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Protect Your Iowa Business With a Non-Compete

Handcuffs Many business owners I talk with are reluctant to enter into a non-compete with their employees.  These business owners are afraid an employee won't sign or a confrontation will occur.  Some just don't believe they should keep the employee from finding a job - even if it is to the employer's detriment.

But to avoid disruptions to your business or losing customer relationships you should consider non-compete agreements in certain situations.  This is especially true if the employee has a close relationship with the customer and could easily take the customer if the employee leave your employ.

The best time to secure a non-compete agreement is when you hire the employee although continued employment may be sufficient consideration to bind even current employees.  Iowa courts have developed a three-part test to determine whether a non-compete agreement is enforceable:

1.  Is it necessary for the protection of the employer's business?

Factors to consider:  Does the employee have a great deal of personal contact with customers?  Is the employee in a position to lure customers away?  Have you spent significant time and money training the employee?

2. Is the non-compete unreasonably restrictive of the employee's rights

Factors to consider:  Is the non-compete limited in time?  The most common time restrictions are 1-3 years.  Courts tend to favor shorter time restrictions.  (This will always depend on the cirmcumstances of the particular case).

Is the non-compete limited in geographic scope?  For a local business, a 50-mile limit may be reasonable while a regional business may use a scope spread out over several states.  It depends on the market area of the particular business.  Because of the Internet and other technologies, geographic limits are becoming a less effective way to control competition from former employees.  Businesses must carefully consider how to be reasonable and still control competition in the global marketplace.

3. Is the non-compete prejudical to the public interest

Factors to consider:  Does the particular non-compete harm the general public?  This part of the test has rarely been used to invalidate non-competes in Iowa.  For example, non-competes in Iowa have been upheld against doctors and dentists where you might expect that limiting access to health care could harm the general public.

Finally, Iowa has adopted a "partial enforcement" doctrine permitting a court to uphold a non-compete agreement to the extent it is reasonable and allowing the Court to modify terms if necessary.  For example, a court may reduce a time restriction from 3 years to 1 year if the judge finds that is appropriate.  Or, a judge could change a geographic restriction from the entire state of Iowa to a 100-mile radius of the business.  This is different from an all or nothing approach where a judge might declare the entire non-compete agreement invalid if just one of the terms is found unreasonable.  When litigating non-compete agreements in Iowa the parties must consider whether the agreement may be partially enforced.   

If you are one of those who is not comfortable with a non-compete agreement for your employees I would strongly encourage you to have at least confidentiality and non-solicitation agreements.  These agreements generally provide protection for your business without restricting the employee's ability to work elsewhere.  If a departing employee attempts to take clients or other employees with them you will be glad you had those agreements in place.

*Remember there are several pitfalls relating to these agreements if not written correctly so be sure to contact your employment or business lawyer to review and/or draft such agreements.  For more information read this interesting article on The Power of the Noncompete Clause through the Harvard Business School.

Photo on Flickr by D.F. Shapinsky (pingnews)

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