Nevada Non-Compete Law Changes Again After Passage Of AB 276
Assembly Bill 276 (AB 276) significantly changes Nevada’s law on restrictive covenants of non-competition.
Less than a year after the Nevada Supreme Court provided new guidance on employee non-competes, Gov. Brian Sandoval signed AB 276 which further changes the law in this area. As a result, employers should consider once more revising their restrictive covenant agreements to comply with the new statute.
On July 21, 2016, the Nevada Supreme Court in Golden Road Motor Inn, Inc. d/b/a Atlantis Casino Resort vs. Islam and Grand Sierra Resort, 132 Nev. __, 376 P.3d 151 (2016) (Atlantis) identified what would be deemed unreasonable and overbroad restraints on non-competition going forward and also limited the effect of blue-penciling provisions in a restrictive covenant. (Read our alert about the Atlantis Decision here).
State statute was largely silent in this area, stating only in NRS 613.200(4) that it is not unlawful for an employee to enter into a restrictive covenant of non-competition with an employer that is supported by valuable consideration and is otherwise reasonable in its scope and duration.
Now, on June 3, 2017, just before the close of the 79th Session of the Nevada Legislature, Gov. Sandoval signed AB 276 into law. AB 276 amends Chapter 613 of the Nevada Revised Statutes by removing the above language in NRS 613.200 and adding a new section addressing restrictive covenants of noncompetition.
The new statute sets forth the requirements for a valid and enforceable restrictive covenant of non-competition in Nevada – requiring that they be evaluated by a new and different standard than set forth in prior court decisions or in statute. The new law also contains a provision responding to the Nevada Supreme Court’s holding in Atlantis regarding blue-penciling, rejecting the limitations issued by the Court.
There are four key areas that the new law addresses. All employers should be aware of these key tenets of the law and, again, consider revising their agreements.
The first key area of the new law addresses enforceability of non-competition covenants. Under AB 276, a covenant is void and unenforceable unless the following is shown:
- The covenant is supported by valuable consideration;
- The covenant does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
- The covenant does not impose any undue hardship on the employee; and
- The covenant imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.
The legislation does not provide any guidance on the new standards. For example, AB 276 does not clarify what constitutes valuable consideration supporting the restrictive covenant. Similarly, AB 276 does not address what restrictions are appropriate in relation to consideration supporting the covenant. Accordingly, these issues and others will need to be interpreted by the courts.
Second, AB 276 contains a provision that is in direct response to the recent Nevada Supreme Court decision in Atlantis where the Court held, among other things, that it could not reform or blue pencil a covenant found to be unreasonable or overbroad. AB 276 provides that if an employer brings an action to enforce a covenant not to compete and the court finds that the covenant is supported by “valuable consideration” but is unreasonable, imposes a greater restraint than is necessary for the protection of the employer, and imposes an undue hardship on the employee, the court “shall revise the covenant to the extent necessary and enforce the covenant as revised.” This provision effectively rejects the Nevada Supreme Court’s holding to the contrary in Atlantis.
Third, AB 276 prohibits covenants not to compete that restrict former employees from providing services to a former client or customer in certain instances. Specifically, such covenants are prohibited only if the former employee did not solicit the former customer or client, the former customer or client voluntarily chose to leave and seek the services of a former employee, and the former employee is otherwise complying with the restrictive covenant.
A sponsor of the bill indicated in legislative committee meetings that an example meeting this exception can be found where a hairdresser leaves a salon, does not solicit his/her former clients and otherwise abides by the covenant, but a former client seeks out the hairdresser at his/her new salon to enlist his/her services.
Lastly, AB 276 limits enforceability of a covenant not to compete if an employee is terminated due to a reduction in force, reorganization or similar restructuring. In such cases, a noncompetition covenant is only enforceable during the time in which the employer is paying the employee’s salary, benefits, or equivalent compensation including severance pay.
These are highly significant changes to Nevada’s law on restrictive covenants of non-competition. Accordingly, we are assisting our clients in reviewing their restrictive covenant agreements and determining whether revisions need to be drafted to comply with AB 276 and further maximize the prospects for enforcement going forward.