In a recent opinion, the Supreme Court of Nevada refused to adopt the "blue pencil" doctrine when it ruled that an unreasonable provision in a non-compete agreement rendered the entire agreement unenforceable. "Blue penciling" refers to a court's willingness to strike unreasonable clauses from a non-compete agreement, leaving the rest of the agreement to be enforced; or to modify the agreement to reflect terms that are reasonable under the law. Many jurisdictions permit "blue penciling" while others have refused to adopt the doctrine.
Traditionally, Nevada courts have followed the latter approach by refraining from reforming or "blue penciling" parties' private contracts, including non-compete agreements. The case of Golden Road Motor Inn, Inc. v. Islam, presented the Supreme Court of Nevada with an opportunity to join the number of jurisdictions that have embraced the doctrine. For various reasons, the Court refused to do so.
The Islam case involved a dispute between a casino worker and his former employer. The worker, who worked as a casino host for the former employer, entered into an agreement with the former employer to refrain from working for any other gaming establishment within 150 miles of the former employer for one (1) year following the end of his employment with the former employer. After resigning from his employment with the former employer, the worker began working as a casino host for a new employer within the prohibited 150-mile radius. The former employer sued the worker to prevent his employment with the new employer.
The Court found the non-compete agreement's prohibition of all types of employment with a gaming establishment within 150 miles of the former employer was overbroad, as such a prohibition extended beyond what was necessary to protect the former employer's interests. The Court also found such a prohibition severely restricted the worker's ability to be gainfully employed. Finding this provision unreasonable, the Court declared the entire agreement unenforceable.
The former employer asked the Court to modify the overbroad provisions of the non-compete agreement to render the agreement enforceable. Rejecting the former employer's argument, the Court stated that it was not its role to rewrite the parties' contract and that courts are not empowered to make private agreements. The Court explained that its restraint from "the urge to pick up the pencil" to modify the non-compete agreement avoids trampling the parties' contractual intent, preserves judicial resources, and holds the employer, as the drafter of the agreement, to a higher standard. The Court explained that under a "blue pencil doctrine," the employer receives what amounts to a "free ride" on the unreasonable provision, perhaps knowing that the provision would never be enforced. Consequently, the Court stated, the practice of "blue-penciling" encourages employers with superior bargaining power to "insist upon unreasonable and excessive restrictions, secure in the knowledge that the promise will be upheld in part, if not in full." This, the Court maintained, forces the employee to bear the burden as employers "carelessly, or intentionally overreach."
In light of this opinion, employers conducting business in Nevada should ensure that non-compete agreements with their employees are reasonably necessary to protect the employers' interests. This means that the scope of activities prohibited, the time limits, and geographic limitations contained in the non-compete agreements should all be reasonable. If an agreement contains even one overbroad or unreasonable provision, the employer risks having the entire agreement invalidated and being left without any recourse against an employee who violates the agreement. Employers should consult with an attorney if they have any concerns about the enforceability of their non-compete agreements with their employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.