Iowa Court of Appeals concludes seven-year non-compete not unreasonable

Iowa Employment & Labor Law Dickinson Law Firm Des Moines Iowa

Posted on 11/30/2011 at 12:40 PM by The Newsroom

On November 23, 2011, the Iowa Court of Appeals reversed the Iowa District Court for Guthrie County and upheld a seven-year, 350-mile radius covenant not to compete.  In Sutton v. Iowa Trenchless, L.C., No. 10582 / 10-2114, the main issue on appeal was the standard under which a non-compete agreement between owners differs from a non-compete between an employer and an employee. The Iowa Court of Appeals agreed with Iowa Trenchless that a different, less stringent standard was appropriate where a non-compete is negotiated between owners of a business in conjunction with the purchase of a departing individual's ownership interest.  Although the standard three-pronged test* is to be applied in determining whether a covenant not to compete is enforceable between owners or between an employer and employee, the Court – citing cases from 1945-1975 – held that greater indulgence is given when the non-compete is between owners.  This greater indulgence is afforded because (i) the non-compete agreement adds value to the goodwill of the business sold and (ii) the parties involved (e.g. owners) are presumed to be in a more equal negotiating position than employers and employees.  (Brecher v. Brown, 235 Iowa 627, 631, 17 N.W. 377, 379 (1945), overruled on other grounds by Ehlers v. Iowa Warehouse Co., 188 N.W.2d 268 (Iowa 1971)).    In reaching its conclusion, the Court of Appeals did caution that this greater indulgence does not mean that all owner-to-owner covenants not to compete are enforceable.  Each case is still analyzed to ensure the restriction is not wider in scope than the operation of the business and there is no other good reason to confine the restriction to narrower limits. The non-compete agreement also provided that if the company incurred any costs or 'reasonable attorneys' fees' in enforcing its terms, those could be recovered from the individual.  Because it had determined the non-compete enforceable, the Court of Appeals remanded the case to the District Court to determine the amount of attorney fees Iowa Trenchless is entitled to recover. * The three-pronged test is: (1) Is the restriction reasonably necessary for the protection of the employer's business; (2) Is it unreasonably restrictive to the employee's rights; and (3) Is it prejudicial to the public interest?

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