The Elements for the Claim of Breach of the Covenant Not to Compete

Generally, a Covenant Not to Compete is “[a]n agreement, generally part of a contract of employment or a contract to sell a business, in which the covenantor agrees for a specific period of time and within a particular area to refrain from competition with the covenantee.”  Black’s Law Dictionary 364 (6th ed. 1990).   The Covenant Not to Compete is known by multiple other names: the “restrictive covenant,” “non-competition agreement,” or as an “agreement not to compete” (hereinafter the “Covenant”).  Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672, 675 (2008).

Nevada’s legislature has recognized the Covenant.  Chapter 613 of Nevada Revised Statutes governs employment practices in Nevada.  NRS 613.200(4) allows any party to negotiate, execute, and enforce:

an agreement with an employee of the person, association, company or corporation which, upon termination of the employment, prohibits the employee from:

(a) Pursuing a similar vocation in competition with or becoming employed by a competitor of the person, association, company or corporation; or

(b) Disclosing any trade secrets, business methods, lists of customers, secret formulas or processes or confidential information learned or obtained during the course of his or her employment with the person, association, company or corporation, if the agreement is supported by valuable consideration and is otherwise reasonable in its scope and duration.

To be valid, a Covenant must be reasonable in its scope and duration.  In Hansen v. Edwards, the Nevada Supreme court developed a test for use in determining reasonableness, declaring that for public policy considerations, the Covenant will not be enforced if it is not reasonable.  83 Nev. 189, 426 P.2d 792 (1967) (a non-compete provision is “unreasonable . . . if it is greater than is required for the protection of the [employer] . . . or [if it] imposes undue hardship upon the person restricted.”).  Care must be taken when drafting that the Covenant imposes upon the employee no greater restraint than is reasonably necessary to protect the business and good will of the employer.  Id.

The Court, after Hansen, reiterated the four characteristics of a valid Covenant: (1) consideration; (2) duration; (3) geographic limit, and (4) public policy. See generally HD Supply Facilities Maint., LTD. v. Bymoen, 125 Nev. 200, 210 P.3d 183 (2009); Traffic Control Serv., Inc. v. United Rentals Nw., Inc., 120 Nev. 168, 87 P.3d 1054 (2004); Camco v. Baker, 113 Nev. 512, 936 P.2d 829 (1997); Jones v. Deeter, 112 Nev. 291, 913 P.2d 1272 (1996); Ellis v. McDaniel, 95 Nev. 455, 596 P.2d 222 (1979); Hansen v. Edwards, 83 Nev. 189, 426 P.2d 792 (1967).  Determining the reasonable scope and duration is a fact-sensitive inquiry.  See, e.g., Traffic Control Servs. v. United Rentals Nw., Inc., 120 Nev. 168, 87 P.3d 1054, 1055–56 (2004) (illustrating a reasonable provision that provided a one-year duration and 60 mile radius); Camco, Inc., 113 Nev. 512, 936 P.2d at 832 (invalidating a provision that provided a 50 mile radius and five-year duration, and reasoning that territorial restrictions must be limited to areas where the employer “established customer contacts and good will”); Jones v. Deeter, 112 Nev. 291, 913 P.2d 1272 (1996) (striking down a non-compete provision that provided a 100 mile radius and a five-year duration); Ellis v. McDaniel, 95 Nev. 455, 596 P.2d 222, 224 (1979) (upholding a non-compete provision that prohibited competition within two years after termination and within five miles of the city limits). “There is no inflexible formula for deciding the ubiquitous question of reasonableness.” Ellis, 95 Nev. 455, 596 P.2d at 224.

In Traffic Control Servs., the Nevada Supreme Court stated:

Employers commonly rely upon restrictive covenants, primarily nondisclosure and noncompetition covenants, to safeguard important business interests. “The non-disclosure covenant limits the dissemination of proprietary information by a former employee, while the non-competition covenant precludes the former employee from competing with his prior employer for a specified period of time and within a precise geographic area.

120 Nev. 168, 87 P.3d at 1057 (2004).  These agreements, moreover, are subject to strict construction by the courts.  See Sheehan & Sheehan v. Nelson Malley & Co., 121 Nev. 481, 117 P.3d 219, 225 (2005) (“[W]e strictly construe the language of covenants not to compete; and in the case of an ambiguity, that language is construed against the drafter.”)

Reasonable Consideration for the Covenant

It is axiomatic that all valid agreements must be supported by proper consideration to be enforceable.  Covenants not to compete are no different, and must be supported by consideration to be enforceable.  Reasonableness, of course, will always be highly dependent on the individual circumstances of the contracting parties and their overall agreement.  As a guide, however, Nevada’s Supreme Court has offered a wide range of consideration that is considered reasonable.

In Jones v. Deeter, consideration of “50 cents per hour in addition to a $6.50 per hour wage” was held reasonable for an employee in the lighting retrofitting business who signed a Covenant.  Jones v. Deeter, 112 Nev. 291, 913 P.2d 1272 (1996).  In a more recent holding, the Supreme Court in Traffic Control Serv., Inc. v. United Rentals Nw., Inc., held that $10,000 in consideration was reasonable.  Id.

Nevada’s most significant holding pertaining to consideration, however, is Camco v. Baker.  In Camco, the court held that an at-will employee’s continued employment alone is sufficient consideration in exchange for making the Covenant.  Camco v. Baker, 113 Nev. 512, 516, 936 P.2d 829 (1997).  The court emphasized that Covenant provisions are merely “modification[s] to the original employment contract.”  Id.  Thus, separate consideration beyond continued employment is not necessary.  Id.  The court also noted that the failure to treat the Covenant provisions as modifications could result in hardships on employers.  Id.

If an employee is at-will, care should be taken to restate the at-will nature of the relationship within the Covenant itself, and to specifically state that consideration for making the Covenant is found in the employee’s continued employment.  Should the employee be other than at-will, the drafter should carefully consider the amount of consideration that would be reasonable under the circumstances (salary, length of the Covenant, the term of employment, etc.).

Reasonable Duration of the Covenant

Again, reasonableness will always depend on the totality of circumstances; the reasonable length of the Covenant for a manager of a restaurant will necessarily differ from the length of time for a scientist who is developing a new drug.

In Jones, the Nevada Supreme Court opined that a “five- year duration [was] not reasonably necessary to protect [the employer’s] business and place[d] too great a hardship on [the employee.]”  Jones, 112 Nev. at 296.  Although the court in Ellis v. McDaniel and Camco both rejected the respective Covenants, it held that a two year restriction was reasonable. Ellis v. McDaniel, 95 Nev. 455, 459, 596 P.2d 222 (1979); Camco, 113 Nev. at 519.  Moreover, the lack of a stated time limitation in a Covenant is automatically unreasonable.  Hansen v. Edwards, 83 Nev. at 191.  In Hansen v. Edwards, where a “no time limitation on the restriction was mentioned,” the court upheld the restrictive covenant after adding a time limit of one year to the agreement (a one-year limitation was also held reasonable in Traffic Control Serv., Inc.).  Id.

Care must be taken to determine the reasonable amount of time in light of the case law discussed above, as well as the industry standards and employee-specific facts.  Best practices suggest requiring the employee to state both the reasons and the conclusion, in writing, why the amount of time required by the Covenant is reasonable.

Geographic Scope of the Covenant

No particular geographic radius restriction will be reasonable in all circumstances.  Of Nevada’s six main cases discussing the Covenants, radii of five, 50, 60, and 100 miles from the employer, were deemed reasonable.  However, in Hansen, the Court rejected a Covenant that forbade a doctor to “undertake to practice medicine within a distance of five miles from the city limits. . .” on grounds of the public’s interest in the doctor’s services.  Hansen, 83 Nev. at 192.  Because the employee was the only specialist in the area who could treat orthopedic patients, even five miles was too much of a limitation.  Id.  The court heavily valued the public’s hardship of having to travel five miles outside the city to retain this doctor’s services.  Id.  Additionally, in Camco, the Court defined a reasonable geographic area to be an area where the employer has established “sufficient customer contacts and/ or good will.”  Camco, 113 Nev. at 833 quoting Snelling & Snelling v. Dupay Ent., 125 Ariz. 362, 609 P.2d 1062, 1064 (Ariz.1980). However, a mere assertion of an area which is the “target of a corporate plan for expansion” is not a reasonable geographic limitation. Id.

Public Policy Considerations

Covenants are at times held invalid as an improper restraint on trade, although, the Nevada Supreme Court in Jones clarified that “Nevada Legislature never intended NRS 613.200 to render postemployment restrictive covenants void as against public policy,” (rejecting the traditional view that restrictive Covenants are per se invalid). Jones, 112 Nev. at 292.

At times, courts hyper focus on public policy when a Covenant possibly restrains trade.  As held by the Supreme Court of the United States in Or. Steam Nav. Co. v. Winsor, a restraint on trade is per se invalid because of: (1) “the injury to the public by being deprived of the restricted party’s industry;” and (2) “the injury to the party himself by being precluded from pursuing this occupation and thus being prevented from supporting himself and his family.”  Or. Steam Nav. Co. v. Winsor, 87 U.S. 64 (1873).  In Or. Steam Nav. Co., the vendee argued that the Covenant “not to run or employ, or suffer to be run or employed, the said steamboat New World upon any of the routes of travel, or the rivers, bays, or waters of the State of California, or the Columbia River and its tributaries, for the period of ten years” was invalid.  Id. at 66.  However, the Supreme Court applied these factors to determine that the restraint on trade after the sale of a steamer was reasonable.  Id. at 69.

First, the provision that “the steamer should not be used in California waters for the period of ten years” was “necessary to protect the former company from interference with its own business.”  Id.  It had no tendency to destroy the usefulness of the steamer, and did not deprive the country of any industrial agency.  Id.

Secondly, the provision did not create any hardship for the vendee by enforcing a “transfer of residence or allegiance on the part of the vendee in order to pursue its employment.”  Id.  Finally, the general interests of commerce in the United States were promoted by this restraint.  Id. at 70.  With no injury suffered by either the public or both parties, valid consideration and fulfillment of the “object and purpose [simply] to simply protect vendors,” the restraint was held reasonable. Id. at 71-72.

The Supreme Court of Nevada is similarly very supportive of public policy.  The court has noted that “the public has an interest in seeing that competition is not unreasonably limited or restricted, but it also has an interest in protecting the freedom of persons to contract, and in enforcing contractual rights and obligations.”  Hansen, 83 Nev. at 192 quoting Lovelace Clinic. v. Murphy, 471 P.2d 450, 453-54 (1966).  In Ellis, even though the provisions were reasonable, the court rejected the restraint on trade of an orthopedic practitioner “because the public has to travel great distances to get to this specialized field… the public interest in retaining the services of the specialist is greater than the interest in protecting the integrity of the contract provision to its outer limits.”  Ellis, 95 Nev. at 459.

Nevada generally holds that:

an agreement on the part of an employee not to compete with his employer after termination of the employment is in restraint of trade and will not be enforced in accordance with its terms unless the same are reasonable. Where the public interest is not directly involved, the test usually stated for determining the validity of the covenant as written is whether it imposes upon the employee any greater restraint than is reasonably necessary to protect the business and good will of the employer. A restraint of trade is unreasonable, in the absence of statutory authorization or dominant social or economic justification, if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted. The period of time during which the restraint is to last and the territory that is included are important factors to be considered in determining the reasonableness of the agreement.

Hansen, 83 Nev. at 191-92.  In addition to the public’s interest and the employee’s interests, the employer’s interests are crucial to a valid restrictive covenant.

Drafting Considerations

The trend is that employment Covenants now contain more than just covenants not to compete; they also contain non-disclosure, non-solicitation, non-diversion and other clauses limiting the scope of the employee’s employment and post-employment activities.  Accelerated Care Plus Corp. v. Diversicare Mgt. Serv. Co. illustrates well how agreements are currently written, enforced, and interpreted by the Nevada courts.  Accelerated Care Plus Corp. v. Diversicare Mgt. Serv. Co., 2011 WL 3678798 (D. Nev. 2011).

In Accelerated Care Plus Corp., the employee and employer signed a Covenant containing “non-competition, non-diversion, and non-solicitation clauses, as well as certain confidential provisions.”  The Covenant prevented the employee from “competing with [employer], soliciting employees of [employer], and inducing customers to retain their business with [employer]…for one year.” The agreement explained that the employer:

provides a variety of services and products to approximately 5000 skilled nursing and therapy facilities throughout the United States (with the exception of Alaska)… [employer] specializes in providing its own training and usage methods for that equipment to skilled nursing and physical therapy facilities.  [It] has compiled its treatment methods into various written materials which include step-by-step guides, handbooks, training programs, and other instruction materials (the “Written Materials”).

The employee signed the restrictive covenant because he held a high position at the corporation and was “privy to high-level information relating to [employer’s] strategic plans and business model, and was also very knowledgeable and skilled regarding [employer’s] treatment methods and Written Materials.”  The court eventually deemed this knowledge as confidential information.  The court also addressed basic elements of a restrictive covenant.

The court held that one year was a reasonable time to protect the employer’s business interests in competition and confidential information.  Although there was no geographic limitation to the Covenant, the court still addressed the issue:

In the case of a localized or regional business, a geographic limitation in a restrictive covenant would reasonably address any possible harm that employer may suffer. However, courts have recognized that when an employer’s business is national in scope, an unlimited geographical scope may be reasonable so long as the field is sufficiently limited.

The court held that disclosure of any confidential information could be limited.  The court then applied the general public interest test from in Hansen v. Edwards.   The court in Accelerated Care Plus Corp. held that the balance of undue hardships imposed on the employer, the possibility of losing competition, and the possible disclosure of confidential information to a rival firm outweighed the hardship imposed on the employee of not being able to work at the new corporation.

See elements for other claims at the Nevada Law Library



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