Restrictive Covenants – The Basics

By : Jon Garner

In today’s employment environment, employees are increasingly being asked to sign “non-compete” agreements.  These types of agreements can take many forms and include a range of different restrictive covenants. For example, they can prohibit and/or restrict:  (a) the use of confidential and/or proprietary information; (b) the solicitation of customers; (c) the solicitation of employees; and (d) general competition within a given industry or field.

Employees often sign agreements containing restrictive covenants without placing much thought or consideration of what the long-term implications of these covenants are.  Employees are often excited about the new opportunity before them and cannot envision a future scenario where these covenants may impact their lives.

Employers, on the other hand, often craft restrictive covenants which are overly broad, unduly burdensome, and as such, unlikely to be enforceable if challenged in court.  Employers are justifiably concerned with protecting the company and/or business they have worked hard to develop and grow, which can result in restrictive covenants that are not reasonable in scope and/or duration.

Regardless of which side of the transaction you are on, employee or employer, a basic understanding of how non-compete agreements are treated under Iowa law is necessary.  Iowa courts have consistently held “‘there is no public policy or rule which condemns or holds in disfavor a fair and reasonable non-compete agreement…such a contract is entitled to the same reasonable construction…accorded to business obligations in general.’”  Thrasher v. Grip-Tite Manufacturing Co., Inc., 536 F. Supp. 2d 937, 943 (S.D. Iowa 2008) (quotingCurtis 1000, Inc. v. Youngblade, 878 F. Supp. 1224, 1259 (N.D. Iowa 1995)).  In determining whether a restrictive covenant is enforceable, Iowa courts consider the following factors:

(1)        whether the restriction is reasonably necessary for the protection of the employer’s business;

  • whether it is unreasonably restrictive of the employee’s rights; and
  • whether it is prejudicial to the public interest.

Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 761 (Iowa 1999).

As stated by the Iowa Supreme Court, “[e]ssentially, these rules require us to apply a reasonableness standard in maintaining a proper balance between the interests of the employer and the employee.”  Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 381 (Iowa 1983).  Put another way, “the validity of the contract in each case must be determined on its own facts and a reasonable balance must be maintained between the interests of the employer and the employee.”  Baker v. Starkey, 144 N.W.2d 889, 897-898 (Iowa 1966).

Recognizing the long-term impact a non-compete agreement can have, whether you are an employee signing an overly restrictive agreement or an employer whose agreement may not be not enforceable as drafted, it is important to fully understand your rights and responsibilities relative to a non-compete agreement beforeit is executed.  A quick review by an experienced business attorney can help avoid unexpected consequences and unnecessary expense related to the future enforcement of a non-compete agreement.

ABOUT JON GARNER

Jon’s caseload often includes matters pertaining to business, family law, civil litigation, criminal matters and mediation. Regardless of the type of case, he believes in helping clients find common ground as they work toward resolution. You can read more about him or get in touch here.