MINUTES OF THE SENATE COMMITTEE ON COMMERCE AND LABOR Sixty-eighth Session February 24, 1995 The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 8:00 a.m., on Friday, February 24, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Randolph J. Townsend, Chairman Senator Ann O'Connell, Vice Chairman Senator Sue Lowden Senator Kathy M. Augustine Senator Raymond C. Shaffer Senator John B. (Jack) Regan Senator Joseph M. Neal, Jr. GUEST LEGISLATORS PRESENT: Senator William J. Raggio STAFF MEMBERS PRESENT: Beverly Willis, Committee Secretary Scott Young, Senior Research Analyst OTHERS PRESENT: Ray Trease, Supervising Compliance Investigator, Consumer Affairs Division, Department of Business & Industry Ken Scruggs, Government Relations Director, Household Financial Group Fred Hillerby, Lobbyist, Professional Insurance Agents of California & Nevada Alice Molasky, Commissioner of Insurance, Insurance Division, Department of Business and Industry Robert Barengo, Lobbyist, Nevada Consumer Finance Association Guy Perkins, Assistant Supervisor, Life & Health, Insurance Division, Department of Business & Industry Scott Walshaw, Commissioner, Financial Institutions Division, Department of Business & Industry Harvey Whittemore, Lionel, Sawyer & Collins Ray Bacon, Lobbyist, Nevada Manufacturers Association Frank MacDonald, Labor Commissioner, Officer of Labor Commissioner, Department of Business & Industry Louis Ling, Deputy Attorney General, Labor Commission, Office of the Attorney General The first order of business was a hearing on Senate Bill (S.B.) 164 Senate Bill 164: Expands circumstances under which person who contracts for services from dance studio or health club may cancel his contract. First to testify was Ray Trease, Supervising Compliance Investigator, Consumer Affairs Division, Department of Business & Industry, who stated he is neutral on the bill. However, if complaints should come along, his department would act as mediator. Next to testify, was Senator Joseph M. Neal, Jr. representing Clark Senate District 4. Senator Neal noted his interest came from dance studios or health clubs locking people into long-term contracts. Senator Neal noted, oftentimes, these types of clubs have the option to cancel contracts by giving a 30-day notice for cancellation, while the consumer does not and often there are legitimate reasons for cancellation. Senator Neal stated he feels S.B. 164 would generate a more equitable situation between these types of clubs and the public. Senator Townsend asked Mr. Trease to contact several of the larger health clubs in southern Nevada and in Reno to take an assessment of the sort of work load, would ensue, should S.B. 164 become law. Senator Lowden questioned Mr. Trease regarding problems that might arise, noting that if S.B. 164 should become law, other types of businesses might well take advantage of the cancellation issue. Senator Lowden stated "If we are saying anybody can cancel a contract without penalties within 30 days, why have a contract at all." Mr. Trease pointed out many times, there is the option to join a particular club for a short period of time. Senator Lowden reiterated her concerns regarding early cancellation of contracts. Senator Neal continued with his reasons for supporting this bill. Mr. Trease reiterated his statement that his department is neutral and would try to look at both sides of any issue. Senator Regan asked Mr. Trease to expand on Senator Townsend's request to look into numbers and length of contract in Las Vegas and Reno by checking with the Better Business Bureau in both of these areas. Senator Regan noted he has knowledge of seniors who had problems with signing long- term contracts. Senator Regan remarked to Senator Lowden S.B. 164 refers to dance studios and health clubs only and would not affect all contracts. Senator Lowden maintained her concerns and stated "I think it opens the door. if you allow for this." Continuing, Senator Lowden stated: If you start with this, where do you stop. I'm not disputing that maybe we should have this, but I think we have to look at a bigger picture here of what we are doing. If we change this law it is going to affect a lot more than just these two industries. Senator Townsend closed the hearing on S.B. 164 and opened the hearing on S.B. 74. Senate Bill 74: Authorizes person licensed to make installment loans to provide noncredit-related insurance to borrowers. Senator Kathy Augustine, Clark Senate District 7, introduced Ken Scruggs, Government Relations Director, Household Financial Group, who would be testifying on behalf of S.B. 74. Senator Augustine stated an amendment to this bill (Exhibit C) would be introduced by Fred Hillerby, Lobbyist, Professional Insurance Agents of California & Nevada. Mr. Scruggs noted S.B. 74 would amend the Consumer Loan Act and would affect Household Finance Corporation. He stated in most states, other than Nevada, consumer lenders are allowed to directly sell insurance in connection with a loan. In Nevada these are two separate transactions and insurance may only be sold by an insurance agent. As originally drafted, the finance company would be allowed to directly sell insurance without going through the insurance agency, causing concern with insurance agents. Mr. Scruggs presented Exhibit C, a proposed amendment allowing finance companies to finance insurance premiums as part of the principal amount of the loan. Mr. Scruggs gave an explanation on the structure of Household Financial Group. Mr. Scruggs noted Household Financial Group is not a bank holding company and not subject to the same restrictions bank holding companies are. Next to testify was Mr. Hillerby who asserted his organization is concerned with the language in S.B. 74 since it is not clear who would be selling the insurance. Referring to Exhibit C, Mr. Hillerby went on with his explanation, stating he feels the key words are "person affiliated" with the licensed agency. He stated his organization supports S.B. 74 with the proposed amendment (Exhibit C). Senator Neal questioned Mr. Scruggs on the meaning of noncredit- related insurance to the borrower. Mr. Scruggs stated the proposed amendment would give those with a need, the ability to purchase term life and term disability insurance and finance the premium. This insurance could be purchased from a wholly-owned subsidiary of Mr. Scruggs's company. Senator Neal asked for further explanation. Senator Townsend stated term insurance could be sold to persons borrowing money and the term insurance would usually run for the length of the loan, so the financial institution would be paid, should anything happen to the borrower. Mr. Scruggs gave further explanation noting wording in S.B. 74 is vague as to whether or not premiums can be financed as part of a loan. Alice Molasky, Commissioner of Insurance, Insurance Division, Department of Business and Industry, testified the proposed amendment would satisfy, in part, some of the concerns of the Insurance Division. Ms. Molasky stated her concerns and possible remedies. Senator Townsend and Ms. Molasky discussed possible new wording for the proposed amendment. Robert Barengo, Lobbyist, Nevada Consumer Finance Association, stated he feels changes in S.B. 74 might be questionable for members of his organization. Senator Townsend suggested that Mr. Barengo, Mr. Hillerby, Mr. Scruggs, Ms. Molasky and anyone else who has an interest, work with Senator Shaffer, who is chairman of the subcommittee on trade associations to come to a resolution and draft another amendment to satisfy all parties. Guy Perkins, Assistant Supervisor, Life & Health, Insurance Division, Department of Business & Industry, was next to testify. Mr. Perkins stated he has doubts about how S.B. 74 would work, but went on to note Exhibit C gave some clarification. However, he did have questions why a loan would be needed when the types of insurance covered could be purchased on a monthly basis. Mr. Scruggs answered by stating there are different circumstances for different people and some might prefer to finance their premiums. Senator Neal asked if other financial institutions/banks are allowed to go into the business of insurance and, if so, could the premium be paid on an installment basis. Ms. Molasky noted it is her understanding that could not apply to banks. Senator Neal questioned if S.B. 74 would apply to only one financial institution. Scott Walshaw, Commissioner Financial Institutions Division, Department of Business & Industry, answering Senator Neal's question, stated it would affect certain consumer finance companies i.e., Household Finance, Beneficial Finance. Senator Neal asked, "Is this a new privilege that we would be offering if we pass this amendment (Exhibit C) to this particular bill" (S.B. 74). Mr. Walshaw answered noting these types of firms can finance credit-related insurance. This would just allow this company to directly finance other types of noncredit-related insurance. Senator Neal and Mr. Walshaw continued with a detailed discussion. Mr. Walshaw noted Household Finance Company wants the ability to finance premiums on policies their agents would be selling. Senator Neal asked what benefit to the consumer this would have. Mr. Walshaw stated it is a matter of convenience. Ms. Molasky stated she feels there should be safeguards for the consumers to avoid overreaching. Senator Neal asked Mr. Scruggs to get information on whether Household Finance Company is authorized for premium financing in any other states. Senator Townsend noted Senator Augustine would work with Senator Shaffer's subcommittee to draft a workable amendment. At this time, Senator Townsend closed the hearing on S.B. 74 and opened the hearing on S.B. 128. Senate Bill 128: Authorizes agreement that prohibits former employee from pursuing certain competitive activities. Harvey Whittemore, Lionel, Sawyer & Collins, stated he is not a sponsor of S.B. 128, however, feels it is appropriate for him to comment. Mr. Whittemore gave examples why he feels obligated to testify. He also referred to Nevada Revised Statutes (N.R.S.) 613.200. Mr. Whittemore stated, "What I am suggesting to you is that S.B. 128 in its scope is designed to solve the problem with the covenant not to compete." Mr. Whittemore went on to outline his thoughts on language for S.B. 128. Mr. Whittemore stated, "The issue is expressing a policy which is clearly understood in light of the controversy and confusion which has been created as a result of the focus on this statute." Mr. Whittemore and Senator Townsend had a detailed discussion on clarification and ramifications. Mr. Whittemore stated: I want to make this clear. I think the policy has to be, of this state, that employers cannot willfully provide false or defamatory or improper information about any employee. Senator Neal and Mr. Whittemore went on with further detailed discussion and explanation regarding the policy and meaning of S.B. 128. Next to testify was Senator William Raggio, Washoe District 3, testified, stating S.B. 128 this bill is his request. Senator Raggio stated: These types of contracts are quite common. They occur usually with executives, persons of significant experience or capability. In the usual case because at the expense of an employer a person has been brought into a company, paid the expenses, under an agreement whereby that person will agree to be employed by that company. Use his/her expertise. What often happens is as part of the arms- length agreement, usually the salary and benefits are extensive. The other side is, the employee covenants that he will, within a reasonable period of time and within a reasonable area, not compete if he/she leaves that company. Those parameters or limitations have been uniformly approved by courts across this country and even our supreme court. The only limitations, are the scope of the limitation must be reasonable. Senator Raggio went on to note: The strained interpretation, which came about through the Labor Commissioner's office and the advice, apparently, of the attorney general deputy representing that office, I suppose you can argue one way or another the way the statute is worded would support that interpretation. The problem is the interpretation that has now been put on it, for the first time since 1911, it has never been questioned, is that companies cannot enter into these kinds of agreements. Even those within reasonable scope. This bill, and I have not reviewed the amendments, that Mr. Whittemore is talking to you about, the purpose is to make it clear that the statute of Nevada does not prevent those kind of reasonable contracts from existing. That's the sole purpose of this bill; to clear the law so these types of contracts can be utilized. Senator Raggio went on to state if Nevada does not permit this, Nevada would be the only state he could think of that does not allow companies to covenant with an employee. He feels there would be a large number of companies that would not operate here, if they were told they could not have these kinds of agreements to protect, not only trade secrets or disclosures, but to protect a clientele. Senator Raggio stated "All this does is to make sure our law is not going to be interpreted to prevent this type of commercial agreement and arrangement." Senator Lowden, Senator Regan and Senator Raggio had further discussion on the worth of this particular law. Senator Neal stated he still has some concerns regarding the wording "reasonable period" an individual can be disallowed to participate in certain types of employment. Senator Raggio stated: The language in the bill is specifically the language the courts have adopted. These kinds of contracts have to have valuable consideration. These types of covenants are enforceable; they do not involve involuntary servitude if they are supported by valuable consideration, if they impose no greater restraint on the employee than necessary to protect the business and goodwill of the person. That's the language courts have approved. Ray Bacon, Lobbyist, Nevada Manufacturers Association, testified to reenforce Mr. Whittemore's and Senator Raggio's comments. He feels without this legislature it could hinder economic development. Frank MacDonald, Labor Commissioner, Office of Labor Commissioner, Department of Business & Industry, who explained what precipitated the need for this legislation. Mr. MacDonald introduced Louis Ling, Deputy Attorney General, Labor Commission, Office of the Attorney General, who testified next, giving case history and background pertaining to a need for this legislation. Mr. Ling went on with further discussion regarding various wording in this legislation. Senator Lowden and Mr. Ling discussed the possible interference of government into private business by use of this legislation. Senator Lowden noted her support for Exhibit C. There was further discussion between Senator Neal and Senator Lowden regarding the issue of potential governmental interference into private business. Senator Townsend summarized, stating to Mr. Ling: You gave to the Insurance Commissioner a memo based on a law we have had since 1911 that was upheld in 1967, but there was a new question involved and you gave an interpretation. Senator Townsend went on to state: This was a major new interpretation on a statute that has been here for 80 some years. I'm confused that you simply couldn't tell the person who inquired that it appeared to you, based on legal interpretation, this was probably an invalid contract and perhaps a contract of adhesion and he/she should seek legal advice. Senator Townsend then stated to Mr. Ling: I hope that you, in working with Mr. Whittemore or Senator Raggio, with the subcommittee, will get an essence of what we are trying to accomplish. I don't know if we need any of this language. Because I'm not sure there wasn't just a contract of adhesion that should have been dealt with in the courts. But, if this needs to be cleared up let's get language we can all live with. I would be very careful when you start entering as a government agency - these are contract actions and we should be very careful. At this time, Mr. Whittemore gave an explanation of the case referred to by Mr. Ling. Mr. Whittemore discussed further legal aspects and ramifications of S.B. 128 and the proposed amendment. Senator Shaffer asked if there is a requirement in the law that would require an employer to identify a disclosure agreement during preemployment discussions. Mr. Whittemore stated there is no requirement. Senator Shaffer and Mr. Whittemore had further discussion. Mr. Ling reiterated support of S.B. 128. Senator Townsend noted the subcommittee, comprised of Senator Neal as chairman with Senators O'Connell and Lowden will take action. There being no further business, the meeting was adjourned at 10:10 a.m. RESPECTFULLY SUBMITTED: Beverly Willis, Committee Secretary APPROVED BY: Senator Randolph J. Townsend, Chairman DATE: Senate Committee on Commerce and Labor February 24, 1995 Page