Most businesses have one or more employees who possess certain confidential information which could be devastating to you and/or your business if they used it to compete with you (either directly or through another entity). The information could be your client/customer list; it could be your pricing formula; it could be your suppliers; it could be your product ideas; it could be almost anything.
Although the Iowa Code gives employers a cause of action against former employees who misappropriate “trade secrets”, a properly drafted non-compete agreement is a more effective way to address this issue.
A non-compete agreement is a contract between the business and the employee. It should be: written and signed; specific; and understood by the parties.
We recommend that an employer make a payment of some amount (it can be a nominal amount) to the employee in return for the employee’s agreement to the terms of the non-compete agreement. This makes it harder for the employee to assert that they didn’t understand that they were entering into a binding agreement.
The elements of a properly drafted non-compete agreement include:
A description of the business of the employer; A description of the prohibited/protected activities; and A temporal limitation.
Although some court cases have required a specification of geographical limitations, with the internet becoming the “norm” rather than the exception for business, we take the position that geographical restrictions are no longer imperative.
We recommend that (if possible) the signing of a non-compete be part of the hiring process. However businesses often seek to implement these agreements after they have had a bad experience or upon their realization of the damage that could be caused by a departing employee. If a long term/key employee resists signing a non-compete agreement, the employer is faced with two (unpalatable) options:
The refusing employee can be terminated (which can be bad on a number of levels); or The employer can HOPE the refusing employee does not turn against the business (good in the short term-bad in the long term).
For inexplicable reasons, many people wrongly believe non-compete agreements are unenforceable. In fact, we have been successful in obtaining judicial enforcement of these agreements.
Essentially, the law in Iowa is that the Courts “balance” the rights of the employer and the needs of the employee. In establishing this balance, courts take into consideration the description of the prohibited activities, the time of the prohibition and the geographic scope of the restriction. If the agreement is “reasonable” as written, it is enforced as is. If the written agreement is determined to be too onerous on the employee, Courts commonly engage in “judicial reformation” and enforce the provisions as “reformed” to what the judge and/or jury consider to be “reasonable”. All non-compete agreements are considered on a case-by-case basis. There is no “automatic” or “safe harbor” formula.
If you, and/or your business, need assistance on any legal matters, please contact us.