The Supreme Court of Iowa has established a three-factor test for the validity of covenants not to compete. To be enforceable, the covenant must be:
- Necessary for the protection of the employer's business; and,
- Not unreasonably restrictive of the employee's rights; and
- Not prejudicial to the public interest.
This article will demonstrate ways in which the various prongs of each test are met, along with relevant case law to consider.
Covenants not to compete which have been enforced are those generally involving a loss of customers as a direct result of the personal/extensive and nearly exclusive contact between the employee and the customer.
In a case involving a Doctor, the court relied on the personal relationship between a doctor and his patients, making the covenant necessary. The record in that case showed that the clinic lost substantial money when one of their member doctors left the clinic and went into competition. This case was decided before the "partial enforcement doctrine." The result might be different under the partial enforcement rule.
Covenants not to compete in employment contracts in which employees not only come into personal contact with their employer's customers, but also are in a position to lure those customers away from their employers, will usually be enforceable.
The Court has enforced non-compete agreements where there is extensive specialized training received by the employee. In a case involving a stockbroker the employer could document $20,000 spent on specialized training, the employee worked for the employer only 16 months and then, the day after he left began soliciting customers of the Employer.
Employees in "route" situations are treated like exclusive salesman where they have control of the relationship and then contacted and solicited customers they had serviced for the company and successfully pirated their employer's accounts.
In another situation, involving a Dental practice, the Court said that, to meet the requirement of reasonableness and necessity, the employer must show that the employee "pirated or had the chance to pirate part of plaintiff's business; took or had the opportunity of taking some part of the good will of the plaintiff's business, or it can reasonably be expected some of the patrons or customers he served while in plaintiff's employment will follow him to the new employment".
The burden of proving reasonableness is on the employer who seeks to enforce a covenant. Although an employer has an interest in protecting his business from an employee's use of personal influence or peculiar knowledge gained in employment, the employer has no right to unnecessarily interfere with the employee following any trade or calling for which he may earn his livelihood.
An employee cannot be precluded from exercising the skill and general knowledge he has acquired or increased through experience or even instruction while in the employment.
Recent Iowa cases have not enforced a covenant that extended beyond five years. Typically, the duration of a disputed covenant ranges from two to three years. The restriction should only provide ample time for the Employer to succeed.
Generally the restriction on the employee must be no greater than necessary to protect the employer. The covenant must not be oppressive or create hardships on the employee out of proportion to the benefits the employer may be expected to gain.
In the dental case mentioned above the Court held that an agreement providing for compensation based on a percentage of the work done for patients, that had been previous patients of the employer, was reasonable.
Partial Enforcement Doctrine
Iowa has adopted the "partial enforcement doctrine", permitting a Court to enforce a covenant only to the extent to which it is reasonably necessary to protect the legitimate interests of the employer, will cause no undue hardship on the employee, and will not impair the public interest.
Previously Iowa had followed an "all or nothing at all" position in deciding the validity of non-compete agreements: if the restriction was too severe, it was not enforced but if on balance the Court felt it should be enforced, it was enforced in its entirety.
Time and Area
Iowa has partially enforced a non-compete agreement, which it found to be too broad in scope and area as written. The protected area must be reasonably related to legitimate interests of the employer and not unduly restrictive of the employee. There must be a rationale basis for the protected area. The time limit must be reasonable.
Generally the time limit should bear a reasonable relationship to the time needed for the employer to establish a relationship, independent of the employee, with the customer. Rarely has more than two years been upheld. Covenants not to compete are unreasonably restrictive unless they are tightly limited as to both time and area.
Specialized Knowledge and Trade Secrets
Knowledge of highly confidential information together with direct personal exposure to the company's customers and supplies can be enforceable. Iowa has upheld a covenant not to compete where the employee involved in the solicitation of the employer's customers and unauthorized disclosure of trade secrets.
Non competition agreements between a franchisor and a franchisee are designed not only to protect the interests of the immediate parties but also to protect other franchisees against competitive activities. Thus to the extent that such non-competition agreements are exacted from all franchisees, each franchisee is thereby protected from competition from other franchisees. The reciprocal protection attendant to franchise agreements warranted enforcement against competition at all franchise locations.
Involuntary Termination of Employee
Where the employee has been terminated from his employment Iowa attempts to balance the equities. Hardship on the employee due to the firing by the employer may be cause to invalidate the non-compete agreement.
List of Relevant Cases
Below is a list of relevant Iowa cases which may help you in your legal research.
- Iowa Glass Depot Inc. v. Jindrich, 338 N.W.2d 376, 381 (Iowa 1983).
- Ehlers v. Iowa Warehouse Company, 188 N.W. 2d 368, 372 (Iowa 1971)
- Brecher v. Brown, 235 Iowa 627, 17 NW2d 377, (Iowa 1945); Ehlers, 188 NW2d at 374.
- Cogley Clinic v. Martini, 112 N.W. 2nd 678, 682 (Iowa 1962)
- Orkin v, Burnett, 146 N.W. 2d 324 (Iowa 1966).
- Farm Bureau Service Co. of Maynard v. Kohls, 203 N.W.2d 209 (Iowa 1972).
- The Phone Connection, Inc. v. Hrbst, 494 N.W. 2d 445, 449 (Iowa App.1992)
- Diversified Fastening Systems, Inc. v. Rogge, 786 F. Supp. 1486 (N.D. Iowa 1991)
- Dain Bosworth Incorporated v. Brandhorst, 356 N.W. 2d 590 (Iowa App. 1984).
- Casey's General Stores v. Campbell Oil, 441 N.W. 2d 758 Iowa 1989)
- Lamp v. American Prosthetics, Inc., 379 N.W. 2d 909 (Iowa 1986)
- Ma & Pa Inc. v. Kelly, 342 N.W. 2d 500 (Iowa 1984).
- Burton E. Tracy & Co., PC v. Frink, 520 N.W. 2d 316 (Iowa App. 1994)
- Rasmussen Heating & Cooling, Inc. v. Idso, 463 N.W. 2d 703 ( Iowa App. 1990)
- Dental East, PC v. Westercamp, 423 N.W. 2d 553 (Iowa App. 1988)
As you can see, some states, such as California, do not recognize noncompete agreements whatsoever. However, Iowa is not one of those states. Remember though, that the validity of these agreements in Iowa are determined on a case-by-case basis.