Governor Sandoval recently signed Assembly Bill 276 (“AB 276”) into law. It has always been the law in Nevada that employee non-competition agreements cannot be enforced unless they are reasonable in scope. AB 276 refines this principle in several important ways.
First, AB 276 states that a non-competition agreement is void and unenforceable unless it: (a) is supported by valuable consideration; (b) does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed; (c) does not impose any undue hardship on the employee; and (d) imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.
Second, a non-competition agreement may not restrict a former employee of an employer from providing service to a former customer or client if: (a) the former employee did not solicit the former customer or client; (b) the customer or client voluntarily chose to leave and seek services from the former employee; and (c) the former employee is otherwise complying with the limitations in the covenant as to time, geographical area and scope of activity to be restrained, other than any limitation on providing services to a former customer or client who seeks the services of the former employee without any contact instigated by the former employee.
Third, if the termination of the employment of an employee is the result of a reduction of force, reorganization or similar restructuring of the employer, a non-competition agreement is only enforceable during the period in which the employer is paying the employee’s salary, benefits or equivalent compensation, including, without limitation, severance pay.
And fourth, AB 276 overturns a recent Nevada Supreme Court opinion by instructing courts to “blue-pencil,” i.e., trim back, over-broad non-competition agreements. Thus, if the non-competition agreement contains limitations as to time, geographical area or scope of activity that are unreasonable, over-broad, or unduly burdensome, the court must revise the non-competition to the extent necessary and enforce the non-competition agreement as revised.
I believe the main effect of AB 276 will be to prevent courts from quickly rejecting a non-competition covenant on the basis that it is too broad. Rather, in a lawsuit to enforce such an agreement, the court is more likely to need an evidentiary hearing to sort through the factors listed in AB 276 and then to decide whether and how far to trim back the non-competition agreement.
Employers and employees alike will want to review their existing non-competition agreements in light of these changes to Nevada law.