LIMITING NON-COMPETE AGREEMENTS

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We get a lot of calls about non-compete agreements.  Are they really enforceable?  Will my employer sue me if I take a job elsewhere?  Are there any limitations on non-compete agreements?  The answers are far from simple, but:  yes, maybe, and absolutely.

A few weeks ago, the New York Times ran an article about non-compete agreements and a growing trend among states to lessen the harsh effects these agreements have on workers.  One of those states is Massachusetts.  Its state legislature has spent the latter part of the current session reforming the state’s non-compete law, including exemptions for certain classes of workers, strict limits on how long a non-compete can be enforced, and a requirement that the agreement be supported by more than the employee’s continued employment.  Lawmakers are still working on resolving differences between House and Senate sponsored bills and crafting a final law.

Other states have already enacted restrictions on non-compete agreements, including Hawaii, New Mexico, Oregon, and Oklahoma, to name a few.  In Hawaii, non-compete provisions are prohibited for workers in the technology industry.  Non-compete agreements in New Mexico are only enforceable for the first three years of employment for physicians, osteopathic physicians, podiatrists, dentists and certified nurse anesthetists.  Employers in Oregon may use non-compete agreements, but for no longer than two years after employment ends and only when certain other criteria are met.  Oklahoma outlaws non-compete agreements so long as the former employee “does not directly solicit the sale of goods, services, or a combination of goods and services from the established customers of the former employer.”

Iowa does not have a specific law limiting the use of non-compete agreements.  Instead, our appellate courts have crafted a fairly clear road map regarding which agreements are enforceable and which agreements overreach and will not be enforced.   In ruling on enforceability, Iowa courts will look at four issues:

1) whether the restriction is reasonably necessary to protect a legitimate business interest of the employer, 2) whether the restriction unreasonably restricts the employee’s right to work, and 3) whether the restriction prejudices public interest.  

See Ma & Pa, Inc. v. Kelly, 342 N.W.2d 500, 502 (Iowa 1984).  Non-compete provisions will be strictly construed against the party seeking to enforce the agreement (usually, the employer).  Cogley Clinic v. Martini, 112 N.W.2d 678, 681 (Iowa 1962) (emphasis added).

These agreements must also be narrowly tailored, and restrictions on a person’s ability to work can be no greater than necessary to protect the employer’s interests.  Mut. Loan Co. v. Pierce, 65 N.W.2d 405, 407 (Iowa 1954).  In determining whether a non-compete provision is unreasonably restrictive of an employee’s rights, Iowa courts have stated,

“the restriction on the employee must be no greater than necessary to protect the employer,” and that “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.”

Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 381 (Iowa 1983).

To be enforceable, the restrictions must be “tightly limited as to both time and area.”  Lemmon v. Hendrickson, 559 N.W.2d 278, 282 (Iowa 1997).  Generally, Iowa courts will enforce non-compete agreements restricting an employee’s employment for a two-year period if geographic restrictions are also reasonable.  See, e.g. Farm Bureau Serv. Co. of Maynard v. Kohls, 203 N.W.2d 209, 212 (Iowa 1972) (six townships for two years); Cogley, 112 N.W.2d at 682–83 (25-miles for three years); Federated Mut. Implement & Hardware Ins. Co. v. Erickson, 110 N.W.2d 264, 268 (Iowa 1961) (three counties for two years).

Moreover, non-competes cannot prejudice the public interest.  Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 761 (Iowa 1999).  Similar to the concerns addressed by New Mexico’s non-compete law, public policy considerations are typically raised in restrictive covenant cases involving physicians or other health professionals whose absences from a given market could endanger the public health.  Sutton v. Iowa Trenchless, L.C., 808 N.W.2d 744, 752 (Iowa Ct. App. 2011).  For example, in Board of Regents v. Warren, 2008 WL 5003750 (Iowa App. 2008), an employer sought to enforce a non-compete against an oncologist that would have prohibited the oncologist from practicing medicine for two years in the Cedar Rapids area.  The appellate court held the non-compete unenforceable as written because it did not limit the doctor’s restriction to the specific type of medicine he practiced and there was a shortage of oncologists in the area.  Thus, enforcement would prejudice the public interest.

It has been a quiet couple of years at the statehouse with few substantive changes taking place in Iowa law.  Iowa’s strong business lobby would likely put up a tough resistance to any legislation attempting to limit the reach of non-compete agreements.  Iowa’s courts, however, have remained steadfast in crafting reasonable limitations to the agreements, balancing an employer’s right to protect its interests and an employee’s right to earn a living.

If you enjoy reading The Pink Slip, please consider nominating it for inclusion in the American Bar Association’s 10th Annual Blawg 100 competition.  Submissions are due August 7, 2016.  Thanks!

Photo Credit:  photo credit: <a href=”http://www.flickr.com/photos/49968232@N00/27022106235″>letter X</a> via <a href=”http://photopin.com”>photopin</a&gt; <a href=”https://creativecommons.org/licenses/by-nc-sa/2.0/”>(license)</a&gt;

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