What Is a Non-Compete Agreement?
A non-compete agreement is essentially a restriction on competition – it’s a method of preventing a former employee from competing with his or her previous employer. In Iowa, as in many other states, this restriction usually occurs within a one-year timeframe following the employee’s termination. Typically, an employer will include a non-compete agreement in an employment contract, or as part of a severance package in order to prevent a former employee from soliciting business from their clients through a new business.
Since many people understand non-compete agreements based on their own experiences in the workplace , the agreements are not often clear to outsiders. In Iowa, we start each agreement with the following language: This is a restrictive covenant, and no law of any state or other jurisdiction shall apply to affect it except that of Iowa. The law in Iowa regarding non-compete agreements makes them difficult to enforce if they are used too broadly. The agreement must be no broader than is necessary to protect the employer and no more burdensome to the employee than is required to protect the employer’s interests. The agreement must also be reasonable in scope and duration.
Iowa and Legal Enforceability
In Iowa, as in many other states, the enforceability of a non-compete agreement is not absolute and will depend largely on the context in which the agreement was made. Iowa courts have long recognized that an enforceable non-compete agreement must be reasonable in its construction and scope. To be enforceable in Iowa, a non-compete agreement between an employer and an employee must not place an unreasonable restraint on the employee’s ability to earn a living in the future. (Valley Farmers Mut. Ins. Assoc. v. Hillebrand, 208 N.W.2d 731, 735 (Iowa 1973); Iowa Code § 550.4). Specifically, a non-compete agreement that is reasonable with respect to its time, area, and activity restrictions and is the result of an arm’s-length transaction which relates to the protection of proprietary rights will be enforced. (Id.) If these factors are met, an otherwise unreasonable non-compete agreement may still be enforced by limiting the scope of the restrictions to what is reasonable under the circumstances. (Lennox Indus., Inc. v. McVay, 412 N.W.2d 232, 237 (Iowa Ct. App. 1987)). An agreement that is wider in its temporal scope or geographical extent than permitted by law will not be rendered unenforceable as a matter of law. (See Barrett v. H & C Insulation, Inc., 523 N.W.2d 878, 880 (Iowa 1994)). While non-compete agreements executed by an employer in contrast to those executed by a seller of a business are treated in largely the same manner in Iowa, notable distinctions exist for the consideration necessary to support their enforcement. For example, consideration in the form of employment is sufficient to support the enforcement of a non-compete agreement made by an employee in a contract for employment. (Fairfield Resources v. Ohio Cas. Ins. Co., 508 N.W.2d 646, 648 (Iowa 1993)). However, mere continuation of employment is inadequate consideration for a non-compete agreement. Rather, consideration must take the form of a material change in the employment relationship that prevents the employee from having relied on the pre-existing employment relationship to such a degree that the employee is no longer capable of seeking employment elsewhere. (See Barrett, 523 N.W.2d at 880; Vargas v. McCausland, 555 N.W.2d 262, 263 (Iowa Ct. App. 1996)). Despite the foregoing standards, determining the enforceability of a non-compete agreement will be a case-by-case determination made by a court, and these determinations will be difficult to generalize.
Requirements for Legal Enforcement
For a non-compete to be valid in Iowa, it must be reasonable in time, geographic scope, and position. A non-compete will only be upheld if the above three factors are balanced in its scope. Courts have been willing to find this balance, and invalid non-competes are now rare. Courts have distinguished between no-compete agreements and no-poach agreements, as the two agreements serve different functions and are not representative of the same risk to the competitive interests of the employer. Therefore, one type of provision may be reasonable and valid while the other is not.
Time Restriction
Courts will look at what is reasonable; for example, a five year restriction against West Coast competition is unreasonable and too restrictive. Other courts have found that a five year restriction is reasonable, but will not go beyond that. In general, anything larger than five years is likely to be found unreasonable.
Geographic Scope
The court will look at the geographic scope of the agreement. It must be what is deemed by the court to be reasonable – a 1,500-mile radius versus a state will be seen as too broad. It may be found reasonable, however, if the employer does business in all 50 states and has more than 1,500 stores in the United States.
The court will also consider the conveyance of customers. If there is a geographical portion of a client base, it will generally only be reasonable to identify clients in a two-hour drive. Anything beyond that will be seen as unreasonable.
Legitimate Business Interests
Iowa courts are looking for a legitimate interest that is protectable by the non-compete agreement. If you are separating from a company, there must be some interest that is being protected. If you create no competition or have no information to disclose, there is nothing in the non-compete for the employer to protect.
Considerations will also be given to whether the employer is the most recent employer the employee worked for. The employer has to be protected from a valid business interest that it has in dealing with employees. If you have left the trade secrets and already taken the clients with you, there is nothing left to protect.
No matter how well the agreement is written, if there is nothing for the company to protect, there is nothing you can do at this point to make it right afterwards. It must be protected initially.
Difficulties Around Enforcing Non-Competes
Iowa courts take the enforcement of non-compete agreements seriously. However, they do not simply enforce any non-compete agreement. The burden is on the business to prove that the agreement is enforceable and that a breach of the agreement has occurred. In addition, an employee may have defenses that a business must overcome in order to obtain an injunction enforcing a non-compete agreement.
Burden of Proof
A business seeking injunctive relief ("any type of relief or remedy ordered by a court against an individual in response to that individual’s conduct") in order to enforce a non-compete agreement faces a difficult burden. The business must demonstrate that the terms of the agreement are reasonable and protect a legitimate interest. It is not enough to show that the non-compete agreement is simply beneficial to the business. The business must present evidence that enforcement of the non-compete agreement will not damage the public . The burden to show that a non-compete agreement is reasonable falls on the business seeking to enforce the agreement. Further, Iowa non-compete case law provides that a non-compete agreement that is contrary to case law will not be saved or reformed to comply with Iowa law.
Defenses
Employers seeking to enforce a non-compete agreement may face defenses and arguments from employees. For example, the employee may argue that the business seeking to enforce the non-compete agreement will not suffer harm as a result of the breach. Iowa courts will not consider speculative or hypothetical evidence of harm when deciding whether to grant enforcement of a non-compete agreement. However, the existence of the non-compete agreement and the fact that the employee is engaged in conduct that is arguably prohibited is weighty persuasive evidence for the business seeking to enforce the agreement.
Options to Non-Competition Agreements
Both companies and individuals frequently ask me if they have other options than a non-compete. The two most common alternatives are the non-solicitation clause and the confidentiality agreement.
The non-solicitation clause is a bit of a misnomer. Neither a former employee nor her new employer is "soliciting" anyone that the former employer already does business with. The former employer is attempting to hire away customers or clients of the former company or former employee.
Traditionally, the non-solicitation clause has been in addition to the non-compete clause. But, in reality, there is no reason why the non-solicitation clause cannot stand on its own. And I have seen it done both ways. In fact, after the Iowa Supreme Court’s 1989 decision in Van Horn v. Neer, my employment lawyer partners and I saw an uptick in their use. Many of our clients chose the non-solicitation clause over the non-compete clause. In 2003, the Iowa Supreme Court addressed the non-solicit clause for the second time in Aon Risk Services v. McGowan. I wrote about the Aon case and the non-solicit clause.
Ionia State Bank v. Hegarty is one of my favorite non-solicit cases. The bank drafted an agreement for a senior lender with a five-year non-solicit of customers. The clause would have precluded Hegarty from accepting an account from a farmer that he had suggested to go elsewhere. While that may sound silly to you, that is exactly the type of conduct that caused the bank to lose.
As mentioned earlier, a confidentiality agreement is a great option for many companies. The quest for the next great idea is never ending. Accordingly, sharing too much with your employee about either your product or technical specifications could result in unintended, yet potentially harmful, disclosures. Disclosures regarding confidential information also fall into the category of things that most businesses know not to do.
Advice for Employers and Employees
For employers, this is a call to action. As with any contract, careful drafting at the commencement of the employment relationship can avoid time consuming and expensive litigation later. We would caution that employers should not rest on any assurances that the agreement will be reviewed and revised later due to the understandable rush to get employees up and running quickly. A non-compete agreement should be an essential part of every hiring process for key employees, particularly if the employee has access to confidential information, dealings with important clients or customers, power to hire and fire and/or the ability to influence the direction of the organization. If the employee could potentially remove many contacts, clients or customers upon termination – the non-compete agreement should be thoroughly crafted to ensure that the appropriate geographic area and relevant duration is included. The non-compete should also reflect that the employment itself is not the only consideration for the agreement – allowing the parties to more easily re-negotiate if needed in the future. Finally , the employer should be willing to invest in a legal review of the agreement and amending it to comply with Iowa law. If the employer is not willing to do so, there is a very good chance that a court would not be interested in enforcing it.
For employees, the obvious approach is to contact a lawyer. But to the extent that is not immediately feasible, employees are urged to at least "think through" the implications and potential reach of the agreement prior to signing. Does the non-compete capture your activities in part-time business A, full-time business B, volunteer work C or internship D? Does the non-compete include "any affiliated entity" which could be interpreted in an overly broad manner? What about working in the same capacity for a competitor or starting your own business? Many times, simply being armed with the above questions can help you more effectively negotiate your terms with your employer and avoid the headache down the road.