One of my favorite books regarding starting a business is about a small shoe company that eventually turned into the market leader in the industry. That book, Shoe Dog, was written by one of Nike’s founders, Phil Knight. In that book a small section is dedicated to some of the people who were in on the ground floor of Nike. Later, however, some of the top talent from Nike left and went to work for its principal competitor, Adidas. Those transfers led to a large lawsuit with an even larger (though confidential) settlement between the companies later on. The lawsuit stemmed, in part, from non-competition agreements that Nike had in place with its former employees before they left for the traditional Adidas.
Over the course of my practice as an attorney, I have been asked to prepare several non-competition agreements for my clients and their employees. The reason for this post is because the legal landscape of non-competition agreements in Nevada was once again recently updated. Specifically, the Nevada Supreme Court heard a case entitled Golden Rd. Motor Inn, Inc. v. Islam, 376 P.3d 151 (2016). In Golden Road, a casino host by the name Sumona Islam (“Ms. Islam”) entered into an agreement with her employer, the Atlantis Casino Resort Spa, in Reno, Nevada. That agreement contained a provision that she would “refrain from employment, association, or service with any other gaming establishment within 150 miles of Atlantis for one year following the end of her employment.” Id. As is often the case, Ms. Islam eventually no longer wanted to work at the Atlantis Casino and soon took a job at the Grand Sierra Resort in the same town.
However, during the course of Ms. Islam’s employment with the Atlantis, she copied onto personal notebooks information about several clients of the Atlantis. She later used that information to recruit that business for Grand Sierra. Once Atlantis found out about the “stolen” information, they immediately entered into a restraining order with Grand Sierra and a lawsuit followed. The following is the language directly from the non-compete agreement,
“In the event that the employment relationship between Atlantis and Team Member ends for any reason, either voluntary or non-voluntary, Team Member agrees that (s)he will not, without the prior written consent of Atlantis, be employed by, in any way affiliated with, or provide any services to, any gaming business or enterprise located within 150 miles of Atlantis Casino Resort for a period of one (1) year after the date that the employment relationship between Atlantis and Team Member ends.”
One year and 150 miles seems pretty reasonable, right? Wrong.
According to the Nevada Supreme Court, when evaluating a non-compete agreement, courts should take into account the duration, geographic scope, work exclusion, and other restraints imposed by the agreement. Keep in mind that, “[t]here is no inflexible formula for deciding the ubiquitous question of reasonableness.” Islam, 132 Nev. Adv. Op. 49 (citing Ellis v. McDaniel, 95 Nev. 455, 458–59, 596 P.2d 222, 224 (1979)). Still, the Golden Road opinion did give some additional guidance on how employers can evaluate reasonableness.
In making its decision about reasonableness, the Nevada Supreme Court reviewed one of its own prior decisions in Jones v. Deeter, 112 Nev. 291, 913 P.2d 1272 (1996). In that case, the court specifically held a five-year time restriction was unreasonable. In another case, Camco, Inc. v. Baker, 113 Nev. 512 (1997), the Court stated that a geographic restriction of 50 miles from any area which was the “target of a corporate plan for expansion” was unreasonable. It is important to remember, however, that although those two opinions struck down a time frame and geographic area, those specifics were struck down because they were unreasonable as they pertained to the specific employment agreement between the parties in those cases.
In the end, the reasoning for completely striking Ms. Islam’s employment agreement came down to the fact that the Atlantis’ agreement prohibited an employee “from employment, affiliation, or service with any other gaming establishment.” Golden Road at 2. The key language focused on by the Court was based on the breadth and scope of the agreement. Essentially, the Court reasoned that if the agreement was upheld, Ms. Islam was prohibited from working at any casino, in any form of employment, for an entire year. The Court then stated that it would essentially be absurd to think that Ms. Islam could use trade secrets to lure potential customers to another resort if she were working as a janitor, for example. Using the janitor example further, it would be very unlikely that the employee would be luring customers away from the employer. If that were the case, the prior employer’s legitimate business interests would remain protected. Ultimately, the agreement was completely stricken because it was too broad.
Another issue to keep in mind is that the Nevada Supreme Court refrained to jump on board with the “blue pencil” doctrine. According to that doctrine, a court can modify agreements so that non-competes can be enforced to the extent they are reasonable. The Court essentially stated that if it re-wrote the contract for the parties, it could create an agreement that neither of the parties intended to enter into in the first place.
As a result, extra care must be taken in drafting contracts that seek to restrict a person’s ability to obtain employment after termination. Based on Nevada’s current law, employers who have entered into non-compete agreements with employees should review those documents in accordance with the reasonableness standards provided by the Nevada Supreme Court. Specifically, the agreements should be evaluated as to whether they extend beyond what is necessary to protect legitimate business interests. Employers should also consider using agreements that specifically reflect the type of competitive work they are seeking to restrict, as well as include a geographic and time-frame restrictions that is also reasonable.