The following articles were written by attorneys for attorneys and published in the “Business Litigation” issue of the printed publication, Communiqué (March 2017):
- “Welcome to the “All-or-Nothing” Era in Enforcing Non-compete Agreements” by Joshua H. Reisman, Esq. and Glenn M. Machado, Esq.
- “Restoring Honor and Avoiding Bloodshed with the Federal Rules” by Andrea M. Champion , Esq. and Patrick J. Reilly, Esq.
- “Considerations if Your Client Has Been Served With a Foreign Arbitration Subpoena” by Russell J. Burke, Esq.
© 2017 The following articles were originally published in COMMUNIQUÉ, the official publication of the Clark County Bar Association. (March 2017). All rights reserved. For permission to reprint this article, contact the publisher Clark County Bar Association, 717 S. 8th Street, Las Vegas, NV 89101. Phone: (702) 387-6011. Photo shown on the cover of our March 2017 issue was provided courtesy of Chris Tucker, ChrisTuckerLV.com.
Welcome to the “All-or-Nothing” Era in Enforcing Non-compete Agreements
By Joshua H. Reisman, Esq. and Glenn M. Machado, Esq.
In Golden Road Motor Inn, Inc. v. Islam, 132 Nev. Adv. Op. 49, 376 P.3d 151 (2016), the Supreme Court of Nevada directly addressed the issue of whether Nevada courts can judicially modify an unreasonable non-compete agreement in order to render the agreement enforceable. The majority of the Court, in a four to three en banc decision, concluded where a non-compete provision is unreasonable, “the agreement is wholly unenforceable, as [the Court] do[es] not modify or ‘blue pencil’ contracts.” Id. at 153. The dissent lamented this “draconian all-or-nothing rule [which] invalidates the entire contract if any part of the non-compete agreement is overly broad.” Id. at 164. Golden Road’s holding impacts not only the drafting of future non-compete agreements, but it also raises serious concerns regarding the viability of existing non-compete agreements governing both current and former employees.
While non-compete agreements by their very nature restrain trade, they are permitted to “protect the business and good will of the employer.” Hansen v. Edwards, 83 Nev. 189, 191, 426 P.2d 792, 793 (1967). However, 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.” Id. at 191–92, 426 P.2d at 793. In analyzing the reasonableness of non-compete agreements, the Supreme Court of Nevada has focused on three types of restrictions: (1) time; (2) geographic; and (3) future work. See, e.g., Ellis v. McDaniel, 95 Nev. 455, 596 P.2d 222 (1979).
Golden Road involved, in part, the Atlantis Casino Resort Spa’s attempt to enforce a non-compete agreement against a former casino host. The non-compete agreement prohibited the former host from working, in any capacity, for any gaming business within 150 miles of the Atlantis for a period of one year.
The district court found the non-compete agreement to be unreasonable as the 150-mile restriction was deemed unnecessary to protect the Atlantis’ interests and the employment restriction was so broad that the employee could not even work as a custodian in any casino within the restricted area.
The Court, in affirming the district court, rejected Atlantis’ argument that, instead of outright voiding the non-compete agreement, the overbroad provisions should be judicially modified. The Court noted that Nevada law holds that an “unreasonable provision renders the non-compete agreement wholly unenforceable[,]” and explained that the Court has “long refrained from reforming or ‘blue penciling’ private parties’ contracts.” Golden Road, 376 P.3d at 156. The majority gave three policy reasons against modifying or blue penciling non-compete agreements: (1) to avoid trampling the parties’ contractual intent; (2) to preserve judicial resources (by not turning the court into attorneys after the fact); and (3) to disincentivize employers from intentionally drafting unreasonable agreements. See id. at 157-59.
Despite these policy justifications, Golden Road leaves current employers in a precarious position. As to new employees, going forward their non-compete agreements better be perfect. As to current and former employees, the employer may be stuck dealing with an unenforceable agreement.
For purposes of drafting new employee non-compete agreements, while there is “no inflexible formula for deciding the ubiquitous question of reasonableness[,]” (Ellis, 95 Nev. at 458-59, 596 P.2d at 224), Nevada precedent does provide some guidance. For example, the longest time restriction allowed by the Court appears to be two years. See id. at 459-60, 596 P.2d at 225. As to geographic restrictions, they should be limited to the territory in which the business has established customer contacts and good will. See Camco, Inc. v. Baker, 113 Nev. 512, 520, 936 P.2d 829, 834 (1997).
Further, the restriction on future employment must be necessary to protect the employer’s interests. For example, in Ellis, the Court narrowed a total prohibition on practicing medicine as the doctor’s subsequent employment was as an orthopedic specialist, while his former employer solely practiced general medicine. Accordingly, the two practices were not in competition with one another. See Ellis, 95 Nev. at 459, 596 P.2d at 224-25.
It also seems advisable for the non-compete agreement to include a severability clause reflecting the parties’ intent that, should any language be deemed unreasonable, the offensive language should be stricken. Golden Road did not address the issue of whether a severability clause could save an otherwise unenforceable non-compete agreement. Notably, such a clause does assuage the Court’s expressed concern regarding trampling the parties’ contractual intent. Further, at least one other jurisdiction has applied a severability clause to excise offending language from a non-compete agreement. See, e.g., SWAT 24 Shreveport Bossier, Inc. v. Bond, 808 So. 2d 294, 309 (La. 2001). There appears to be no downside to including such a provision, and it has the potential to salvage a non-compete agreement should a court have concerns with any of its terms.
As to current employees presently operating under likely unenforceable non-compete agreements, the agreements should, if possible, be “updated.” Continued at-will employment is sufficient consideration to uphold a non-compete agreement. See Camco, 113 Nev. at 517, 936 P.2d at 832. Thus, the employer can simply insist that the at-will employee’s non-compete agreement be modified to ensure its enforceability. If the employment is for a set term, however, the employer should offer additional monetary consideration to amend the non-compete agreement. Obtaining cooperation from current employees may actually not be very difficult because the amended agreement will likely be less restrictive than the original agreement.
Golden Road’s all-or-nothing rule is especially problematic where an employer needs to enforce a pre-existing, unreasonable non-compete agreement against a competing former employee. Golden Road leaves the employer little in the way of argument in favor of enforcement, including: (1) if applicable, a severability clause that might allow the agreement to be edited; (2) if the offending term is ambiguous, it might be open to reformation (with the caveat that ambiguous terms are usually construed against the drafter); and, arguably, (3) Golden Road should not be applied retroactively to preclude the blue penciling of non-compete agreements that predated the decision.
The last option is admittedly a “Hail Mary” argument, but support for the argument is found within the Golden Road opinion. A judicial decision potentially applies prospectively if it establishes a new principle in law—either by overruling clear past precedent on which litigants may have relied or by deciding an issue of first impression whose resolution was not clearly foreshadowed. In this regard, the dissent in Golden Road noted that the Court had previously engaged in judicially modifying preliminary injunctions (enforcing non-compete agreements) to make restrictions on the employee reasonable. See 376 P.3d at 165. And, even the majority approvingly cited a treatise that suggested that courts in Nevada had the discretion to modify or blue pencil the terms in a non-compete agreement. See id. at 159 n. 10. Accordingly, it can be argued that Golden Road decided an issue of first impression whose resolution was not clearly foreshadowed. This argument presents an uphill battle, however, as the majority emphasized that it has “long refrained from reforming or ‘blue penciling’ private parties’ contracts”—indicating that the Court was not establishing any new principle in law. Id. at 156.
Joshua H. Reisman, Esq. is a member and founder of Reisman Sorokac. He concentrates his practice in state and federal courts, administrative agencies, and private mediations and arbitrations, focusing on complex commercial litigation. He manages the firm’s litigation efforts from inception through trial, post-judgment, and appeal.
Glenn M. Machado, Esq. concentrates his practice in the areas of commercial litigation and professional responsibility. For over ten years, Mr. Machado was an Assistant Bar Counsel for the State Bar of Nevada, where he handled all aspects of the attorney-discipline process and wrote numerous articles for Nevada Lawyer.
Restoring Honor and Avoiding Bloodshed with the Federal Rules
By Andrea M. Champion, Esq. and Patrick J. Reilly, Esq.
Supreme Court of the United States Chief Justice Roberts, in a 2015 Year End Report on the Federal Judiciary, gives history lesson to current litigants on duels of the 1800s. See John Roberts, 2015 Year-End Report on the Federal Judiciary (Dec. 31, 2015), available at http://www.supremecourt.gov/publicinfo/year-end/2015year-endreport.pdf. In 1838, John Lyde Wilson, the governor of South Carolina, wrote a “code of honor” to avoid bloodshed. Id. at pg. 1. According to Chief Justice Roberts, the code had “exactly the opposite effect.” Id. at p. 2. Chief Justice Roberts reminds us that the code of honor stands as “a stark reminder of government’s responsibility to provide tribunals for the peaceful resolution of all manners of disputes.” Id. at pg. 2-3. Why does Chief Justice Roberts issue this reminder? Because the Supreme Court and the Advisory Committee on the Civil Rules believe that current day litigants have gone wild and all, including the judiciary, need to be reined in.
The 2015 amendments to the Federal Rules of Civil Procedure (“F.R.C.P.”) should be unsurprising to those who have been paying attention. Since the late 1970s, the Supreme Court and the Advisory Committee have worked to limit discovery to avoid abusive discovery tactics. All of the changes to F.R.C.P. 26 over the years have been made with the intent to accomplish the goal of securing the “just, speedy, and inexpensive determination of every action and proceeding,” as proscribed by F.R.C.P. 1. But the 2015 amendments are different.
The eight word addition to Rule 1 exemplifies the Court’s emphasis on making federal judges and attorneys responsible for avoiding unnecessary or wasteful litigation. See F.R.C.P. 1 (adding the underscored words to the Court’s direction that the Rules “be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.”). F.R.C.P. 26(b)(1) embodies this message by adding a new proportionality element. According to Roberts, “the key here is careful and realistic assessment of actual needs” by both the parties and the federal judge guiding the scope of discovery. Id. at p. 7. What is unclear at this point is whether the 2015 amendments will have their desired impact on the cost—financial and otherwise—of litigation.
Since the amendment took effect on December 1, 2015, the U.S. District Court in Nevada has issued a number of decisions applying the new Rule 26(b)(1). In January 2016, Magistrate Judge Peggy Leen issued an opinion setting forth a lengthy background of Rule 26 and noted that “[a] change in the legal culture that embraces the leave no stone unturned and scorched earth approach to discovery is long overdue.” Roberts v. Clark Cnty. Sch. Dist., 312 F.R.D. 594, 604 (D. Nev. 2016). The Roberts opinion appears to embody Chief Justice Robert’s directive. After noting its duty to “take on a stewardship role,” the Court went on to engage in a lengthy analysis of the case before the Court and the discovery at issue, taking proportionality into account. See id. at 604-09. However, as a whole, the decisions out of Nevada’s District Court are inconsistent. While a number of the Court’s decisions engage in a proportionality analysis, they do so to varying degrees. See e.g., Wilson v. Wal-Mart Stores, Inc., No. 2:15-cv-1791-RCJ-VCF (D. Nev., Feb. 9, 2016); Ballentine v. Las Vegas Metro. Police Dep’t., No. 2:14-cv-01584-APG-GWF (D. Nev., May 9, 2016); First Am. Title Ins. Co. v. Commerce Assocs., LLC, No. 2:15-cv-832-RGV-VCF (D. Nev., Jan. 3, 2017). One decision in which the court declined to engage in a proportionality analysis appears limited to its unique facts. See TDN Money Sys. v. Global Cash Access, Inc., No. 2:15-cv-02197-JCM-NJK, 2016 U.S. Dist. LEXIS 99526 (D. Nev., July 28, 2016) (declining to conduct a proportionality analysis because neither party acknowledged the 2015 amendments). What really remains to be seen is whether the district courts will consistently “take on a stewardship role, managing their cases from the outset rather than allowing parties alone to dictate the scope of discovery and the pace of litigation,” and whether the appellate courts will support those efforts, as the Advisory Committee intended. See John Roberts, 2015 Year-End Report on the Federal Judiciary, at p. 10.
Andrea Champion, Esq. is an associate at Holland & Hart LLP, where she practices commercial litigation.
Patrick Reilly, Esq. is a partner at Holland & Hart LLP. Pat is an AV-rated trial lawyer with over 20 years of experience who practices on a variety of litigation matters.
Considerations if Your Client Has Been Served With a Foreign Arbitration Subpoena
By Russell J. Burke, Esq.
Nevada has adopted the Uniform Arbitration Act of 2000 (“UAA”). See NRS Chapter 38. Among other things, this chapter governs the situation where a Nevada resident is served with a foreign—i.e., not based out of the State of Nevada—arbitration subpoena. See NRS 38.233(7).
If your client has been served with a subpoena from a foreign arbitration proceeding that you find objectionable in any way, be aware that Nevada law is not clear on how to handle the objectionable subpoena. Additionally, even though dozens of other states have adopted the UAA, guidance from those other jurisdictions is unclear and even contradictory on some aspects.
May the subpoena issue directly from the foreign arbitrator?
As an initial matter, Nevada law requires that a party to litigation in another state court case, as opposed to an arbitration proceeding, must first “perfect” the foreign subpoena by submitting the subpoena to the clerk of a court in the county in which discovery is sought to be conducted. See NRS 53.170. The party seeking to serve the foreign court subpoena upon a Nevada resident must complete this perfection process before serving the foreign court subpoena in this state. See id.
In contrast, NRS 38.233(7), the arbitration counterpart to NRS 53.170, does not contain the same perfection language. Rather, it uses more ambiguous language. The Supreme Court of Nevada has never addressed whether a foreign arbitration subpoena may forego perfection as required for a foreign court subpoena. However, guidance from other jurisdictions that have adopted the UAA suggest that perfection may be required. For example, Colo. Mills, LLC v. SunOpta Grains & Foods Inc., 269 P.3d 731, 734-35 (Colo. 2012) (stating in dicta that it found “instructive” the principle that a foreign court subpoena be perfected when considering the effect and scope of a foreign arbitration subpoena).
Thus, practitioners should be aware of the potential jurisdictional issues of a foreign arbitration subpoena served in Nevada, that may or may not require perfection, in the event that it becomes necessary to object to the subpoena.
What path to recommend if the subpoena is objectionable?
Numerous options exist should you find the need to advise your client that a foreign arbitration subpoena is objectionable. However, none present a clear “right” path and all options face challenges.
The UAA comments state that a non-party to the arbitration who disagrees with a subpoena “simply need not comply.” UAA at § 17 ¶ 8. Such seemingly bold guidance potentially conflicts with NRCP 45 and the protections afforded and duties required by this rule. Whether you choose to follow the guidance from the UAA comments or make timely and specific objections pursuant to NRCP 45, the party that served your client with the foreign arbitration subpoena may decide to initiate a Nevada action for the sole purpose of compelling discovery responsive to its subpoena. Conversely, depending on how adamant your client may feel about its objections to the subpoena, in order to protect itself, the onus may fall on your client to initiate a Nevada action or seek protection from the foreign arbitrator. Moreover, even though you may find yourself in a Nevada action, another state’s law may control substantive objections depending on the arbitration agreement. All of these options and the associated pros and cons must be analyzed against the backdrop of the fee provisions in NRCP 37.
At What Stage in the Foreign Arbitration Must You Respond?
Finally, on the issue of whether an arbitrator may issue a discovery subpoena to a non-party to the arbitration, as opposed to a subpoena to appear for the actual arbitration hearing, courts are conflicted. Compare COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269 (4th Cir. 1999) (holding no discovery subpoena permitted to a non-party to an arbitration) with Amgen, Inc. v. Kidney Ctr. Of Delware Cnty., 879 F. Supp. 878 (N.D. Ill. 1995) (permitting prehearing discovery). Some courts have allowed arbitrators to issue documents-only subpoenas but not deposition subpoenas. E.g., Integrity Ins. Co. v. Am. Centennial Ins. Co., 885 F. Supp. 69 (S.D.N.Y. 1995).
Therefore, should you find a reason to object, you may be able to include objections based on the stage of the proceedings—hearing stage versus discovery stage.
Russell J. Burke, Esq. is an attorney at Ballard Spahr LLP, where he litigates complex commercial litigation.
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