What is a Non-Compete Clause?
A non-compete agreement (also known as a noncompetition agreement, noncompete clause or covenant not to compete), is a provision in an employment contract that restricts an employee from embarking on certain commercial activities after their employment ends. Non-compete agreements generally apply to individuals hired as a result of an employer’s recruitment efforts, such as key employees, institutional knowledge holders, and top producers in order to keep talented employees from using sensitive information or training gained while employed . The intention behind a non-compete agreement is to sustain the competitive advantage gained by the employer through investing in that employee, and delaying the competition by withholding the former employee’s competitive resources for a proffered amount of time and distance.
Iowa Non-Compete Laws
Iowa does not have a specific statute on non-competes, although non-competes are based in contract law. Non-competes are analyzed under equitable principles, however. The Iowa Supreme Court has yet to define the elements of a non-compete agreement but Court has upheld their use.
Under Iowa law, non-competes are enforceable only if they are necessary to protect a legitimate business interest of the employer and provide a fair protection to the employer but not impose a greater detriment on the employee than is necessary and by considering other factors depending on the facts of each case. There is no absolute requirement of a geographical territory or duration for a non-compete. In determining enforceability of non-competes, the Iowa Supreme Court utilizes a balancing test that weighs an employer’s protectable interest against the hardship it imposes on the employee and the public. Property interests protectable by non-compete agreements: (i) trade secrets, (ii) confidential customer lists developed through substantial time and expense, (iii) confidential information unique to the employer’s business, (iv) specialized training provided by the employer, and (v) prior dealings with specific customers. Because Iowa law does not require a time period or geographic territory, employers may decide to limit employees on the basis of products or services the employee sold or serviced or in specific geographic areas in or outside Iowa. In Iowa, the general law is that where a non-compete agreement is found to be overbroad, the reasonable amount of trade protection may be linked to that non-compete by judicial reformation of the original agreement.
Iowa Non-Compete Enforceability
As a general proposition, Iowa courts will enforce non-compete agreements if they are (1) supported by consideration and (2) reasonably limited in time and area. In determining whether these requirements are met, an Iowa court will consider the totality of the circumstances surrounding the case. Courts will typically look to whether the agreement protects a legitimate business interest of the employer and the hardship imposed upon the employee as well as the former employer’s interest.
A recent Iowa case tackles the "relevant time frame" for assessing the reasonableness of a non-compete which can impact an employee’s right to compete. In Harvey v. Care Initiatives, Inc., No. 22-0124, 2022 Iowa App. LEXIS 966 (Iowa Ct. App. Aug. 10, 2022), the Iowa Court of Appeals found that a post-employment non-solicitation agreement with a former employee wasn’t reasonably limited in time because the relevant period from which to measure employee contact with former patients went back almost a decade and "well before" the agreement was executed. The suit involved a 20-year employee who worked as a case manager for a period of 16 months in a West Des Moines location. During that 16-month time, the employee came into contact with about 900 patients. Soon after leaving her position in 2018, the employee accepted a position with an employer that serviced the same geographic area. The former employer demanded she stop further involvement with her former patients; she declined. The employer sought to compel arbitration despite the employee’s claim that provisions relating to arbitration and choice of law were procedurally unconscionable, and the court found otherwise. But it also found the non-solicitation provision of the independent contractor agreement unenforceable in light of the time-frame, given that many of the 900 patients were not located in the area of the agreement. It also determined that the six-month restriction was not the relevant period from which to determine the employee’s experience with a patient.
Key Terms in Iowa Non-Competition Agreements
Essential to determine whether the agreement is enforceable will be the consideration given to the agreement at the time it was entered into, i.e., whether sufficient consideration supported the agreement at the time it was executed. A present agreement to be employed is adequate consideration for a non-competition agreement with a term not exceeding two years. Woensdregt v. Bankers Trust Co., 450 N.W.2d 864, 868 (Iowa 1990). An employment at will arrangement is a "mutuality of obligation," which ‘"provide[s] bind[ing] promises on both sides: the employee to work, the employer to pay.’" Id. (quoting Restatement (Second) of Contracts § 73, comment a (1981)).
A non-competition agreement reasonably limited in time and location is enforceable under Iowa law. Wernimont v. Iowa Methodist Medical Ctr., 579 N.W.2d 19, 20 (Iowa Ct. App. 1998). The following limitations in time and geography are reasonable: two year contractual period; 20-mile geographic area. Id. A "reasonableness" determination may require that a court apply a three step test: (1) has the former employee engaged in competition with the former employer?; (2) has the former employee found employment elsewhere?; and (3) how long has the former employee been out of the former employer’s employment?" Woensdregt, 450 N.W.2d at 868 (citing Alexander & Alexander, 476 A.2d at 130). The latter two considerations weigh the equities involved in each case. Id.; see also Houghton v. Houghton, 258 N.W.2d 330, 334 (Iowa 1977) (refusing to enforce a 21-month non-competition agreement for the practice of medicine).
Fighting a Non-Compete in Iowa
Employees who have been presented with non-compete agreements may be in the position of challenging their enforceability. Some factors used to challenge the enforceability of noncompete agreements include: whether the agreement is too long, too broad, or not supported by valid consideration. Non-compete agreements (also called covenants not to compete) are disfavored by courts as restraints on trade and should be strictly construed if enforcement is sought. Iowa Statute, Iowa Code section 614.19 allows employee non-compete agreements [that are supported by a contract] to be enforced for a maximum of two years for persons, and five years for a corporate entity. Because employees and their employers need certainty, a determination of the enforceability of a non-compete by one court will be honored by other courts. In determining whether a non-compete agreement is too long, too broad or unsupported by valid consideration, an examination of the agreement and the surrounding circumstances will be undertaken. For instance, an Iowa Court in McAuliffe V. Citrano, stated that a non-compete agreement prohibiting an individual from working in the same area of business for two years in all of North America and Asia was too lengthy in time and too broad in scope and, therefore, unenforceable in Iowa. Similarly, in Merck v. Wright, an Iowa Court held a 25-year restraint against competition was unconscionable to the point of being voidable. Additionally, the Iowa Court has the ability to sever or void unreasonable portions of the agreement but to the extent it is unable to do so, an entire agreement can be voided. The key point of any challenge to a non-compete agreement is to pay particular attention to the requirements stated in the statute and the entire non-compete agreement itself. Iowa Courts have indicated that a non-compete agreement is invalid unless sufficient consideration exists. A recent decision by the Iowa Court of Appeals provided an example of what constitutes "sufficient consideration" for a non-compete agreement. In this case , Bill’s Supermarket sold a series of stores to Dahl’s Food Markets. As part of the sale, Dahl’s required the sellers and Bill Clark himself to sign a non-compete agreement. The sellers signed the agreement but Mr. Clark failed to do so. Years later, however, Mr. Clark agreed to a new non-compete agreement with Dahl’s. He did not receive any additional consideration for the new agreement, however, it still contained the language of the non-compete agreement he had refused to sign with his original agreement. The Court held that Mr. Clark received sufficient consideration for the new non-compete agreement due to the the original non-compete agreement being valued at ten percent of all revenues from the store sales, which were then paid to Clark, as well as the closing of the store sales. In sum, sufficient consideration, albeit indirect, existed to support the new non-compete agreement. The determination of the enforceability of non-compete agreements in Iowa is conducted on a case-by-case basis. Some non-compete agreements impose restrictions on employees’ ability to engage in post-employment employment, which sometimes become the focal point of litigation and require clarity on their enforceability. For instance, some non-compete agreements restrict an employee from pursuing business with former clients, or from competing against the employer in the same industry in a defined geographical area. Whether a non-compete agreement is enforceable will depend greatly on its specific terms, the underlying contract, the respective relationships between the parties, and the surrounding circumstances. Iowa is relatively unique in terms of a straightforward statute which governs noncompete clauses. Most states do not have a statutory provision which enumerates which terms are to be present in non-compete clauses. It is extremely important to understand what the statute and Iowa Courts require in order to enforce non-compete agreements as they are viewed with disfavor by our Courts.
Iowa Alternatives to Non-Competes
In the event that non-compete agreements seem inappropriate, there are other types of post-employment obligations which can still protect an employer’s competitive interests. First and foremost is a non-solicitation agreement, which can be used to prohibit a former employee from soliciting or attempting to solicit business from customers of his former employer for a reasonable period of time after the relationship ends. A non-solicitation agreement could also go so far as to prohibit the former employee from soliciting fellow employees. A non-solicitation agreement would be evaluated by the court to determine whether or not its restriction of trade found a balance between protection of the legitimate business interests of the employer to be protected and the public policy of free trade found in Iowa Code section 550.
A confidentiality agreement will provide the greatest protection to the employer when it expressly defines and protects those trade secrets and/or confidential and proprietary information which are necessary for the employer’s business operation. Although these types of agreements are among the most common of all restrictive covenants because of their extreme importance to employers, they are also among the more difficult to enforce. Once such information is disclosed, the company’s competitive advantage is lost. Thus, the more clearly that trade secrets and/or confidential information are defined and set forth in the confidentiality agreement, the easier those agreements are to enforce. In addition, the less time between execution of the confidentiality agreement and the time of the employee’s or former employee’s access to the trade secrets or confidential information, the easier the agreement will be to enforce. Confidentiality agreements which seek to prohibit the use of an employee’s knowledge of his/her job, without regard to limitation on time or scope, will simply fail.
The importance and enforceability of confidentiality agreements, within the context of changing information security technology, is an area where the law will continue to evolve, as Iowa courts have historically erred on the side of not interfering with free trade.
How There are Iowa Non-Compete Impacts to Employees and Employers
The impact of a non-compete agreement in Iowa for an employee is often viewed as a negative thing. Non-competition clauses can restrict your ability to work and earn money. It can mean you either a new job, or lower pay, or moving to another state. Most often an employee would not sign a non-compete agreement unless it was necessary to land the job. Most employees would not ever negotiate a non-compete because it is a condition of employment and is not generally up for negotiation. The only time you might be able to negotiate the terms of a non-compete is if you have something unique to offer an employer and are in demand. But understand that your negotiating power weakens every day that you continue to work without an offer of employment.
The impact of a non-compete agreement in Iowa for your employer is typically a good thing, at least at first. An enforceable non-compete agreement can be used by an employer to try to protect whatever information they take the time to put in writing, test, and call a trade secret. It gives them something to use against employees they fear will leave the company and immediately work for a competitor. Depending on how the non-compete is negotiated, it can be used to lock you out of working for a competitor. In that case the non-compete can earn the employer a few months or years in which time investment can be recouped through increased sales without competition. In that way, a non-compete can decrease employee turnover, protect the company from potential losses, boost profit, all of which in theory are good things for an employer.
Iowa Non-Compete Agreement Trends
In recent years, the use of non-compete agreements has become more prevalent in Iowa as businesses try to protect their proprietary information and customer relationships. Nevertheless, non-competes have been scrutinized as the Iowa courts and legislature attempt to balance employers’ interests with employees’ right to work. The controversial nature of non-competes has also drawn the attention of legislators. Therefore, it is essential to understand the impact of Iowa case law and pending legislation on non-competes.
Large corporations are increasingly using non-competes in Iowa. Moreover, with more employers asking their employees to sign non-competition agreements in exchange for employment or other benefits, there is a strong likelihood that Iowa courts will see more non-compete cases in the future. Additionally, the Iowa legislature (while yet considering its own legislation regulating the use of non-competes) has recognized the public’s concern about the use of non-competes. In April 2016, the Iowa House Economic Growth and Technology Committee met for an informational meeting in which Iowa House members heard testimony regarding the history of non-competes in Iowa, non-competes in other states, and the economic incentives/reasons for non-competes. However, no legislation has been proposed recently addressing non-competes in Iowa.
The Iowa courts have largely ruled against enforcement of non-competes in recent years. In 2010, in the case of Davis v. Brinks, Inc., 759 N.W.2d 676 (Iowa 2010), the Iowa Supreme Court considered an employer’s request for injunctive relief against an employee who left to work for a competitor. The employer asserted that the employee was violating a non-compete by working at the competitor. The Iowa Supreme Court determined in that case that it would not enforce the non-compete, largely because the company had not proved that it had a legitimate business interest in enforcing the non-compete. The same year, in the Davis case, the Iowa Court of Appeals in the case of Jack Rabbit. Sys., Inc. v. Borys, 778 N.W.2d 600 (Iowa Ct. App. 2010), upheld the lower court’s decision that denied the company’s request for injunctive relief against the employee who had worked for the competitor in violation of the non-compete. The court’s decision was largely based on the fact that , after working for the competitor for approximately two years, the employee had not contacted a single customer or prospective customer in violation of the non-compete. The court also noted that an injunction would prevent the employee from working in essentially the only job for which he was qualified.
Iowa law generally looks favorably on non-competes that do not last for a long duration. For example, in 2012 the Iowa Supreme Court ruled in the case of Valley Commercial Cleaning, Inc. v. Raab & Kreitlow, Inc., 806 N.W.2d 8, 15 (Iowa 2011), that an eight-month duration was reasonable. However, a longer term may be enforceable. In 2011, in Turner v. McGinn, 804 N.W.2d 466, 471 (Iowa 2011), the Iowa Supreme Court upheld a non-compete that restricted a former employee from soliciting any of the employer’s customers for two years.
On the other hand, non-competes prohibiting more than a customer list or specific customers have been deemed overly broad. In 2009, in the case of ISU Credit Union v. Smith, 758 N.W.2d 41, 49 (Iowa 2009), the Iowa Supreme Court ruled that a non-compete agreement that prohibited the employee from "having any contact with any member, this includes any of that member’s family, or any person that could be a member" was too broad and thus, unenforceable. Iowa courts have also ruled against enforcement of non-competes that cover a broad territory. In 2011, in the case of National Athletic Surfaces, Inc. v. Cheng, 791 N.W.2d 29, 34 (Iowa Ct. App. 2010), the Iowa Court of Appeals concluded that a two-year, statewide prohibition on an employee who worked for an Iowa-based specialty service and sales company was excessive.
The benefit to employers of having an employee sign a non-compete is that it arguably creates goodwill. However, the Iowa legislature has proposed bills to eliminate non-competes. In 2016, Iowa Rep. Chris Hall introduced a bill to the legislature that would make it unlawful for an employer to require an employee to sign a non-compete. Iowa Rep. Ron Jorgensen introduced a similar bill. Neither bill got out of committee. Whether the Iowa legislature will propose other bills regulating non-competes in 2017 remains to be seen.