When I recently wrote about how Texas courts decide which state’s law will apply to a non-compete, I worried if anyone would care, or understand why they should care. Three days later, as if on cue, the Nevada Supreme Court issued Golden Road Motor Inn, Inc. v. Islam, a non-compete decision that directly conflicts with Texas law, illustrating that choice of law can make all the difference in determining whether a non-compete will be enforced. Thanks, Nevada.
The Nevada case embraced the “all or nothing” view of enforcement of non-competes, holding that an unreasonably broad non-compete is totally unenforceable and will not be “reformed” by a court. In other words, Nevada rejected the “blue pencil” rule, under which a court will rewrite an unreasonable non-compete to make it reasonable. This stands in stark contrast to Texas, where the non-compete statute requires the judge to rewrite an unreasonably broad non-compete.
This contrast raises some great questions:
- Is the Nevada decision a sign of a national trend? Maybe.
- If so, is the trend likely to come to Texas? Yeah, right (that was sarcastic).
- Can Texas employers rest easy and draft their non-competes as broadly as they want, secure in the knowledge that if a judge finds the non-compete too broad, the judge will rewrite it to the extent necessary to enforce it? More about this later.
First the Nevada case itself. Golden Road Motor Inn, Inc. v. Islam had the typical non-compete litigation fact pattern:
- Employee signs non-compete with Employer
- Employee becomes unsatisfied with her work
- Employee does things she shouldn’t (accessing, altering, and copying customer information from Employer’s computer system)
- Employee goes to work for Competitor
- Employee provides customer information to Competitor
- Employer sues Employee and Competitor, alleging breach of non-compete and other claims
In this case, the employee was a casino hostess. The non-compete barred her from employment with any other “gaming establishment” within 150 miles of the casino for one year following the end of her employment. All seven justices of the Nevada Supreme Court agreed that this was an unreasonably broad non-compete and therefore not enforceable as written. But the court split 4-3 on whether the employer was entitled to reformation, with the majority holding that the court will not rewrite an unenforceable non-compete to make it enforceable.[1]
Why would a court adopt this “all or nothing” approach? The best argument for this approach is what I call the Narrowly Tailored Incentive. In most cases, the employee signs whatever the employer puts in front of her. If reformation is available, the employer can write the non-compete as broadly as it wants, knowing that a judge will save an unreasonable non-compete. But if reformation is not available, the employer has an incentive to narrowly tailor the non-compete, which is better for competition and the employee.
The Nevada Supreme Court cited this argument but, strangely, focused more on the point that courts should not rewrite the unambiguous terms of the parties’ private agreement. This is a common argument in other contexts, but it is out of place in non-compete law. The whole point is that non-compete agreements are restraints of trade that affect the public interest in free competition, not just the private parties’ interests. Courts will refuse to enforce an overly broad non-compete not because of the parties’ intent, but because of public policy.
The court also went off track by citing the principle that courts should respect the terms the private parties freely agreed to. That is usually a rationale for enforcing a contract as written. It makes less sense to cite that principle as a reason for not enforcing the contract at all.
The better rationale for not allowing reformation is the Narrowly Tailored Incentive, as some other courts have recognized. One Delaware court, for example, criticized reformation because it gives the employer “every reason to start with an overbroad provision.”[2]
Nationwide, there is a spectrum of views on the blue pencil rule:
- Some states, including Georgia and Wisconsin, simply do not allow reformation of an overbroad non-compete.[3]
- Others, such as Louisiana, disfavor reformation and limit it to striking the offending language, rather than rewriting the non-compete.[4]
- Some states, including Delaware and New York, allow rewriting the non-compete if the employer acted in good faith, but it is discretionary with the judge.[5]
- The Texas legislature, in its wisdom, has by statute made reformation of an overbroad non-compete mandatory.[6]
The majority of states allow reformation to some extent. But is Nevada’s “all or nothing” rule a sign of a trend? There has been a growing chorus of criticism of excessive use of non-competes. It is possible that other states could follow Nevada as part of an effort to enact “non-compete reform.”
But don’t expect Texas to join the chorus. Texas judges must follow the Texas non-compete statute which, as noted above, makes reformation mandatory. And you don’t need a political science degree to know there is virtually zero chance the current Texas legislature would go against powerful business lobbies and make it harder to enforce non-competes, even if it was inclined to do so.
So Texas employers can do what they want with non-competes, right? Not so fast. The Texas non-compete statute does have some advantages for employees. Texas may be pro-business, but it also has a tradition of rugged individualism. While the Texas statute gives the employer the right to reformation, it also provides an important incentive to narrowly tailor the non-compete: if the non-compete is unreasonably broad, the employer cannot recover damages that occur before reformation.
Thus, in Texas the second best kind of compete is one that is tailored as narrowly as possible to protect the employer’s confidential information and customer relationships. To maximize the right to seek an injunction and damages in the event of a breach, Texas employers should narrow the non-compete “until it hurts.” For example, a six-month non-compete limited to the company’s customers in the employee’s sales territory may feel too skimpy to the employer, but it is more likely to be enforceable.
If that’s second best, what is the best kind of Texas non-compete? Look for that in a future edition of Five Minute Law.
*Update: In 2017 Nevada passed a new non-compete statute. The statute overturned Golden Road Motor Inn in part by allowing courts to “blue pencil” a non-compete by revising it to the extent necessary to make it enforceable. But in other ways the statute favors employees. See Nevada Enacts New Non-Compete Law.
*Further Update: In 2021 Nevada banned non-competes for hourly workers.
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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm (zachwolfelaw.com). Thomson Reuters named him a Texas Super Lawyer® for Business Litigation in 2020, 2021, and 2022.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.
[1] Golden Road Motor Inn, Inc. v. Islam, 2016 WL 3940950, at *8 (Nev. July 21, 2016).
[2] “In my view, a court should not allow an employer to back away from an overly broad covenant by proposing to enforce it to a lesser extent than written. More importantly, a court should not save a facially invalid provision by rewriting it and enforcing only what the court deems reasonable. Doing so puts the employer in a no-lose position. If an employer knows that the court will enforce a reasonable covenant as a fallback, the employer has every reason to start with an overbroad provision.” Delaware Elevator, Inc. v. Williams, 2011 WL 1005181, at *10 (Del. Ch. 2011).
[3] Allied Informatics, Inc. v. Yeruva, 554 S.E.2d 550, 553 (Ga. Ct. App. 2001); Wis. Stat. § 103.465 (2007).
[4] L&B Transp., LLC v. Beech, 568 F. Supp. 2d 689, 693-94 (M.D. La. 2008); Lobrano v. C.H. Robinson Worldwide Inc., 2011 WL 52602, at *7-9 (W.D. La. Jan. 7, 2011).
[5] Elite Cleaning Co., Inc. v. Capel, 2006 WL 1565161, at *8 (Del. Ch. June 2, 2006); RHIS, Inc. v. Boyce, 2001 WL 1192203, *7 (Del. Ch. Sept. 26, 2001); BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388 (1999); Marsh USA Inc. v. Schuhriemen, 2016 WL 2605014, at *4 (S.D.N.Y. May 2, 2016).
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