Non-Compete Agreements: Enforceable if Reasonable

An issue that comes up very often is whether a non-competition agreement is enforceable. In Iowa, non-competition agreements are usually fully enforceable if the terms are reasonable, and the definition of reasonableness has largely already been determined. In Iowa, there are three aspects to determine the reasonableness of the non-compete:

• Duration. The length of time a non-compete is enforceable was traditionally up to five years, however most non-competes are limited to one to two years to ensure reasonableness.
• Geographical Area. The area where you want to prevent competition cannot be larger than the area in which you currently do business. If you only do business in the metro area, you cannot enforce a non-compete for the entire state.
• Scope. The business you are trying to prevent in the non-compete must be the business you are currently in. You cannot prevent someone from opening a type of business that you are not currently actively pursuing.

If the terms of the non-compete are not reasonable, a court can revise the terms to make them reasonable, but the judge also has the power to throw out the agreement completely, so it is safer to have reasonable terms in the agreement from the start.

Many people get “right to work” confused with non-competes. Iowa is a “right to work” state, but that only pertains to being able to work for an employer and not being required to join a union. Right to work has nothing to do with non-competes and does not affect their validity at all.

Ideally, the employee should get something additional for signing the non-compete to ensure that it is enforceable. A contract requires an offer, acceptance, and consideration. Some cases have argued that the employee is giving up his/her right to compete and should get some sort of additional consideration for signing the agreement, separate and apart from employment with the company.

To enforce a non-compete, usually an attorney will send a cease and desist letter to the past employee and the employee’s new employer before filing action. As an employer, it is a good idea to make sure your new employees are not subject to a non-compete with their previous employer before they are hired to prevent an interference with contractual relations claim against you by their previous employer. If a potential employee is subject to a non-compete with a previous employer and you absolutely have to hire him/her, you can contact that employer to offer to buy the employee out of the non-compete if you feel it is worth it to gain that employee.

Besides non-competes, employers should have confidentiality/nondisclosure/non-solicitation agreements or provisions in their employment contract. Information an employee obtains on the job should be kept confidential and should not be allowed to be disclosed to any third parties, especially subsequent employers. Every employee should also have a confidentiality/nondisclosure agreement to prevent disclosure of items such as: trade secrets, customer information, vendors, etc. Non-solicitation provisions will keep your departing employee from stealing your other employees away. All of these provisions together can protect your business from being ransacked by departing employees.

This article is providing general information and is not intended to be legal advice.