Should Nevada Employers Revise Non-Compete Agreements in Light of Amendment to NRS 613.195?
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Should Nevada Employers Revise Non-Compete Agreements in Light of Amendment to NRS 613.195?

Brownstein Client Alert, June 7, 2022

Many technology and non-technology employers require employees having access to proprietary and sensitive information to sign contractual agreements not to compete during and when their relationship terminates. This contractual aid is common in Nevada and other states that allow such non-compete agreements. This contractual protection is in addition to the protections afforded by the Uniform Trade Secrets Act (see e.g., Chapter 600A, Nevada Revised Statutes), the Defend Trade Secrets Act (18 U.S.C. Sections 1831-39), robust confidentiality and non-disclosure agreements, as well as effective strategies to perfect, maintain and protect intellectual property. Some states, such as California, only allow non-compete covenants in specific circumstances. See Cal. Bus. & Prof. Code Section 16600 et seq. (individuals); cf. Ixchel Pmarma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1162 (2020) (“a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in lawful trade or business with another business.”)

In 2017, the Nevada Legislature adopted a statute specifically addressing covenants not to compete. Prior to 2017, covenants not to compete were governed largely by rules created by the court, focusing upon the reasonableness of the restrictive terms and the consideration provided to the employee. Hansen v. Edwards, 83 Nev. 189, 191-92 (1969) (“[a] restraint on trade is unreasonable … if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.); Ellis v. McDaniel, 95 Nev. 455, 458-59 (1979) (time and geographic limitations are necessary factors to consider when evaluating the reasonableness of a noncompete); Jones v. Deeter, 112 Nev. 291, 292 (1996) (holding five year restriction was too great a hardship for the employee and not necessary to protect the employer’s interests); Camco v. Baker, 113 Nev. 512, 519-20 (holding restrictions of two years and within fifty miles of any area which was the “target of a corporate plan for expansion” unreasonable).

Previously, at the preliminary injunction stage, Nevada district courts would fashion a preliminary injunction enforcing the restrictive covenant while the case is pending. The Supreme Court of Nevada addressed several appeals involving preliminary injunctions and declared certain restrictions were unreasonable, thereby revising the terms of the preliminary injunction. Hansen, 83 Nev. at 191, 193 (modifying a preliminary injunction to make the preliminary injunction reasonable in terms of geographic scope and time); Ellis, 95 Nev. at 460 (modifying preliminary injunction to make the limitation reasonable) cf.Camco, 113 Nev. at 520 (affirming denial of preliminary injunction as terms of agreement unenforceable). It also addressed rulings on summary judgment. Jones, 112 Nev. at 1275-76 (reversing summary judgment, finding covenant unreasonable). To deal with the question whether the district court has the ability to reform an unreasonable agreement to make it enforceable, the Supreme Court in Golden Road Motor Inn. v. Islam, 132 Nev. 476, 488 (2016) held that on the merits, courts cannot reform unreasonably restrictive covenants.

The Nevada Legislature responded to the holding in Golden Road Moter Inn. In 2017, it enacted Nevada Revised Statute Section 613.195, which recited the current state of the law1 and also expressly requires a court to reform any unreasonable provisions and enforce the agreement as revised as long as it also finds the covenant is supported by valuable consideration. NRS 613.195(6). Thus, an otherwise unreasonable restrictive covenant may still be enforced in Nevada but subject to conditions the court deems reasonable.

The question does arise whether covenants entered into before 2017 are provided the benefit of the reformation provision in NRS 613.195(6). Although the Nevada Supreme Court and Nevada Court of Appeal have not yet addressed the issue, the same has been litigated in the district courts of Nevada and the United States District Court, District of Nevada. It is notable that in one case decided in 2019, the Eighth Judicial District Court held NRS 613.195 to be applicable retroactively, reformed an unreasonable covenant entered into before the enactment of NRS 613.195, and entered a preliminary injunction based upon the revised terms. Aruze Gaming America, Inc. v. Hutchins and Interblock USA, L.C., 2019 Nev. Dist. LEXIS 284 (Eight Judicial District Court, Nevada Case No. A-19-787787-B, March 14, 2019) (granting preliminary injunction).

However, in another case in the Eighth Judicial District Court, also in 2019, another judge held NRS 613.195 not to apply to covenants entered into prior to the enactment of NRS 613.195. In that case, the court refused to alter the covenant and held it to be unenforceable, denying a motion for preliminary injunction. United States Anesthesia Partners v. Devin Chern Tang, Sun Anesthesia Solutions, 2019 Nev. Dist. LEXIS 262 (Eighth Judicial District Court, Nevada Case No. A-18-783054-C, January 31, 2019) (motion for preliminary injunction denied); Felden Hanson Isaacs Miyada Robison Yeh v. Devin Chern Tang, 2019 Nev. Dis. LEXIS 830 (Eighth Judicial District Court, Nevada Case No. A-18-783054-C, August 28, 2019) (held NRS 613.195 does not apply to agreements entered into before enactment of that provision in 2017, motion for reconsideration denied).

At least one United States District Court judge in the District of Nevada has held that NRS 613.195 is substantive rather than remedial, and therefore NRS 613.195 cannot be applied retroactively. Paws UP Ranch, LLC v. Martin, 463 F.Supp. 3d, 1160, 1167-68 (D. Nev. 2020).

A material change to Nevada’s non-compete statute was again made in 2021, adding Section 3, making non-compete agreements void as applied to hourly wage earners: “A noncompetition covenant may not apply to an employee who is paid solely on an hourly wage basis, exclusive of any tips or gratuities.” NRS 613.195(3). It appears that courts might find the 2021 amendment will not have retroactive effect. See Paws UP Ranch, LLC, 463 F.Supp. 3d 1167 (relying upon Sandpoint Apts. v. Eighth Judicial District Court, 129 Nev. 813 (2013) andHoldaway-Foster v. Brunell, 130 Nev. 478 (2014)); U.S. Const. art. I, Section 10 (“No state shall pass any Law impairing the obligation of contracts.”). Therefore, pre 2021 covenants not to compete may cover hourly wage earners as long as they are supported by consideration and are reasonable (pre-2017 covenants), or if not reasonable may be reformed if entered into between the enactment of NRS 613.195 and the amendment thereto in 2021 (roughly October 2017‒October 2021).

Therefore, an employer has a decision to make: (1) revise current non-compete agreements now to take advantage of the savings provisions in the statute, NRS 613.195(6), allowing a court to change otherwise unreasonable provisions and enforce the non-compete; or (2) maintain its current non-compete agreements, which might have the benefit of covering hourly wage earners, but may also be subject to being declared void as unreasonable and therefore completely unenforceable if subject to pre-NRS 613.195 law and not created during the gap period between roughly October 2017 and October 2021.

Regardless of whether an employer decides to revise its non-compete agreements now, it should ensure that all employees are bound by robust non-disclosure agreements. All employers should also have policies and strategies in place to perfect, maintain and protect trade secrets and other intellectual property. Many times, a non-disclosure agreement and strong policies to perfect, maintain and protect intellectual property prove more valuable in litigation and negotiations than a non-compete agreement.

1A “noncompetition covenant is void and unenforceable unless the noncompetition covenant: (a) Is supported by valuable consideration; (b) Does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed; (c) Does not impose any undue hardship on the employee; and (d) Imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.” NRS 613.195(1). The Legislature went further to address working with former customers: “A noncompetition covenant may not restrict ... a former employee … from providing service to a former customer or client if: (a) The former employee did not solicit the former customer or client; (b) The customer or client voluntarily chose to leave and seek services from the former employee; and (c) the former employee is otherwise complying with the limitations in the covenant as to time, geographical area and scope of activity to be restrained …” NRS 613.195(2).

This document is intended to provide you with general information regarding Nevada state laws governing non-compete agreements. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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