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August 2016

Are Your Nevada Noncompete Agreements Now Invalid?

Although Nevada courts have previously stated that noncompete agreements are construed narrowly, historically, the courts have enforced them provided the terms are reasonable. What is reasonable is a significant issue of debate which can be dependent on the facts of a particular case. Time and territory are important considerations. However, other factors such as the type of employment prohibited are also important. In many cases, when confronted with excessive time or territory restraints, Nevada trial courts have modified noncompete agreements to make them reasonable. This is known as the “blue-pencil” approach and is used by courts in many states across the country. In states which allow blue-penciling, courts will modify or strike out an unreasonable restraint. For example, if a court determined that prohibiting employment with a competitor in a radius of 100 miles is overbroad, the court will modify that restraint to an appropriate distance, perhaps 25 miles, or strike the offending provision.

In a significant decision, a divided Nevada Supreme Court wholly rejected the blue-pencil approach and held that Nevada courts are not allowed to modify unambiguous contracts. In Golden Road Motor Inn, Inc. v. Islam, a casino employer and Sumona Islam, an employee working as a casino host, entered into a noncompete agreement which prohibited her employment or association with any other gaming establishment within 150 miles of the employer for one year following the end of her employment. After about three years of employment, Islam resigned her employment and was hired by another local casino to work as a host. 

The majority held that the noncompete agreement was unreasonable, citing to both the distance and the fact that it prohibited all types of employment. The majority’s primary focus centered on the fact that the noncompete agreement would prohibit Islam from even working as a custodian at any casino or gaming establishment. The majority reasoned that the agreement’s prohibition on all types of employment severely restricted Islam’s ability to be gainfully employed, meaning the provision was overbroad and unenforceable. The majority held that an unreasonable provision made the non-compete agreement wholly unenforceable.

In its decision, the majority clarified a few other policy points. First, a strict test of reasonableness is applied to restrictive covenants because of the economic hardship imposed on employees. This factor is given considerable weight. Leniency must favor the employee and the terms of the agreement must be construed in the employee’s favor. Discussing the unequal bargaining power between employees and employers, the majority also held that in the context of noncompete agreements, the employer is not entitled to good faith presumption.

Agreeing with the employer, the dissent argued that the trial court could and should have modified any overbroad term of the agreement. In particular, the dissent stated the noncompete should be blue-penciled to restrict employment only as a casino hostess and not any other type of employment with a competitor. The dissent argued that a majority of states allow this type of blue-penciling which attempts to implement the intent of the parties. The majority disagreed, stating that when language is unambiguous, it represents the intent of the parties. It criticized the dissent’s approach, stating that blue penciling creates the possibility of trampling on the parties’ contractual intent and creates an agreement to which the parties did not actually agree. The majority explained that the court’s job is to interpret contracts, not to draft them. The willingness of the court to partake in drafting would violate the impartiality that is required of the bench. According to the majority, this infringement occurs even where the modification is minimal.   

What does this mean for existing noncompete agreements in Nevada? If a Nevada noncompete contains a time restriction for longer than necessary to protect the employer’s interest, it may invalid. If the noncompete contains an overbroad distance requirement, it may be invalid. This is an important consideration in Nevada because of its unique geography. There are few urban centers which are separated by significant distance. This means that a restriction which might otherwise seem reasonable is overly broad when actually applied. Finally, the Islam decision strongly suggests that if the noncompete agreement prohibits all types of employment with a competitor, it is likely invalid. Employers should review their noncompete agreements and evaluate whether they contain any unreasonable provisions as Nevada courts are no longer free to modify offending terms. Employers should take particular note that noncompete agreements will be construed against the employer and the employer will not be presumed to be acting in good faith. 

Finally, the Islam court also addressed a few other important issues that affect many employers. It was undisputed that when she resigned her employment, Islam took information about the employer’s customers and altered the data in the employer’s database. Ultimately, the employer was able to retrieve and repair the information. The court held that Islam’s alteration of the customer contact information did not amount to conversion because the information was not lost and restoring was done with a relatively minimal cost. The court held that conversion is generally limited to severe and major interferences with the right to control personal property that justify requiring the actor to pay the property’s full value.

The court also addressed a misappropriation of trade secrets claim against the subsequent employer.  This portion of the decision was also divided. The majority reaffirmed the trial court’s ruling that the original employer did not establish that the subsequent employer knew or even should have known the information was a trade secret. The subsequent employer knew about the noncompete agreement and asked Islam not to bring anything from her prior employment. She stated that all information was her own “book of trade.” The majority held that without the original employer’s customer list or Islam’s candid insight, it was impossible for the subsequent employer to know whether it was using the original employer’s trade secret. The majority reasoned that finding a misappropriation of trade secrets based on these facts would encourage employers of former employees to send letters accusing the new employer of trade secret violations where no real claim of misappropriation existed. This would quash legitimate competition.

This ruling was made in the context of casino host’s trade. It is unclear whether the Nevada Supreme Court will apply the same reasoning to other misappropriation cases. It does suggest, however, that employers may need to take additional steps to demonstrate the subsequent employer knows information it has received constitute trade secrets.

The full text of the decision, please click here.




Business Transactions

Robert S. Larsen

Business Transactions
Commercial Litigation
Employment Law