A shift in strategy may better protect businesses, employees
After a July Nevada Supreme Court decision, Nevada business owners must revisit their non-compete agreements. The decision creates so much uncertainty, businesses should strongly consider revising their non-compete strategy altogether.
In Golden Rd. Motor Inn, Inc. v. Islam, the Supreme Court held that the employer’s non-compete provision unlawfully extended beyond what was necessary to protect the employer’s interests, which resulted in an undue hardship on the employee. As a result, the Court voided the entire agreement and the former employee is now free to work for any direct competitor without restriction. This unexpected outcome sets a precedent fraught with landmines for businesses that fail to address the issue proactively.
The conventional wisdom passed from Nevada lawyers to their business clients has always been to draft reasonably broad non-compete provisions. If a court found that the provision was too broad, the court had the power to lighten the restriction, but still enforce the agreement. Thousands of non-compete agreements in Nevada are drafted in this way. All of them need to be revisited.
Now, if a judge finds an agreement “unreasonable,” the entire agreement is void. Nevada joins a tiny minority of states that follow this rule. Employers cannot expect their non-compete agreement will be enforced at any level. They must weigh the risk that the agreement could be thrown out entirely. Uncertainty now clouds employment agreements in Nevada, potentially opening the flood gates to expensive litigation.
Nevada businesses have three options. First, wait for cases to be litigated and for the law to develop into a clear blueprint. This option could take years and will leave business owners at risk if they choose to keep existing non-compete agreements in place. Second, wait for the composition of the Nevada Supreme Court to change because a court composed of different justices might reverse this change. Only four of the seven justices supported the decision. However, a guard change at the Supreme Court level will likely take longer than waiting for a new case to be litigated and it provides no guarantee the law will change. Meanwhile, both business owners and employees remain at risk with today’s unclear rules. Third, businesses can do away with non-compete clauses entirely and instead focus on the information they would like to protect. This new protection option is the quickest and cleanest way to bring clarity to the muddled issue.
Perhaps a counterintuitive solution, banning non-competes has the potential to help Nevada-based businesses. They could instead consider strengthening confidentiality and trade secret protections in lieu of employee-focused laws.
When a business honestly reviews what it is trying to protect, they usually find it is the information and intellectual property, not the services. Non-competes lose relevance as the value of services gives way to the value of information and technology. A casino VIP host does not hurt casino A by going to work for casino B. But if that VIP host takes valuable information to casino B, therein lies the problem. That valuable information can be adequately protected, and more accurately managed, through thoughtful confidential and trade secret strategies.
If businesses instead rely on confidentiality and trade secret protections they can leave less room for interpretation to the courts, create greater certainty that businesses’ confidential information is protected, and potentially save thousands, if not hundreds of thousands, on litigation fees.
Matthew Digesti is Chief Legal Officer of Bristlecone Holdings