After Pivotal Decisions In 2015 And 2016 Disfavoring Restrictive
Covenants, the Nevada Supreme Court Signals A Willingness
To Swing Back Toward Enforcement
– By J. Malcolm DeVoy, Esq., & Erica A. Bobak, Esq.i
Attorneys and business owners alike recall the descending panic of 2015 and 2016, when decision after decision from the Nevada Supreme Court called enforceability of non-compete provisions into question. First, the Nevada Supreme Court raised the stakes for enforcing such provisions, requiring specialized knowledge and skills not easily replicated.ii Then, it clarified Nevada law that its courts would not revise, or “blue pencil,” overbroad non-compete provisions to be reasonable and enforceable.iii In 2017, the Nevada Legislature passed a billiv that resulted in blue-penciling becoming enshrined in Nevada law.v When the Nevada Supreme Court considered the issue again in Shores v. Global Experience Specialists, Inc. (“GES”),vi the result was not as unfavorable to non-compete agreements as its prior precedent would have indicated.
The Shores Background – A Common Scenario
In Shores, the Nevada Supreme Court considered a preliminary injunction enforcing a non-compete agreement against a former employee. The non-compete agreement at issue stated, in relevant part, that the employee would be unable to directly or indirectly compete with his former employer, GES, a tradeshow and convention event planning and marketing company. This restriction also restricted Shores from working in a similar capacity for any of GES’s competitors for the 12 months following the end of his employment. The non-compete agreement was nationwide in scope, indicating that these restrictions would apply throughout the United States.
Shores worked for GES as a sales associate for over three years. He subsequently was promoted to sales manager, responsible for soliciting trade shows and conventions to contract with GES to build show floors and exhibits. As a condition of his promotion, Shores was required to sign a Confidentiality and Non-Competition Agreement (the “Agreement”). Several months later, though, Shores accepted a position, substantially similar to his position with GES, with one of its largest competitors based in Southern California.
GES sued Shores for breach of his Agreement with GES. In addition to monetary damages, GES sought damages for injunctive relief and moved for a preliminary injunction to enforce the terms of the Agreement and prohibit Shores’s employment with its competitor. To support the geographic scope of its non-compete agreement, GES provided the district court with a spreadsheet showing it conducted business over the last two years in at least one city in each of 33 states, the District of Columbia, and Puerto Rico. Based upon this evidence, the district court granted GES’s request for a preliminary injunction, finding that the Agreement was reasonable in breadth and scope given GES’ national client base. The district court enjoined Shores from performing similar work for a competitor that he had previously performed for GES. Shores appealed this preliminary injunction to the Nevada Supreme Court.
The Nevada Supreme Court Weighs In
On appeal, the Court agreed with Shores that the Agreement was far too broad in its geographical scope and prohibited Shores from working in jurisdictions where GES did not have existing business connections. The Nevada Supreme Court ruled that the district court abused its discretion when it found that GES was likely to succeed on the merits and granted the preliminary injunction to enforce the Agreement, which restricted Shores from performing similar services anywhere in the United States, because evidence that GES had conducted business in most states did not establish that it conducted business in every state throughout the United States. Because GES did not conduct business in every single state, the Agreement’s nationwide geographical scope was overly broad and likely would not be found reasonable under at trial.
Besides being narrowly tailored to protecting legitimate business interests, a non-compete agreement must not restrict activities for too long a time following an employee’s departure, or restrict competition over an excessive or unreasonable geographic area. To be enforced though an injunction, the non-compete agreement must be reasonable in geographic reach, scope, and duration.vii The Nevada Supreme Court has found non-compete agreements to be unreasonable when the agreement restricts the employee from competing for an unreasonably long amount of time and/or it restrictions competition in an unreasonably large territory. What is considered “reasonable” varies from business to business and requires a specific consideration of the facts and circumstances surrounding the agreement.viii Simultaneously “[a] restraint of trade is unreasonable…if it is greater than is required for the protection of the person for whose benefit the restraint is imposed.”ix
Although GES characterized itself as a nationwide business, this “semantic designation” did not overcome well-settled Nevada precedent, where a non-compete agreement that extends beyond the geographical areas in which an entity has protectable business interests is, by definition, unreasonable.x The geographical scope of a restriction must be limited to areas where the employer “has established customer contacts and good will.”xi The Supreme Court also concluded that when an employer seeks to enforce a non-compete covenant through a preliminary injunction, it is the employer’s obligation to present substantial evidence that the covenant is reasonable. Although preliminary injunctions generally are granted on incomplete evidence, GES—like any movant seeking injunctive relief—was still required to show a reasonable probability of success.
While GES did present evidence of its business connections across the USA, such connections were limited to 33 states (often, just one city within those states), which did not automatically render a nationwide restriction reasonable. In other words, the preliminary injunction improperly prevented Shores from working in “his chosen profession in a number of jurisdictions for which GES [did not present any] evidence of previously existing business contacts.”xii GES’s evidence was insufficient to conclude the Agreement’s nationwide restriction was reasonable, and GES did not demonstrate the Agreement created only those geographical restrictions that were necessary to protect its interests. As a result, the Supreme Court held the district court abused its discretion by failing to uphold relevant precedent on non-compete agreements, and the Court reversed the preliminary injunction due to its overbreadth.
Takeaways For Non-Compete Litigation
The Shores decision does not alter the law governing non-competes in Nevada, but signals a move toward enforcement, and away from the opposition found in Golden Road. For both drafters and litigators, Shores highlights the challenges an employer faces in seeking to enforce a non-compete agreement while underscoring the necessity of reasonable geographic and temporal limitations within the non-compete provision. An employer looking to enforce its non-compete agreement must be prepared to prove to a court that its restrictive covenants are properly limited to a geographic restriction to only those areas where the employer can provide evidence of established business interests.
Additionally, employers must anticipate that evidence of the business interests undergirding the non-compete agreement will be thoroughly examined. The restrictions on time and geography will require evidence to show that they are reasonable and necessary for the employer to enter the relationship. Before rushing into litigation, employers and their counsel should confirm their ability to carry the employer’s burden of make a prima facie showing that a non-compete agreement’s terms are reasonable and will be enforced.
Shores is not a perfect decision for employers, and it is not a cure to what ails the challenges of enforcing non-compete agreements in Nevada. It is, however, a marked step back from the brusque treatment that the Nevada Supreme Court has meted out to similar contract terms in recent years. While the business community awaits the Nevada Supreme Court’s full-throated approval for injunctive relief, Shores represents a scaling back of hostility toward such agreements.
i. J. Malcolm (“Jay”) DeVoy is the owner of DeVoy Law P.C., and Erica A. Bobak is an associate attorney with the firm, joining upon completing her clerkship for Department 30 of the Eighth Judicial District Court. DeVoy Law focuses on providing representation to clients in significant business disputes, serious personal matters, and advising medical professionals and practices about issues including licensure, HIPAA, Stark Law, and the Anti-Kickback Statute.
ii. Excellence Cmty. Mgmt., LLC v. Gilmore, 351 P.3d 720 (Nev. 2015).
iii. Golden Rd. Motor Inn, Inc. v. Islam, 376 P.3d 151 (Nev. 2016).
iv. AB 276 (2017).
v. NRS 613.195.
vi. 134 Nev. Adv. Op. 61, 422 P.3d 1238 (2018).
vii. Camco, Inc. v. Baker, 113 Nev. 512, 518, 936 P.2d 829, 832 (1997).
viii. Jones v. Deeter, 112 Nev. 291, 296, 913 P.2d 1272, 1275 (1996), citing Hansen v. Edwards, 83 Nev. 189, 191, 426 P.2d 792, 793 (1967).
ix. Hansen, 83 Nev. at 191-92, 426 P.2d at 793.
x. Shores, 422 P.3d at 1242.
xi. Camco, 113 Nev. at 520, 936 P.2d at 834.
xii. Shores, 422 P.3d at 1241.