New Nevada Legislation Affects Noncompetition Agreements

In June of last year, Nevada’s Governor signed Assembly Bill 276 into law, which amended Chapter 613 of the Nevada Revised Statutes relating to, among other things, “noncompetition covenants.” The new law has yet to make its way through the courts but presents significant changes to previously existing law and calls into question whether an employee’s continued at-will employment is sufficient consideration to support a noncompetition covenant (i.e., agreement). Specifically, the new law requires that noncompetition covenants (1) be supported by valuable consideration; (2) do not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed; (3) do not impose any undue hardship on the employee; and (4) impose restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant. Unfortunately, the new law does not define “valuable consideration.” In Nevada, prior to the passage of the new law, continued at-will employment was considered sufficient consideration to support a noncompetition covenant between an employer and an existing employee. That may no longer be the case. In an effort to avoid costly litigation, prudent Nevada employers may now wish to offer one-time cash payments, bonus payments or other consideration (beyond continuing employment) to an existing employee in exchange for signing a noncompetition covenant.

“Noncompetition covenants” refer to “agreement[s] between an employer and employee which, upon termination of the employment of the employee, prohibits the employee from pursuing a similar vocation in competition with or becoming employed by a competitor of the employer.” The new law makes clear that an employer may not restrict a former employee from providing services 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 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. Thus, it appears that employers may be able to restrict a former employee’s ability to initiate contact with former customers but may not be able to restrict a former employee’s ability to provide services for former customers who voluntarily reach out to the former employee and seek the former employee’s services.

Additionally, under the new law, if an employee is terminated as a result of an RIF, reorganization or similar restructuring by the employer, a noncompetition covenant is only enforceable during the period of time in which the employer is paying the employee’s salary, benefits or equivalent compensation. This is a significant change in the existing law and contemplates a situation (i.e., employer initiated termination due to restructuring) that actually works to invalidate a noncompetition covenant except during the period of time that the employer is paying the employee.

While the new law deals with noncompetition covenants, it specifically authorizes employers to enter into agreements preventing the disclosure of “any trade secrets, business methods, lists of customers, secret formulas, or processes or confidential information learned or obtained during the course of his or her employment with the former employer.” Often, an employer is more interested in protecting these interests (i.e., confidentiality interests) than prohibiting an individual from engaging in competitive ventures. Once again, the new law refers to the requirement for “valuable consideration” for such nondisclosure agreements and that they be otherwise reasonable in scope and duration. A separate nondisclosure agreement would likely be the most effective way to assist ManagedPay’s client with the protection of its confidential and proprietary information and documents (including but not limited to its trade secrets). As Mike previously mentioned, putting restrictive language that a company wants to be binding on employees solely in a document (i.e., Employee Handbook) that does not constitute a contract is insufficient. This is why a separate nondisclosure agreement supported by valuable consideration is a preferable option.

Finally, the new law also allows courts to blue pencil (i.e., revise) noncompetition covenants to the extent deemed necessary to enforce the covenant (as revised). This aspect of the new law is widely considered to benefit employers because NV courts may now blue pencil an overly broad agreement and enforce the agreement as revised rather than find the agreement void and unenforceable because of its over breadth.

As you might have guessed, we will have to wait for cases to work their way through the courts to know just how the law will be interpreted and whether it will be applied retroactively. However, as for now, the new law certainly affects the way noncompetition agreements and confidentiality interests agreements will be drafted going forward and, as discussed above, prudent employers may wish to offer additional consideration beyond continued employment to support a noncompetition covenant or a confidentiality interests agreement with an existing employee in an effort to avoid costly litigation. As for employers with noncompetition covenants and/or confidentiality interests agreements in place that pre-date the new law, we recommend that they have these agreements reviewed for compliance with the new law (particularly because the recent changes in the law could apply retroactively). At least now courts are in a position to revise an agreement’s terms that might have otherwise rendered it void and unenforceable, rather than striking it down in its entirety.

Brought to you courtesy of ManagedPAY
Prepared by Sharon A. Wey, Esquire
Miller Tack & Madson

For more information on Noncompetition Agreements or other Employment-related matters, please contact: 

Bill Rosado
bill@managedpay.com
702-215-5880