Nevada Supreme Court Defines Courts’ “Blue Pencil” Obligations in Noncompete Agreements
In Tough Turtle Turf, LLC v. Scott, 139 Nev. Adv. Op. 47 (Nov. 2, 2023), the Supreme Court of Nevada reversed a district court’s order denying the employer’s request for a preliminary injunction to enforce a noncompete covenant against three former employees. The district court concluded that not only was the covenant procedurally unconscionable, it was also substantively unconscionable in that it was overbroad, oppressive, excessive in scope, and one-sided in the employer’s favor. However, the district court declined to modify the covenant, stating it could not be “redrafted by the court in a manner to allow for injunctive relief.”
The Nevada Supreme Court: (1) found there was minimal procedural unconscionability such that the district court erred in invalidating the covenant as procedurally unconscionable and unenforceable as a matter of law and (2) agreed with the district court that the noncompete covenant is substantively unconscionable as written but remanded the case finding the district court should have analyzed whether the covenant’s scope could be modified under NRS 613.195(1) and (6) so as to render it reasonable and enforceable.
The Supreme Court’s ruling provides employers with guidance on when to expect district courts to blue pencil noncompete covenants as well as the potential scope of a court’s blue penciling.
Never, Always, or When Possible – When Will a Court Blue Pencil?
Following statutory revisions approved by the Nevada Legislature in 2017, Nevada’s noncompete statute requires district courts to blue pencil unreasonable noncompete agreements and enforce the restrictive covenant as modified. Those statutory changes followed and superseded the Nevada Supreme Court’s ruling in Golden Road Motor Inn, Inc. v. Islam, 132 Nev. 476, 488, 376 P.3d 151, 159 (2016), which held that “an unreasonable noncompete covenant can never be revised,” as recognized by the Tough Turtle Court.
- NRS 613.195(6) provides that a district “court shall revise … to the extent necessary” a covenant that unreasonably limits time, geographical area, or scope of activity; imposes a greater restraint than is necessary to protect the employer; or imposes undue hardship on the employee.
- NRS 613.195(1) provides that a “noncompetition covenant is void and unenforceable” if it imposes a restraint that is greater than is required for the protection of the employer, imposes any undue hardship on the employee, or imposes restrictions that are not appropriate in relation to the valuable consideration supporting the noncompetition covenant.
In Tough Turtle, the Nevada Supreme Court concluded that “NRS 613.195(1) and (6), taken together, do not require a district court to always modify an overbroad noncompete covenant; however, the district court must modify an overbroad noncompete covenant when possible.” (Emphasis added). Reading (1) and (6) in harmony, the Court explained that district courts must consider whether an unreasonable covenant can be modified “under NRS 613.195(6). If the noncompete covenant is modifiable, then the court should revise the covenant so that it is reasonable under NRS 613.195(1)” and, thus, enforceable.
Revise, Rewrite, or Redraft – What is a Court’s Scope of Modification?
In Tough Turtle, the Supreme Court also addressed the scope of a district court’s potential modification of a noncompete covenant. The Court stated that “NRS 613.195(6) calls for a district court to ‘revise’ the noncompete covenant—not to rewrite or redraft it.” (Emphasis added). The Court further acknowledged “the general rule prohibiting courts from creating new contracts for parties,” leaving room for a district court to refuse to modify a covenant found within a contract “so lacking in the essential terms” such that the court would have to provide them. The Court cited:
- Ins. Ctr., Inc. v. Taylor, 499 P.2d 1252, 1256 (Idaho 1972) and Eichmann v. Nat’l Hosp. & Health Care Servs., Inc., 719 N.E.2d 1141, 1149 (Ill. App. Ct. 1999), which refused to modify a noncompete provision because the “drastic modifications” required to make it reasonable and enforceable “would be tantamount to fashioning a new agreement.”
- Bayly, Martin & Fay, Inc. v. Pickard, 780 P.2d 1168, 1172-73 & n.19 (Okla. 1989), which refused to modify a noncompete covenant because the defects were so substantial that the covenant “would have to be rewritten” and would require “the making of a new contract.”
The Court went on to explain, however, that NRS 613.195(6) “nonetheless mandates judicial revision of a restrictive covenant if this can be done without subjecting employees to unreasonable terms.” (citing Taylor, 499 P.2d at 1255-56; Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835, 844 (Mo. 2012)). The Court clarified “that there are instances when a noncompete covenant will be unenforceable, such as when no valuable consideration supports the noncompete covenant or when the court would need to rewrite rather than revise the noncompete covenant. But overbreadth alone will not render the covenant unenforceable if the restrictions can be modified under subsection (6) so that they are reasonable and do not impose an undue hardship on the employee or a restraint greater than necessary for the employer’s protection.”
Unconscionable or Not – How did the Court View Tough Turtle’s Noncompete Covenant?
When Tough Turtle bought out its previous owner’s stake in the company, the three plaintiff employees filled out paperwork which did not include a noncompete covenant. Several years later, plaintiffs signed additional employment-related paperwork, including an employment agreement. Each paragraph of the agreement was separately numbered and began on a new line with a heading in the same typeface, font, and size as the text of the paragraph, except for the paragraph labeled “Non-Competition.” That paragraph, the source of the disputed noncompete covenant, was merged with the preceding paragraph and did not start on a new line. It was also numbered 12, even though the subsequent paragraph was identically numbered.
- The district court invalidated the noncompete covenant as unconscionable. The district court found it was a “fatal” error to place the covenant where it could be easily overlooked because the employment agreement merged the noncompete provision into the preceding paragraph rather than setting it out as its own separate paragraph. According to the district court, this called into question whether the employees could readily ascertain its terms, thus making it procedurally unconscionable and therefore unenforceable as a matter of law.
- The Nevada Supreme Court disagreed. The Court noted that the employment agreement used the same font size throughout, and while plaintiffs complained that the agreement was one of several documents attached to a single email, they failed to show that they did not have a meaningful opportunity to review the agreement or that when they signed and returned the employment agreement they did not assent to all of its terms, including the restrictive covenant. According to the Court, “any procedural unconscionability stemming from the merger of the noncompete covenant into the preceding paragraph of the employment agreement is not enough to invalidate it without an additional showing of substantive unconscionability.” Given the mandatory blue-penciling language of NRS 613.195(6), the Court ruled that the district court should not have analyzed substantive unconscionability based on the covenant as written. Rather, the district court was required to determine whether the restrictive covenant was modifiable, and if so, modify it and review the covenant for substantive unconscionability as modified.
When considering whether a contract is unconscionable, the Nevada Supreme Court in Tough Turtle highlighted that courts generally require a showing of both procedural and substantive unconscionability. When drafting and reviewing noncompete provisions, employers should keep in mind the Tough Turtle holding means a provision found to be overbroad under NRS 613.195 will be analyzed by a district court to determine if it is modifiable under NRS 613.195(6). If it is, employers should be prepared for the court to modify the provision and review it for substantive unconscionability as modified. Under Tough Turtle, employers would be best served by making sure their noncompete provisions will survive judicial scrutiny to avoid creating the opportunity for a court to blue-pencil a provision.
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