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December 15, 2018

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With restrictive ruling on noncompetes, casinos could be forced to adjust

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In 2012, after several years working as an executive casino host for the Atlantis Casino Resort Spa in Reno and at Harrah’s before that, Sumona Islam took a job with the Grand Sierra Resort three miles away. One problem: Islam had signed a noncompete agreement preventing her from taking the job.

Not long after Islam defected to the Grand Sierra, Atlantis sued. Its lawyers alleged a violation of the agreement and said Islam had copied and altered the casino’s proprietary customer information. The case went to trial and was appealed to the Supreme Court of Nevada, which ruled last month that the noncompete was unreasonable, a ruling that could have broad implications for businesses in Nevada.

The court’s order in late July, which has flown largely under the radar, represents a “paradigm shift,” argued Howard Cole, a Lewis Roca Rothgerber Christie partner who has drafted several noncompetes.

“Companies should immediately be discussing with their counsel: What do we have to do?” Cole said.

In question before the court was whether Atlantis could enforce a noncompete agreement prohibiting Islam from employment at a gaming business within 150 miles of Atlantis for more than one year after working at the casino. In a narrow 4-3 ruling, the court found the clause "overbroad." Favoring employee interests, the court majority refused to modify the contract and said the entire agreement was invalid.

“According to the term, Islam is prohibited from being employed, for instance, as a custodian, at every casino within a 150-mile radius,” Justice Michael Douglas wrote for the majority. “The agreement’s prohibition of all types of employment with gaming establishments severely restricts Islam’s ability to be gainfully employed. For these reasons, we deem the term to be overbroad and unreasonable.”

The use of noncompetes extends far beyond the casino industry. Illinois-based sandwich chain Jimmy John’s recently dropped an infamous noncompete clause that prevented its employees from taking jobs with its competitors for two years. The Nevada Supreme Court once invalidated a noncompete that prohibited a legal assistant from competing within 100 miles of Reno/Sparks for a period of five years.

They are used by construction companies, media outlets and health care groups alike, and the aim is to protect core business interests.

Casinos often apply noncompete agreements to employees, like hosts, with access to proprietary information. Having reviewed and drafted noncompete clauses for Nevada clients, including gaming interests, Cole said the decision could make many of those agreements hard to enforce as written.

“None of those agreements, in my opinion, would past muster after the Atlantis decision,” he said.

For companies, requiring employees to sign noncompete agreements can cut both ways. Unless a casino is prepared for a legal battle, the clauses can deter that company from poaching new talent if competitors also use noncompetes. A casino near Baltimore — Maryland Live — filed a lawsuit in July that accuses MGM Resorts International, which is building a casino in the state, of hiring hosts who signed noncompete agreements. The suit says the hosts improperly collected information about “high-rollers.”

“Maryland Live is resorting to threatening its current and former employees with unenforceable noncompete provisions in hopes of preventing people from working in other states, regardless of whether their new employment would compete with Maryland Live,” MGM Resorts has said in a statement.

Like several casino operators, MGM Resorts said it uses noncompete agreements in cases where it feels a need to protect its business interests. Contracts negotiated by the Culinary Union exclude such clauses.

Joshua Buck, president of the Nevada Employment Lawyers Association, said many jurisdictions are looking at the breadth of noncompete agreements and the restraints they place on doing business.

“You cannot have a noncompete anywhere in California,” Buck said. “I personally think that they are increasingly being looked at with hostility and increasingly being looked at with skepticism.”

Some predict the Nevada Supreme Court’s decision could impact Nevada companies because the court refused to modify Atlantis casino’s “unreasonable” noncompete. When some courts deem noncompete agreements overbroad, they will modify sections rather than invalidate the entire clause.

“The court is pretty clear that they are not going to reform or interpret unreasonable language,” said Ruben Garcia, a professor at UNLV’s Boyd School of Law who specializes in employment issues.

In noncompete cases, the court must weigh the hardship placed on the employee with the need for an employer to protect its interests. And the majority of the court sided with the employee in this case.

The facts of it, pending before the Nevada Supreme Court since 2013, placed Sumona Islam — the employee — in the crosshairs between Atlantis, her former employer, and Grand Sierra, the casino that hired her. Before leaving Atlantis, Islam copied customer data that she later inputted into Grand Sierra’s computer system. She also altered customer data in Atlantis’ computer system. After a criminal proceeding, gaming regulators revoked her work permit, which she had reinstated on an appeal this year.

Given these facts, the three dissenting judges questioned why the majority expressed such concern for the employee. The dissent argued that modifying the clause to remove the broad language, rather than invalidating the whole clause, would have better balanced the interests of the employee and employer.

Islam’s attorney Mark Wray did not dispute his client’s actions, but he said that noncompetes are often used as an anticompetitive tactic. He said casinos hire hosts to benefit from their existing relationships.

“Nobody owns these gamblers,” he said.

Before the Nevada Supreme Court, Atlantis had argued that Grand Sierra should also be liable for taking its trade secrets — the copied information that Islam uploaded to Grand Sierra’s computers. The court sided with Grand Sierra, which argued that it had no knowledge that the data amounted to trade secrets. Lawyers for Grand Sierra did not respond to a request for comment.

In a statement, an Atlantis spokesperson said: “We are disappointed with the split-decision opinion by which the casino that subsequently employed the host and admittedly used the same information was absolved of liability, and that our strenuous efforts to obtain legal protection against further misuse of that information were not wholly successful.”

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