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Nevada Legislature interferes with your business’ prevention of competition

As you are aware, Gordon Law has previously provided information on Nevada’s laws concerning covenants not to compete. (Please see https://gordonlawlv.com/id-tell-id-kill-sue-disclosing-trade-secrets-best-way-protect-business-trade-secrets/#.WT2gIGjyvD4.) However, at the eleventh hour, the Nevada Legislature has made material changes to the manner in which you can protect your business from competition from former employees.

The provisions of AB 276 became enforceable upon its passage. What that means is that, without true advance notice to you, your existing covenants not to compete with your employees may have become void and unenforceable. This opens you up to greater uncertainty and 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 you need to pay your employee something in exchange for the agreement 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. The law does not provide a definition for “valuable consideration” or “undue hardship.” This ambiguity will give rise 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, the law gets even worse. Now, there are limitations on your ability to prohibit an employee from soliciting a former client or customer. Also, if you terminate the employee as a result of a reduction in force, reorganization or similar restructuring, your agreement is only enforcable so long as you are paying the employee.

Consequently, if your business is going through some restructuring or reduction — a time when your business would be extraordinary vulnerable — the Nevada Legislature has further endangered the viability of your business by forcing you to pay former employees (who you obviously cannot afford) or face them competing directly with you.

Finally, given the immediate enforceability of the new law and the substantial ambiguity of language, there are substantial questions as to whether the non-compete covenants you may presently have with your employees have suddenly become worthless. Based upon this, I urge you to contact Gordon Law to immediately review and possibly redraft your non-compete covenants.

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