In the 2017 Legislative Session the Nevada Legislature passed Assembly Bill (“AB”) 276 which materially alters the manner in which restrictive covenants will be enforced in Nevada in the future. It is is common in employment agreements, particularly those of key employees, to include a restrictive covenant which prohibits certain competitive actions on behalf of the employee after leaving or being terminated. Employers often times use these agreements to protect themselves from employees leaving to seek employment with a competitor after they have been trained at considerable cost. Nevada recognizes the enforceability of such agreements so long as they meet certain, specific requirements.
Under Nevada law, restrictive covenants are enforceable, provided that the terms of the covenant are reasonable. “Reasonableness” is measured by whether an agreement imposes upon the employee any greater restraint than is reasonably necessary to protect the business and good will of the employer. See Camco, Inc. v. Baker, 113 Nev. 512, 518, 936 P.2d 829, 833 (1997). The time duration and geographic scope of the restriction sought to be imposed are two important factors in evaluating the reasonableness of any employment restriction.
Until the passage of AB 276, Nevada courts were not permitted to “blue pencil” employment agreements which were found to be overly restrictive. “Blue penciling” refers to a practice of enforcing an overly broad employment agreement through the court’s striking the unenforceable clauses and/or modifying the agreement in such a way as to be enforceable. AB 276 changed this practice and mandates that courts engage in “blue penciling”.
AB 276 specifically states that noncompetition agreements are void and unenforceable unless they are: (a) supported by “valuable consideration”; (b) do not impose greater restraint than is necessary to protect the employer; (c) “do not impose any undue hardship on the employee”; and (d) only impose restrictions that are appropriately related to the valuable consideration that supports the agreement. Additionally, under A.B. 276(2) non-compete provisions cannot prohibit customers from doing business with the employee if: (a) the former employee does not solicit the customer; (b) the customer voluntarily chooses to seek out the former employee; and (c) the former employee is otherwise complying with the limitations in the non-compete agreement.
Given that AB 276 has only recently been enacted there are no cases which interpret its specific provisions, thus employers are advised to proceed with caution and to review their employment agreements carefully to ensure compliance with the new law.