What Is a Noncompetition Agreement?
A non-compete agreement, sometimes included in what is called a "covenant not to compete" – is a legally binding contract between an employer and its employee, or a company and one of its independent contractors, that forbids the employee, contractor, or sometimes even the business owner from entering into a commercial relationship with a competitor following the termination of his or her employment or contractual engagement .
In other words, it is a legal tool by which an employer asks an employee to sign an agreement preventing him or her from competing with the company by starting up a similar business, going to work for a related company or disclosing any of the employer’s trade secrets to a competitor after leaving the company.
Examples of information that might be covered by a non-compete agreement include information regarding the company’s trade secrets and other proprietary information, customer lists, business plans and manuals, pricing and marketing strategies, contracts with vendors, etc.
Legal Foundation of Non-Compete Agreements in Nevada
An individual’s or business’ ability to enforce post-employment restrictions is typically determined by the law of the state where they are employed and/or had significant responsibility for an employer prior to leaving that employer. The law of non-compete agreements in Nevada is distinct from laws that govern such agreements in other states, requiring analysis of both Nevada statutes and Nevada case law -which are both discussed below.
Nevada Revised Statute ("NRS") 613.195 provides that in order to be enforceable, "[a] covenant not to compete or agreement otherwise restraining a person from engaging in a lawful profession, trade or business may be entered into by and between an employer and an employee . . ." The text of NRS 613.195 continues on to provide that for an agreement to be enforceable there must be "a" unique relationship between the parties, "b" an agreement to give an employee a proprietary interest in a business, and "c" employee receipt of valuable consideration (i.e. something of value). NRS 613.195 does not, however, provide parameters or guidance as to the extent of these factors and what an employee must receive in order to have a proprietary interest in the employer’s business, and/or something deemed "valuable consideration." In determining whether a non-competition agreement that is otherwise in the form required by statute is enforceable, courts generally look to see whether an agreement is aligned with that which is necessary to protect legitimate business interests. Specifically, a court will analyze the agreement in light of the following three considerations: (1) the existence of a valid agreement; (2) whether the agreement is of temporal and geographical scope sufficient to protect the employer’s interest; and (3) whether the covenant restricts an employee from engaging in his or her occupation as a former employer’s expense.
In order to enforce a non-competition agreement against a former employee, an employer must establish that: (1) there is a valid agreement; (2) there is consideration in that the employee was given something of value by the employer; and (3) the agreement and its enforcement do not conflict with the public interest or policy. While the exact parameters of a valuable interest and what is worthy of protection remains undefined in Nevada, court-involved enforcement of non-compete agreements in Nevada remains rather common. Moreover, we can expect courts to continue to weigh these three factors in determining if there exists a solicitor-client or some type of confidential relationship, if the scope of the restriction is reasonable, and if the restriction was narrowly tailored to prevent the employer from competing with an employee’s pre-existing business as prescribed by NRS 613.195 vis-à-vis controlling case law.
Enforceability of Non-Compete Agreements in Nevada
The enforceability of a non-compete agreement in Nevada is determined by a judicial analysis of the reasonableness of the agreement regarding the geographic scope, duration, and the legitimate business interest articulated by the employer. In determining the enforceability of such an agreement, Nevada courts will engage in a reasonableness analysis regarding all three criteria.
Geography: The geographic restriction in a non-compete agreement involving a statewide prohibition is less likely to be enforceable. A radius type prohibition is more likely to be enforceable. An agreement restricting an employee from working anywhere in the United States or in the world is unlikely to be enforceable.
Duration: A two-year restriction in employment would generally be viewed as reasonable, however, anything longer than that may be held to be unreasonable. While there is no hard and fast rule or exact period of time that determines reasonableness, a court may use other factors in conjunction with the duration analysis, such as the general economic conditions and the diminishing value of the employer’s proprietary information. For example, an employed accountant or lawyer may have access to proprietary information that has intrinsic value for many years. A personal trainer teaching a different kind of yoga may have proprietary information that has no value after the trainer leaves the company.
Legitimate Business Interest: If an employee at will had a relationship with hundreds of customers, a 12 month or even a 24 month restriction may not be unreasonable. Another example may be where a closing attorney has relationships with hundreds of lenders, particularly lenders that handle hundreds of real estate closings a year. A restriction against working for a particular lender is unlikely to be held unreasonable. Or, if a shareholder in a company spends years acquiring a large client by making significant investments in personnel and equipment, a customer based restriction against working for the competitor that competes with the employer at the same geographic location as the client for a period of 12 months may not be viewed as unreasonable. However, if a closing attorney works every closing, has no contact with clients, and is not embedded in the company, a 12 month restriction may not be enforceable.
Recent Amendments to Nevada Noncompete Laws
Over the past couple of years, Nevada has made a push for increased transparency when it comes to the scope and enforceability of non-compete agreements. In 2017, the Nevada Legislature enacted Assembly Bill 151, amending NRS 613.195 to limit the scope of non-compete agreements to 3 years. AB151 also prohibits employers from avoiding the terms of the bill by offering separation pay or compensation in exchange for a "release" or waiver of an employee’s right to compete with the employer.
The new law applies to any contract entered into on or after October 1, 2017 and is generally applicable to all employers. The only exemptions to the new clarification on the unenforceability of overly broad non-compete agreements in Nevada are listed at NRS 613.195(4): upon retirement, if the individual was terminated as a result of a mass termination, if anyone in the affected business "sought or solicited" the employee to work for a competitor, and if the employee earned more than $100,000 in wages during the 12 months preceding the termination.
In addition to being limited in terms, the existing text of NRS 613.195 makes is clear how neterminations will be analyzed: We do not take issue with Plaintiff’s logical argument that gross receipts are not a proper measure of damages in an action under § 613.195. Rather, it is undisputed that the statutory formula measures "gross receipts" as defined in a federal statute, not the parties’ damages. Therefore, the liquidated damages provision did not operate as a penalty, and was not void under § 613.195(2).
In Reeck v. Gallagher Trust, the Court of Appeals found that a liquidated damages provision may be utilized to calculate actual damages for breach of contract claims relating to non-compete agreements. However, any such clause must be reasonable and not act as a penalty for breaching the agreement.
How To Create a Non-Compete Agreement in Nevada
There is no statutory form for a non-compete agreement or other covenant not to compete – rather, these restrictions are governed by the common law in Nevada. While some states require the agreement to be supported by a specific consideration (such as a bonus for signing the agreement), Nevada law provides that continued employment is sufficient to support an otherwise lawful restrictive covenant.
To ensure enforceability of a restrictive covenant, the covenant should: Expressly state the area of restraint: Identifying the area of restraint within the confines of a state or city is often not enough. Instead, the clause should specify the geographic area in which the former employee is restricted from engaging in competitive activity. Limit the duration of the restraint: Courts are not likely to enforce a covenant that lasts more than a year from the date the former employee terminated his or her employment. Therefore, when drafting the clause, it is best to limit the duration as narrowly as possible . Be geographically limited: The United States Supreme Court has specifically held that a restrictive covenant that applies to worldwide employment is invalid because the employee may have no other available job options. Furthermore, if an employee works on a national scale, courts are likely to invalidate the clause if the restriction does not allow for the employee to work or solicit customers within certain states. Generally prohibit direct and indirect competition: That is, the agreement should prevent the employee from competing against his or her former employer, in whatever manner, in order for the clause to be enforced by the court. Forbid solicitation for a period of time following employment: Solicitation provisions restrict an employee from soliciting clients for a period of time after his or her employment ends. Thus, to be enforceable, the restraint must last for a period of time that is reasonably necessary to protect the employer’s business interests. While there is no exact window of time that is considered reasonable, a six-month or one-year prohibition is typically sufficient. A duration longer than a year, however, may not be enforced by the courts.
Contesting a Non-Compete Agreement in Nevada
If you are presented with an overly broad non-compete agreement that your employer refuses to negotiate, or an agreement that you feel restricts your right to work, you may challenge the court for judicial reformation or invalidity of the non-compete. The primary grounds for challenging a non-compete are that it is overbroad, vague, unduly burdensome, or signed under duress, intimidation, or coercion. It is also possible to challenge a particular restriction in an otherwise valid agreement, or an accompanying non-solicitation agreement, independence agreement, or confidentiality/non-disclosure agreement.
In response to an employee challenge to the validity of a non-compete, the employer may file a motion to enforce the non-compete. This will compel the employee to demonstrate the unreasonableness of the agreement. To this end, the court will evaluate the interests of both the employee and employer, assessing the facts, geographical area, length of time, and any other relevant factors. In many cases, Nevada courts uphold reasonable restrictive covenants, even when challenged.
Another employer response to a challenge is to file an action for breach of the non-compete agreement, seeking injunctive relief and damages. While this action is pending in Nevada, the employer may seek a temporary restraining order (TRO) against an employee to prevent them from engaging in competitive activities at their next job. The burden is on the employer to prove the TRO is necessary. This litigation is very expensive and escalates the conflict between the parties.
It is important to realize that although the courts in Nevada have generally enforced non-compete agreements deemed to be reasonable, employees are not helpless. These agreements are very rarely struck down completely by the courts, but often they are reformed to be less restrictive when shown to be unreasonable. Employees should not give up; instead, they are encouraged to explain their position to the judge at every opportunity.
Consequences for Businesses and Employees
Employers should carefully vet in-house counsel and/or outside counsel for non-compete agreements and ensure that they are correctly drafted and interpreted. Employees should consider the restrictions on their employment that they are agreeing to, for what consideration, and for how long. To the extent that a non-compete is too broad in its restrictions or scope, an employer may have an uphill battle in enforcing it.
For purposes of this article, the term "Employer" shall include any company, whether incorporated or not, at which an employee or independent contractor works at the time of signing or agreeing to a non-compete agreement. The term "Employee" shall include an independent contractor who has signed or agreed to the non-compete agreement.
A non-compete agreement can be thought of as a binding contract between an Employee and an Employer. An Employee’s relationship with an Employer may be amicable during employment but that circumstance may not last once employment is terminated. Employees may believe they have a right to work wherever and in whatever capacity they choose, while Employers may believe they have a right to protect against business competition, especially from a former employee. And when the inevitable occurs, employers and employees may engage in litigation to try to vindicate their respective rights.
Both Employers and Employees need to analyze whether the terms of the agreement are reasonable and fair to both sides. The terms of a non-compete agreement should be explicit in terms of its duration, the location/business geographic area to which it applies, the specific types of business activities that are prohibited, and whether there is any consideration paid for the agreement, such as a signing bonus, exclusion from future bonuses, or both. It is important to note that as of April 1, 2015, if the Employee is merely a prospective employee or an independent contractor who has not been hired, consideration for the non-compete agreement must be disclosed to the Employee in writing in the offer of employment or contract. N.R.S. 613.195(5). Without the proper consideration, the promise to not compete will not be enforced by a judge or jury, or agreed to by Employee, or both.
The location, duration, and prohibited activities of a non-compete agreement must be reasonable in all respects based on the facts and circumstances of the particular business. For example , if a local grocery store chain seeks to prevent its former employees from working for a competitor’s store within a county, city, or town contained within its delivery range, that would be reasonable. However, a restriction that such employees not work for a competitor’s store in the whole state of Nevada would not be reasonable. To put it another way, if a local grocery store delivery range extends to cities within the northern counties of Nevada but not the southern counties, the restriction from working at a competitor’s store within those cities would be reasonable, but not for those cities located within the southern counties.
If these terms are not expressly stated in the non-compete agreement but left to interpretation, the Employer’s ability to enforce them may be limited. For example, if an Employer attempts to restrict an Employee from competing in business throughout the entire state of Nevada, that provision may be deemed void if the scope of the restriction is overly broad. In addition, Employers should avoid placing unreasonable restrictions on the nature of the types of services that its employees may provide to a competitor. For example, if a grocery store restricts all of its bakers from working for a competitor grocery store, even though bakers may be considered interchangeable, it could be held to be overly broad because it prevents a former baker from working as a cashier or in another capacity for a competitor.
Non-compete agreements are generally disfavored by courts and enforced only to the extent that is reasonable in the circumstances. Generally speaking, non-compete agreements are enforced by a judge or jury if an Employer shows that: (1) the restraint is based upon a lawful purpose; (2) the restraint is not greater than reasonably necessary to protect the business; and (3) the interest or ability of the public to subscribe for the products or services that need protection is not prejudiced. N.R.S. 613.200. The burden of proof is on the Employer to show that those elements have been satisfied.
Both Employers and Employees need to consider all of these implications. To the extent that a non-compete agreement is overly broad in its territory, duration, or scope of restricted activities, it will not be upheld by a judge or jury, and that means no protection from competition by a former employee.