Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained.
Nevada courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Nevada
Nevada law generally prohibits an employer from willfully preventing a former employee from obtaining employment elsewhere in the state. But the statute does specifically allow non-competition or non-disclosure agreements that restrict a former employee from:
as long as the agreement is supported by consideration and is reasonable in terms of geographic scope and duration.
- "pursuing a similar vocation or becoming employed by a competitor" of the former employer or
- disclosing any trade secrets, customer lists or other confidential information obtained during the employment
- have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect a legitimate business interest of the employer. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. While Nevada courts have not specifically addressed whether the offer of initial employment is sufficient consideration, or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate, they have enforced such agreements. On the other hand, the Nevada Supreme Court has held that an at-will employee’s continued employment is sufficient consideration for enforcing a non-competition agreement.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration and geographic scope. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee's ability to work.
Examples of non-compete agreements that Nevada courts have found to be reasonable include:
- A 2-year restriction against an orthopedic surgeon from orthopedic surgery within a 5-mile radius serviced by the former employer medical clinic. The surgeon was permitted to practice general medicine within the limitations.
- A restriction against a podiatrist from practicing in one city. There was no time limit in the agreement so the court supplied a 1-year limitation.
The courts have found restrictive covenants unreasonable or used the "blue pencil" rule to modify agreements in these situations:
- A restriction against a former pawn shop manager from competing in an area within 50 miles of any location targeted for corporate expansion by the former employer. The court stated that to be reasonable, the territory restriction must be limited to those areas in which the former employer has established customer contacts and good will.
- A 5-year, 100-mile radius restriction against the former employee of a lighting retrofitter because it placed too great a hardship on the employee and was not reasonably necessary to protect the former employer's interests.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.
Questions & Answers: Non-Competition Agreements in Nevada