Nevada Governor Brian Sandoval recently signed Assembly Bill 276 (“AB 276”), which articulates new rules and requirements for non-compete agreements, some of which fundamentally alter the legal landscape for the enforcement of covenants not to compete. Most notable among the new law’s requirements is the mandate that courts must revise language that might otherwise render non-competes unenforceable. The new law should provide comfort to franchisors operating in Nevada by closing a significant loophole left open last year by the state’s Supreme Court.
New Requirements for a Non-Compete Agreement to be Enforceable
According to the new law, to be enforceable a covenant not to compete must:
- Be supported by valuable consideration (the grant of a franchise or license will almost certainly be sufficient);
- Not impose any restraint that is greater than necessary for the protection of the party for whose benefit the restraint is imposed;
- Not impose any undue hardship on the restricted party; and
- Impose restrictions that are appropriate in relation to the valuable consideration supporting the non-compete covenant.
Confidentiality and Non-Disclosure Agreements
The new law does not prohibit agreements to protect a party’s confidential and trade secret information if the agreement is supported by valuable consideration and is otherwise reasonable in scope and duration.
Courts are now Required to “Blue Pencil” Non-Compete Language that is Overbroad
This is by far the most significant part of the new law and the aspect that should give franchisors with Nevada-based franchisees the most comfort. But first, a bit of background.
Generally speaking, courts across the country have adopted one of three approaches when addressing over-broad restrictive covenants; these approaches are generally referred to with some variation of the term “blue penciling.” When a court faces a non-compete that it finds objectionable based on some aspect of the provision, a court may use one of these approaches:
- The court may reject the restrictive covenant in its entirety. In other words, because some aspect of the covenant goes too far in its restrictions, the court may refuse to enforce the covenant at all. This is known as “no blue penciling”.
- The court may strike (delete) the parts of the covenant that it believes are overbroad, and leave the rest of the terms of the covenant unchanged. This is known as “strict blue penciling.”
- The court may choose to revise (rewrite) the restriction to make it reasonable. This is known as “general blue penciling” or “red penciling.”
Prior to AB 276 becoming law, Nevada courts used the most conservative of all of these approaches. The Nevada Supreme Court held in the case Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151, 153 (2016) (“Golden Road“) that Nevada law prohibited any form of blue penciling whatsoever, which meant that any part of a covenant not to compete the court determined objectionable would require the court to refuse to enforce the non-compete in its entirety.
Now, however, so long as a non-compete is supported by valuable consideration, Nevada’s courts are obligated to revise overbroad restrictions that impose a greater restraint than is necessary to protect the enforcing party’s interests and impose an undue hardship on the restricted party. The revisions must cause the limitations (e.g. time, geographical area, and scope of activity to be restrained) to be reasonable and no greater than necessary to protect the interest of the enforcing party. Stated differently, a Nevada court must now generally blue pencil (or red pencil) a covenant not to compete that the court believes is overbroad.
AB 276 is a big victory both for employers and franchisors, which no longer need to worry about a court completely refusing to enforce a non-compete in the state. Agreements that may have been found to be void under Golden Road can now be revised and enforced in Nevada. As a result, franchisors can now enter the Nevada market with confidence, assured that courts in the state will not refuse to enforce the covenants not to compete that are commonly contained in franchise agreements.
– Special thanks to my employment law partner, Rob Rosenthal, who prepared a summary of the new law upon which this article was based (which also served as a first draft for this piece).