Many technology and nontechnology employers require that workers who have access to proprietary and sensitive information 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 noncompete agreements.
This contractual protection is in addition to the protections afforded by the Uniform Trade Secrets Act, robust confidentiality and nondisclosure agreements, as well as effective strategies to perfect, maintain and protect intellectual property. Some states, such as California, allow noncompete covenants only in specific circumstances.
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. In the 2016 case Golden Road Motor Inn v. Islam, the Nevada Supreme Court ruled that a trial court cannot reform an unreasonable agreement to make it enforceable.
In 2017, the Nevada Legislature responded to Golden Road Motor Inn by creating Nevada Revised Statute Section 613.195. That statute recited the current state of the law and 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.Thus, an otherwise unreasonable restrictive covenant may still be enforced in Nevada but subject to conditions the court deems reasonable.
Whether the reformation provisions of the statute apply may turn on when the noncompete was agreed to. 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 in Clark County and the U.S. District Court of Nevada. In one case in 2019, the Eighth Judicial District Court held NRS 613.195 to be applicable retroactively, allowing the court to reform an unreasonable covenant entered into before the enactment of the revised statute instead of merely holding it unenforceable because it is unreasonable, and entered a preliminary injunction based upon the revised terms.
However, in another case in the Eighth Judicial District Court, also in 2019, another judge ruled the statute does not apply to covenants entered into prior to the enactment of 613.195, and the court refused to uphold the covenant in a preliminary injunction hearing.
At least one U.S. District Court judge in Nevada has also ruled that NRS 613.195 is substantive rather than remedial, and therefore, it cannot be applied retroactively.
A material change to Nevada’s noncompete statute was again made in 2021, adding Section 3, making noncompete 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.”
It appears that courts might find the 2021 amendment will apply only to covenants not to compete entered into after October 2021.Therefore, pre-2021 covenants not to compete might cover hourly wage earners as long as they are supported by consideration and are reasonable (pre-2017 covenants), or if not reasonable, might be reformed if entered into between the enactment of NRS 613.195 and the amendment thereto in 2021 (roughly October 2017 through October 2021).
Therefore, an employer has a decision to make: (1) revise current noncompete agreements now to take advantage of the savings provisions in the statute, allowing a court to change otherwise unreasonable provisions and enforce the noncompete; or (2) maintain its current noncompete agreements, which might have the benefit of covering hourly wage earners but might 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 noncompete agreements now, it should ensure that all employees are bound by robust nondisclosure 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 nondisclosure agreement and strong policies to perfect, maintain and protect intellectual property prove more valuable in litigation and negotiations than a noncompete agreement.