Court rules Iowa employer's non-compete agreement is too restrictive

Non-compete agreements, or covenants not to compete, are often used to protect a business from competition from a former employee going to work for a competitor or starting his or her own business.  They are generally used for employees who will have access to important business information, such as financial information or trade secrets; employees who will play a key role with customers; or employees who will obtain special skills or training while on the job.   The key to drafting an enforceable non-compete is finding the right parameters.  In a recent Iowa case from Guthrie County, Sutton v. Iowa Trenchless, L.C., CV081386, a seven-year non-compete agreement within a 350-mile radius was declared too restrictive.  Four years into a seven-year non-compete with Iowa Trenchless, Plaintiff Sutton filed for declaratory relief to get out of the remaining three years.   In this case, the Court ruled that the remaining years of the non-compete were not necessary to protect Iowa Trenchless, and that the 350-mile radius was unreasonably large and also not needed for the protection of the company's business interests.  Sutton was able to cut short his non-compete agreement even though it was negotiated between the parties.  Generally non-compete agreements must have reasonable time and geographic restrictions.  When such agreements are challenged, the courts look to a reasonableness standard to balance the interests of the employee and the employer.  In Iowa, the most common time restrictions are one to three years, while geographic restrictions depend on the market area of a business and where an employee worked.  In deciding whether to enforce a non-compete agreement under Iowa law, courts use a three factor test:  (1) Is the restriction reasonably necessary for the protection of the employer's business? (2) Is it unreasonably restrictive of the employee's rights? (3) Is it prejudicial to the public interest?  Iowa has adopted what is called a partial enforcement doctrine. 

This permits a court to modify an agreement to the extent it is reasonable it may change the length of time of the non-compete, the geographic restriction, or both. Practice Pointers Iowa employers considering the use of non-compete agreements may want to start by asking the following questions:

• Which positions in our organization will have access to key business information and/or play a key role with our customers?

• What is our market area is it local or regional? 

• Will any of our employees gain unique skills or knowledge while on the job? 

Keep in mind that there is no standard or magic formula for non-compete agreements, nor are non-compete agreements the only way to protect your company's proprietary and business information.  Many factors should be considered in determining if a non-compete agreement is the right way to go or whether some other avenue such as confidentiality agreements or non-disclosure agreements is better suited for protecting your company. Finally, remember that non-competes and other agreements intended to protect your company's proprietary and business information should be signed by the employee at the time of hire.  That way expectations are clear and protections are in place from the start.  However, under current Iowa law, such agreements can be obtained or modified later, during employment, because continued employment is sufficient consideration to make a non-compete or other restrictive covenant binding on the employee under current Iowa law.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.