From 1983 to 1997, the Iowa Hawkeyes Football Team did not have an enforceable non-compete agreement against the Iowa State Cyclones Football Team – it just seemed that way.
Without fail, Sam and I always get questions regarding the enforceability of covenants not to compete (also known as a non-compete agreement, or “NCA”) in employment contracts. It is a common misconception that NCAs are unenforceable and, as a result, harmless for employees to concede to and useless for employers to insist upon.
In fact, Iowa courts regularly enforce NCAs. As a result, a well-drafted NCA is a very important tool for every employer to consider.
What is a covenant not to compete?
In employment contracts, an NCA is a provision whereby the employee agrees not to perform in some unfair competitive capacity against the employer. The impetus for an NCA is to restrict a former employee from gaining an unfair advantage against his or her former employer by exploiting that employer’s confidential information relating to operations, customer lists, trade secrets, business practices, etc. Courts do not allow NCAs to restrict all competition from a former employee, rather, NCAs are only enforced to the extent that it protects the former employer from unfair competition.
Are NCAs enforceable?
The argument against NCAs is that they act as “a restraint of trade which limit an employee’s freedom of movement among employment opportunities.” Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 761 (Iowa 1999). Accordingly, Iowa courts are very deliberate when enforcing NCAs, taking great care to ensure that the restrictions imposed are no greater than necessary to protect the employer. Mutual Loan Co. v. Pierce, 65 N.W.2d 405, 407 (Iowa 1954).
Iowa courts employ a three element test to determine whether an NCA is enforceable:
- Is the restriction is reasonably necessary for the protection of the employer’s business? Revere Transducers, 595 N.W.2d at 761.
- The initial burden of proof is on the employer to show that the covenant is necessary to protect its business. Dental East, P.C. v. Westercamp, 423 N.W.2d 553, 555 (Iowa Ct.App.1988).
- Did the employee have close proximity to customers? Revere Transducers, 595 N.W.2d at 761.
- Did the employee obtain confidential knowledge? Id.
- What is the general nature of the business and occupation? Id. (Obviously, the employee’s increased exposure to customers and confidential information result in a greater likelihood of satisfaction of the first element.)
- The courts’ second element considers whether the NCA unreasonably restricts the employee’s rights. Revere Transducers, 595 N.W.2d at 761.
- An NCA will not be upheld if it is oppressive or creates hardships for the employee which are out of proportion to the benefit of the employer. Dental East, 423 N.W.2d at 555.
- When considering the second element, courts focus on the time and geographic restrictions of the NCA. Lemmon v. Hendrickson, 559 N.W.2d 278, 282 (Iowa 1997). For example, a 5-year restriction across the State of Iowa may be overly restrictive and unenforceable as written, whereas a 2-year restriction in Polk County may be reasonably protective of the employer’s interests and therefore enforceable as written.
- The final element examined by the courts is one of public policy – is the NCA prejudicial to public interest? Revere Transducers, 595 N.W.2d at 761. Essentially, this element asks whether the NCA restriction placed on the employee’s competition would adversely affect the public interest within the restricted area.
Why should you consider an NCA in your employment agreements?
A majority of businesses have some protectable interest which would be better protected with a well-considered NCA. Some examples of potentially protectable interests are:
- Client/customer lists
- Pricing and rebates
- Business-related routes
- Trade secrets
- Close customer contact and relations
- Unique and/or confidential information or business practices
Ultimately, many of those aspects which are paramount in making your business profitable may be worthy of protection. Even if you are uncertain whether your interests are protectable by an NCA under Iowa law, it may be better to put the protection in place and hope that the court upholds the NCA in the unlikely event that a challenge is made. There is only one certainty when it comes to NCAs – no protection will be afforded if there is no NCA in the employment agreement.
If you, or someone you know, are in need of legal services regarding contracts for your business, employees, or subcontractors, please feel free to contact the Kreamer Law Firm, P.C. through our website or by calling (515) 727-0900.