Nevada law regarding noncompete agreements has been in flux over the past five years. This trend may continue if proposed legislation to do away with noncompete agreements in all but a few circumstances becomes law during the 2021 Nevada legislative session.
In Nevada, noncompete agreements are currently enforceable. However, they are subject to careful scrutiny because they are restraints of trade.
The requirements for a Nevada noncompete agreement to be enforceable have changed in recent years. Before 2017, a noncompete was enforceable only if it was supported by valuable consideration and reasonable in its scope and duration. Thus, to enforce a noncompete agreement, an employer bore the burden of showing that the restrictions were reasonable.
For years, many Nevada courts had the practice of “blue penciling” noncompete agreements whose restrictions were not reasonable, i.e., modifying the agreements to make them reasonable and enforceable. For example, if a noncompete prohibited a former employee from working in a competing enterprise for a period of 10 years after the termination of her employment (an unreasonable timeframe), a district court would generally revise the agreement to make it reasonable (perhaps 2 years) and enforce the revised agreement. However, in 2016, the Nevada Supreme Court held in Golden Road Motor Inn, Inc. v. Islam, 376 P.3 151 (Nev. 2016), that if any provision within a noncompete agreement is unreasonable, a court may not blue pencil the provision to make it reasonable. Instead, the entire noncompete agreement is deemed “wholly unenforceable.”
In direct response to Golden Road, the 2017 Nevada Legislature enacted a noncompete statute that requires courts to blue pencil noncompete agreements that are unreasonable in scope and enforce the agreements as modified. Specifically, NRS 613.195, was enacted to state that if a noncompete is supported by valuable consideration but is unreasonable in scope, “the court shall revise the [agreement] to the extent necessary and enforce the [agreement] as revised.” NRS 613.195 (5).
NRS 613.195 was not made retroactive. So, the Nevada Supreme Court recently had occasion in Duong v. Fielden Hanson Isaacs Miyada Robinson Yeh, Ltd., 136 Nev. Adv. Op. 87 (2020), to consider whether a court can blue pencil an unreasonable noncompete agreement entered into before the enactment of NRS 613.195, if the agreement contains a clause permitting the modification of unenforceable provisions. The Nevada Supreme Court held that it can. Distinguishing Duong from Golden Road, the court noted that the stand-alone agreement in Golden Road did not contain a provision permitting modification, whereas the agreements in Duong did. Therefore, the agreements could be blue penciled and enforced as modified.
Now, however, a bill has been introduced to make noncompete agreements unlawful in Nevada, with only a few exceptions. Assembly Bill 47 (“AB 47”) proposes to amend Chapter 598A of the Nevada Revised Statutes to make it unlawful to enter into a noncompete agreement that retrains a natural person from engaging in a lawsuit profession, trade, or business of any kind, except for agreements involving: (1) the sale of a business; (2) the dissolution of or disassociation from a partnership; or (3) the dissolution of or termination of an interest in a limited-liability company. (AB 47 § 11.) AB 47 would also entirely repeal NRS 613.195, Nevada’s current noncompete statute. (AB 47 § 25.)
In light of this potential change to Nevada noncompete law, employers who would like to enter into enforceable noncompete agreements with employees should consider doing so now in case AB 47 is enacted. In addition, if AB 47 is ultimately enacted, employers should immediately review their standard employment agreements and remove all noncompete provisions.
Throughout the legislative session, King Durham will continue to monitor AB 47 and other bills that may affect employers.