Craig's Corner - Wealth Planning Insights

Monday, August 21, 2017

What To Look Out For When Drafting Non-Competition Provisions in A Business Sales Agreement

In July of 2016, the Nevada Supreme Court dropped a bombshell.  In a case called Golden Road Motor Inn, Inc. v. Islam, it banned courts from engaging in the practice of ‘blue penciling’ non-competition agreements.  Blue penciling happens when the court is considering whether a non-competition agreement is enforceable; if the court decides the agreement is unenforceable but can be fixed with a few simple corrections, it could make those changes and then enforce the agreement.  After Golden Road v. Islam, however, the courts will no longer be allowed to make those changes.  For businesses writing non-competition agreements in the course of a purchase or sale of a business, Golden Road makes it critical to be sure the agreements are drafted correctly, or else the court will refuse to enforce them!

What does Nevada allow in non-competition provisions?

Nevada generally allows business to enter into non-competition agreements as long as they are “reasonable.”  Under Nevada law, a non-competition provision can be unreasonable for two reasons:

  1. The restriction goes farther than is necessary to protect the original business
  2. The restriction creates an “undue hardship” for the restricted person

There is no specific formula a court will use to decide if a non-competition agreement is unreasonable, but it will consider factors such as how much geographical area the agreement prohibits competition in, and how long the agreement prohibits competition.  

For example, in a previous case, Nevada’s Supreme Court held that an agreement prohibiting competition for five years was unreasonably long.  In another case, it refused to enforce an agreement prohibiting competition within 50 miles of any area the original business was planning to expand into.  The Court found that it went farther than was necessary to protect the original business, and was thus ‘unreasonable.’

What happened in the Golden Road case?

The Golden Road case involved a casino host named Sumona Islam.  Her employer, the Golden Road Inn, followed a standard Nevada business practice and had drafted a very broad non-competition clause into her contract—after all, if a court decided it was unreasonable, it typically just modified it to make it enforceable.  The contract in this case prohibited Ms. Islam from “employment, affiliation, or service with any gaming operation within 150 miles” for a year after her employment ended.

The Golden Road Inn’s luck ran out, however.  When Ms. Islam challenged the non-competition provision, the case ended up going all the way up to the Nevada Supreme Court.  After much deliberation, the Court decided that blue penciling this type of business contract was inappropriate and would no longer be allowed; from now on non-competition agreements would be all-or-nothing in court.  And in Golden Road’s case, the agreement was way too broad—for example, not only was Ms. Islam prohibited from working as a casino host, she would be unable to work even as a custodian in any gaming establishment.  Because the Court refused to modify the unreasonable agreement, it refused to enforce it.

What does this mean for my business?

If you are a Nevada business owner and you rely on non-competition agreements in your contracts, the Golden Road decision leaves you with two options: double-check them now to be sure the court will enforce them, or wait until they’re challenged and hope for the best.  As the Golden Road Inn found out, hoping for the best probably won’t go well for most Nevada businesses who have made a practice of drafting broad non-competition clauses.  Our firm’s attorneys specialize in Nevada contract law and are available to help you review and rewrite your non-competition agreements with the Golden Road decision in mind.  If you have questions about your business’s contracts, contact us today to arrange a free consultation!

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S. Craig Stone II of Stone Law Offices, Ltd. serves clients throughout Clark County, Southern NV, Las Vegas, Henderson, Boulder City, North Las Vegas, Summerlin, Carson City, Reno, Washoe County, and Nye County. Also serving clients with asset protection nationwide.

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