On December 31, 2020, the Nevada Supreme Court issued an opinion addressing and clarifying several issues relating to the power of the court to reform or modify an unreasonable noncompetition agreement often referred to as blue penciling.
In Duong v. Fielden Hanson Isaacs Miyada Robison Yeh, Ltd., 136 Nev. Adv. Op. 87 (2020), the employer sought to enjoin two anesthesiologists from breaching noncompetition agreements. After the employer merged with another company in 2016, the anesthesiologists entered into employment contracts that contained a noncompetition provision restricting the anesthesiologists from working at several facilities. The agreement also contained language requesting that, if any provision of the agreement is found unreasonable by a court, "any such provision shall nevertheless be enforceable to the extent such court shall deem reasonable, and, in such event, it is the parties' intention . . . and request that the court reform such portion in order to make it enforceable." The district court blue-penciled the noncompetition agreement pursuant to NRS 613.195(5), which requires the court to reform an unreasonably restrictive covenant to the extent necessary to enforce it, and granted the preliminary injunction to enforce the modified agreement against the anesthesiologists.
On interlocutory appeal, the anesthesiologists argued that the noncompetition agreement was unreasonable and thus wholly unenforceable under Golden Road Motor Inn, Inc. v. Islam, 132 Nev. 476, 376 P.3d 151 (2016). The anesthesiologists further argued that the district court improperly applied NRS 613.195(5) because the statute did not become effective until 2017 (after the anesthesiologists entered into their noncompetition agreements in 2016).
Ruling in favor of the employer, the Nevada Supreme Court in Duong upheld the district court's enforcement of the modified noncompetition agreement. The Nevada Supreme Court clarified that Golden Road merely held that a district court cannot on its own blue-pencil an unreasonable noncompetition agreement. In other words, Golden Road did not prohibit courts from blue-penciling an unreasonable noncompetition agreement where the agreement itself contained a blue-penciling provision. In reaching this conclusion, the Duong Court distinguished the noncompetition agreement at issue from that in Golden Road, noting the latter did not include a provision authorizing the court to blue-pencil the agreement if deemed unreasonable. Notably, in a footnote, the Duong Court declined to address the issue of whether NRS 613.195(5) applies retroactively, explaining that its holding regarding enforceability of blue-penciling provisions within a noncompetition agreement was dispositive. Despite the expiration of the preliminary injunction, the Duong Court additionally concluded that the appeal was not moot as it affects the parties' legal rights in the underlying action by determining whether the employer had a legal basis to seek damages for the alleged violations of the blue-penciled noncompetition agreement.
This ruling is significant as it makes clear that courts in Nevada have the authority to blue-pencil noncompetition agreements entered into prior to NRS 613.295(5)'s June 3, 2017 effective date to reform an overly broad noncompetition agreement if the agreement contains a provision allowing for such modification or reformation. Employers in Nevada should consult with counsel to ensure that their noncompete agreements contain the most up-to-date provisions for enforceability.
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