers away from the employer and the employer’s legitimate business interests would remain protected. Accordingly, the Court determined that the provision was overbroad and unreasonable.

Enforceability

The Nevada Supreme Court noted that although some states will “blue pencil” or modify agreements so that non-competes can be enforced to the extent they are reasonable, it was more persuaded by the reasoning of states that decline to engage in that practice. Specifically, the Court reasoned that declining to blue-pencil agreements “avoids the possibility of trampling the parties’ contractual intent” and creating an agreement not actually agreed to by the parties. The Court further explained that since an employer-drafted contract containing unenforceable provisions will likely be signed by the employee, if the Court chose to modify the agreement to make it enforceable, that would encourage “employers with superior bargaining power ‘to insist upon unreasonable and excessive restrictions, secure in the knowledge that the promise will be upheld in part, if not in full.’” Accordingly, noting that extra care must be taken in drafting contracts that are in restraint of trade, the Court held that unreasonable non-compete agreements are wholly unenforceable.

Recommendations

Employers who have non-compete and/or non-solicitation agreements with their employees should review those agreements and evaluate whether they extend beyond what is necessary to protect legitimate business interests. Employers should consider tailoring their agreements to reflect the type of competitive work they are seeking to restrict, as well as include reasonable geographic and time restrictions that go no further than necessary to protect their goodwill and other protectable interests. For example, employers should make sure to limit the geographic reach to the smallest area necessary; shorten the duration of the agreement to the fewest months or weeks necessary; and narrow the job positions covered by the agreement to the position the employee held at his prior employer or to as few comparable positions as possible.

As the Nevada Supreme Court has now warned employers drafting such agreements, a “strict test for reasonableness is applied for restrictive covenants in employment cases.” In the wake of the Islam decision, now is the time for Nevada employers to review and revise their existing non-compete agreements and take a hard look at what interests really warrant protection and to narrowly tailor those agreements to what it is the employer seeks to legitimately and reasonably accomplish.