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Aftermath of Nevada Legislature leaves employers with few options for covenants not to compete

Building a business is a lengthy and involved process. Business owners can spend anywhere from months to years conceptualizing, planning, implementing and revising and honing their business ideas, creative processes, products and systems. During this process, which can be expensive, they often hire employees to implement or sell those ideas, processes, products and systems.

Having those employees quit later is not only upsetting emotionally (if they were great at their jobs), but it can also be negatively impactful in other ways, including the possibility of them taking their former employer’s intellectual property with them when going to work for primary competitors — or starting their own businesses. Either can be devastating for the former employer.

Previously, business owners possessed good options for protecting their hard work, including safeguards from the misappropriation of trade secrets. For example, the owner of a trade secret could sue to stop former employees from taking trade secrets through improper means and using them for themselves or by another party.

Trade secrets are defined as “information including, without limitation, a formula, pattern, compilation, program, device, method, technique, product, system, process, design, prototype, procedure, computer programming instruction or code” that has economic value; is not readily ascertainable; and is the subject of efforts to maintain its secrecy. As such, included within protected information may be a business’ client list, pricing documents and marketing strategies.

Additionally, a Nevada business owner was previously able to limit his or her employee’s ability to compete with them through a covenant not to compete, which was enforceable so long as the limitations contained therein were reasonable.

Unfortunately, much of that changed at the eleventh hour of the 2017 Nevada legislative session, where material changes were made to the manner in which one can protect his or her business from competition from former employees.

The provisions of Assembly Bill 276 became enforceable upon its passage last month. Essentially, without any advance notice to them, many businesses’ existing covenants not to compete with their employees suddenly became void and unenforceable. This opens businesses up to greater uncertainty as well as the possibility of more extensive litigation.

According to the new law, a non-compete covenant is void and unenforceable if it is not supported by valuable consideration and/or imposes a greater restraint than is required for the protection of the employer, which would place an undue hardship on the employee, or has restrictions that are inappropriate in relation to the consideration given.

In English, this means that a business may now need to pay its employee something in exchange for agreeing to refrain from competition. That amount needs to have a relationship to the restriction sought and cannot force the employee to suffer an “undue hardship” by the enforcement of the agreement.

As it currently exists, the law does not provide a definition for “valuable consideration” or “undue hardship.” This ambiguity will lead to an increase in litigation over whether a covenant not to compete has satisfied these requirements or if it is, ultimately, unenforceable.

As troublesome as this is, there’s more. There are now limitations on a business’ ability to prohibit an employee from soliciting a former client or customer. Additionally, if a company terminates an employee as a result of a reduction in force, reorganization or similar restructuring, the company’s non-compete agreement is only enforceable so long as it is paying the employee.

Therefore, if a business is going through a restructuring or reduction — a time when it would already be quite vulnerable — the Nevada Legislature has further endangered the viability of that business by providing it with two equally unappealing options: 1.) Pay the very employees it could not afford to keep or 2.) Have former employees compete directly with them, using tools and techniques learned from, or created for, their former employer.

Given the immediate enforceability of the new law and the significant ambiguity of its language, there are many questions as to whether existing non-compete covenants are now worthless. I recommend all businesses contact their attorneys as soon as possible to go over their non-compete agreements with a fine-tooth comb to determine what is still relevant and what needs to be changed.

Gordon Law founder Aviva Y. Gordon, Esq., has more than 20 years experience practicing business law in Southern Nevada and has successfully argued before the Nevada Supreme Court. She is a member of the Nevada and California Bars.

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