Power of Attorney - April 2006

Non-Competition Agreements

How to Avoid the Pitfalls

by Steven M. Shinn

Many companies face the problem of how to protect themselves from a key employee defecting to competitors with customer lists and other confidential information. One way to address this situation is to require employees to sign a non-competition agreement. A non-competition agreement is essentially a contract between an employer and an employee that states that when the employee leaves the company he/she is not permitted to work for a competitor of the former employer.

Said agreements are usually accompanied with covenants to keep the company’s trade secrets confidential. Due to space limitations, this article will solely address restrictions placed on employees by employers. Surprisingly, many individuals, including attorneys, do not consider such restrictions to be valid and enforceable, believing them to unduly restrict an individual’s right to earn a living. Equally surprising are the amount of appellate cases dealing with the subject that have been decided by the Nevada Supreme Court.

Contrary to what appears to be the general public perception, the Nevada Supreme Court has generally upheld the enforcement of said agreements – if said agreements are reasonably calculated to protect the company’s business and good will. An agreement will be held invalid or the scope of restrictions reduced where such a restriction imposes an undue hardship, or when the restrictions far exceed necessary protections. For instance, if the restraint restricts employment for an unlimited geographic area and for an unlimited time, the restriction would be unreasonable and probably would be struck down. If a public interest is involved, the court may also rescind the restriction.

What does all this mean? It means the Supreme Court will look to the language of the restriction, the kind of business being conducted, the location of the business’s customers and the duration of the restriction, as well as other pertinent factors. For example, in 1967, the Supreme Court considered an agreement which restricted the employee doctor from engaging in the practice of surgical chiropody within a 100-mile radius of Reno upon termination of his employment. There was no time period specified as to the duration of the restriction. While the Supreme Court could have struck down the agreement due to the absence of any limits on the length of the restriction, it modified the non-competition agreement and indicated that it was valid for a one-year period.

Twelve years later, in 1979, the Supreme Court reviewed an agreement between another physician and a medical clinic. At issue was an employee’s contract that prohibited him from competing with his former employer within five miles of the city of Elko for a period of two years. Because the employee was the only practicing orthopedic surgeon in the area and no one else at the clinic practiced in that area of medicine, the court restricted the employee physician from practicing in general medicine for the duration of the agreement, but allowed him to practice orthopedic surgery.

It has been made abundantly clear that the high court will look at each situation and the factors enumerated above and make its decisions accordingly. Thus, drafting a covenant not to compete requires some amount of thought for fairness toward the employer as well as the employee, and in some situations, the needs of the community.

Steven M. Shinn
Steven M. Shinn is an associate of Harmon & Davies, PC which practices in the area of employment law, labor, real property and construction.