Review of Non-Compete Agreements
Non-compete agreements are contracts between employers and employees that restrict the future activities of the employee. Commonly, non-compete agreements are employers’ attempts to "lock-up" their employees following the resignation, termination or constructive discharge of an employee. Such agreements often attempt to both expand the time frame and geographical location in which a departing employee is restricted from performing any work in the same profession as her former employer. In addition to time and geography restriction, many employers also impose subject restrictions in order to prevent their employees from "jumping ship" with privileged knowledge of particular clients, customer list, or just their general knowledge of the business . Depending on the jurisdiction, non-compete agreements can be unenforceable unless the restriction is reasonable in duration, scope, and geographic application. In the past, Iowa courts have been known to use a strict review when confronted with judicial challenges to non-competes in an employment setting. However, in recent years, Iowa courts seem to be favoring a more lenient approach in evaluating the enforceability of non-compete agreements. Although Iowa courts have not formally adopted the "blue pencil" method of reviewing non-compete agreements (i.e., rewriting an unreasonable provision in order to render it enforceable), if the court perceives a good faith effort by the employer to limit the non-compete to reasonable parameters, only the unreasonable provisions of the non-compete may be struck down and the rest of the agreement upheld.
Iowa Non-Compete Statutes
Iowa is one of a handful of states (north of the Mason-Dixon line) whose courts have not adopted the common law Restatement of Contracts rule, which provides that to be enforceable, a non-competition provision must not be broader than necessary to protect a legitimate business interest. Instead, Iowa courts follow a rule of reasonableness requiring that such provisions be limited in temporal and geographic scope.
"The employer may enforce the noncompete provision only if the provisions are: 1) necessary to protect a legitimate interest of the employer; 2) the interests of the employee and injury to the public are not greater than the employer’s need to be protected; and 3) the public have been properly consulted in order to avoid undue burdens on the employment, economic, and social life of the community."
The Iowa courts have not expressly defined the term "legitimate business interest." In general, the Iowa Courts consider whether or not the employee has unique knowledge or skills only available to that employee which would not be easily duplicated by a competitor or available to a competitor through proper business means. For example: Iowa Code § 8.1 defines "confidential information" as: "Proceeds: Recovery on Subsequent Wrongful Acts" and "Residual Until Final Judgment is Obtained" are defined by Iowa Code § 9B.6 as: Except as agreed to by the parties as part of the agreement, the terms of an agreement shall not be enforceable if they involve the proceeds or residual of a subsequent wrongful act.
Legal Test to Enforce Iowa Non-Competes
For the majority of Iowa non-competes to be enforceable, they must meet the following criteria:
- The non-compete must have a reasonable geographic scope.
- The non-compete must have a reasonable duration.
- The non-compete must protect a legitimate business interest.
Iowa Courts have ruled that the above factors are necessary, but not sufficient. Not only must the non-compete have a reasonable scope and duration, but courts in Iowa have ruled that the scope of the non-compete must be no "greater than reasonably necessary" to protect a legitimate business interest.
The scope of a non-compete will in large part be limited to the areas where the employee worked. The scope should generally not prevent an former employee from competing where the employee did not work, unless there is some other reason for protecting that portion of the territory. For example, if a restaurant worker in Dubuque could potentially open a restaurant of similar concept in Madison, Wisconsin, a court may modify the agreement or rule it in enforceable. However, as a result of the Internet, a wait staff worker in Madison may be prevented from using their knowledge about Madison restaurant goers by selling that information online. In that scenario, a court may apply an equities test and enforce a non-compete. Where the efforts of the employee during employment can be used to unfairly compete, the non-compete may be appropriately expanded outside of the area where the employee worked.
The duration of a non-compete in Iowa is generally limited to two years. Courts have ruled that periods longer than two years enforceable where the non-compete is of limited scope. Overlap between the duration of the non-compete and the duration of the new employment may be considered when determining whether the duration is reasonable.
Recent Court Rulings on Iowa Non-Compete Law
As discussed in Part 2, the actual terms you see in a non-compete come from real-world contract disputes and legal rulings. For new ideas to be introduced into a non-compete, a company can ask the court for an opinion as to whether such a term is legally enforceable in Iowa. As a result, court cases are an obvious source of updates to Iowa non-competes.
Recent Iowa Cases
There have only been a limited number of cases out of Iowa courts in recent years. However, there are arguably three major cases that every employer and employee should know.
Case 1: Pennoni v. GrubHub
In 2018, the U.S. District Court for the Northern District of Iowa addressed a non-compete agreement’s time limitation. In that case, an account executive at GrubHub was fired and subsequently sued for an injunction, contending that his non-compete was void in light of Iowa’s 18-month limitation on such agreements. The court disagreed and ruled that the Iowa legislature’s "3-Year Limit" only applied to attorneys and physicians, and not account executives. As such, the clause was legally enforceable in spite of the fact that the employee was terminated.
While this case was not an Iowa Supreme Court decision, it was one of the few district court decisions to serve as a guide to what makes a non-compete valid or invalid. Therefore, it is a very valuable case for consideration.
Case 2: Spencer v. TSumas
In 2019, the Iowa Supreme Court ruled that a hospital’s non-compete was unenforceable against an orthopedic surgeon. Under that agreement, any physician who left the employ of the hospital would not be able to practice in the town the hospital was located in for two years without the hospital’s consent. The Supreme Court ruled that, despite its apparently clear terms, the non-compete actually violated the state’s 18-month limit on physician non-competes (passed in 1996). The Court stated that a community the size of the town in question could not sustain two or more orthopedic surgeons, and that limiting all viable competitors in a two-year span would conflict with the law’s intention.
While this case only involved two parties, it is yet another case that helps define the scope of enforceable non-competes in Iowa, which do not require absolute clarity. Tendency to violate the limits imposed by state law is the chief indicator of unenforceability.
Case 3: Direct Appeals v. MacDonald
In 2020, a case involving non-competes for Iowa occupational therapists shed light on what would happen when an employee does not receive any consideration at all for signing it. The former employee contended that, because she was hired as a temporary employee and paid via an hourly wage, she was not paid consideration and the non-compete was null and void. The Iowa Supreme Court disagreed and ruled that temporary employment can count for consideration. The Court reasoned that the signed non-compete did not lack consideration simply because the employee did not quit or receive a raise in compensation at the time of signing.
This case is important to consider, because Iowa non-competes lack a requirement of mutual consideration (unlike Illinois, for example, where something of value must be given to both the employer and employee). It also reinforces the idea that an employer can dismiss an employee and still have a valid non-compete in place.
Non-Compete Lawsuits and Defenses
Employees can present several legal challenges to non-compete clauses. The first challenge is that the non-compete clause is really a non-solicitation, which is less restrictive and is usually between two or more of the employee’s coworkers. If an employee can prove that the clause he or she signed is a non-solicitation (as opposed to a non-compete), the employer then has a burden to show some reason that the clause – now being treated as a protective covenant rather than a non-solicit – is trade secret information worthy of trade secret protection.
Another common legal challenge is that the non-compete you signed is unenforceable because it is too broad in duration, scope, or territory. The courts generally take a very narrow view of what constitutes "enforceable," and are more willing to "blue pencil" a reasonable restriction into something more enforceable. If Blue Pencil does not make the language enforceable, the court will likely invalidate it entirely (as opposed to severing "reasonable" from "unreasonable" restrictions).
There are several ways that an employer can protect itself and be more successful in protecting its non-compete provisions from a defense. First , the company must have a valid business justification for the provision. This typically includes customer connections, customer relationships, employee relationships, or protecting proprietary information that qualifies for protection. Only by having at least one of these can an employer justify a non-compete restriction on an employee.
Second, the non-compete must be reasonable in its restrictions. If it impacts an employee’s ability to work, it should be limited in its restrictions to only what it necessary to protect a legitimate business interest. The longer the restriction is, and the more general the scope of the restriction, the harder it is to be reasonable.
Finally, blue-penciling a non-compete clause requires that any unreasonably broad, vague, or overreaching portions of the clause be clearly severable from its remaining provisions. In other words, a court cannot simply add words, substitute phrases, or change one phrase for another phrase in order to make the provision reasonable.
Alternatives to Iowa Non-Compete Agreements
Alternative to non-compete agreements do exist in the state of Iowa. Rather than restricting employees from working for a competitor, employees are more likely to agree to a confidentiality agreement under Iowa law. A confidentiality agreement protects the employer rather than the employee. Such an agreement requires the employee to not disclose or use at any time any confidential information obtained during the course of employment. Since a business’ secret information is only valuable as long as it is kept secret, such agreements are vital in protecting the interest of an employer.
Another alternative to non-compete agreements in Iowa is non-solicitation clauses. Employers may consider having employees sign a non-solicitation clause which does not prevent the employee from joining a competitor, however, it forbids them from soliciting other employees at the old company to come and work for the new company. An agreement that promises not to solicit clients may also be an option.
Effect on Iowa Employees and Employers
"Non-compete agreements" are part of the fabric of Iowa employment law. They often have far-reaching implications for employers and employees alike.
As a general matter, non-compete agreements are contracts between an employer and employee that provide the employee will not perform a specific type of work in a certain location for a certain period of time after the employment relationship ends.
They are most common in industries with a high demand for talent, such as technology or finance. There, highly skilled employees are often offered more money by numerous companies to perform essentially the same work.
In this context, non-compete agreements allow employers to protect their investment in their employees’ skills by requiring employees to remain with them for a period. Hopefully, the employer brings some added value to the relationship to justify keeping top talent.
But the benefits of non-compete agreements are more easily understood than the limitations they may pose on employees looking to switch employers.
Some non-compete agreements prevent employees from working in the same industry entirely. Under these non-compete agreements, if the employee wants to make a career move in his or her industry, they can’t work for a competitor for the duration of the non-compete agreement.
Employees hurt by non-compete agreements should take another look at their current employment agreements.
For example, A, an employee, accepts a position with Acme Corporation. Acme has A sign a non-compete agreement that lasts two years even after A leaves the company. After a year, A receives an amazing opportunity to go to work as a scientist for a competing tech company, Bugs Corp.
However, due to the non-compete agreement, A can’t take the position with Bugs. A may want to consider other available positions with other companies, apply in other cities or states, attend networking events or conferences to try to land a new job, etc.
In short, non-compete agreements can be especially harmful to employees who wish to change jobs and (naturally) want to make sure they don’t compete with their old employers.
For employers, these non-compete agreements can do more than protect their investment in their best employees.
Non-compete agreements are also valuable because they add value to a business’s saleable assets. For example , Company B wants to buy Acme because they believe it contains highly valuable technology. Company B believes those same employees will move on after the purchase to direct competitors where they may attempt to replicate Acme’s technology.
If A is the chief scientist and one of the most talented in the industry, Company B may shy away from the purchase entirely unless A agrees to stay with Acme for a period of time and abide by the non-compete agreement that Acme has with A. Company B may even require that some compensation be provided for the non-compete agreement in the transaction.
The question an employee considering a new job, whether an internship or a full-time position, must ask is whether the possibility of signing a non-compete agreement is worth the potential career limitations.
For many employees, a non-compete agreement is merely a small price to pay for a highly sought after position. The employer, for example, may consent to pay a bonus as compensation for the signing of an otherwise unreasonable non-compete agreement.
For others, no amount of compensation will restrain them from pursuing equal or better opportunities in the future. Whether or not an employee is being protected or restricted ultimately depends on the particular factual situation and the reasonableness of the constraints the non-compete agreement puts on the employee.
For instance, the non-compete agreement may be uncommon in a specific industry, or it may be broader in scope than what is generally found. If this is the case, the employee may want to consider other factors, like the strength of the potential new opportunity, and whether the non-compete agreement is worth the career limitations.
Unlike some other states, non-compete agreements in Iowa cannot last forever. With a few exceptions, there are limits on how long a non-compete agreement can last and how much weight courts will give the non-compete agreement after a while.
They key factor is to understand how the non-compete agreement affects you when starting a new job. This will allow you to weigh the pros and cons of entering into a non-compete agreement, and make an informed decision about potential career limitations.