Will an Iowa court enforce the non-compete in our employment agreement?
Yes, if it is reasonable: on a three-part reasonableness test, and the court may cut an overbroad covenant down rather than strike it. In Lamp v. American Prosthetics, Inc. the Supreme Court stated the test: "In deciding whether to enforce a restrictive covenant, the court will apply a three-pronged test: (1) Is the restriction reasonably necessary for the protection of the employer's business; (2) is it unreasonably restrictive of the employee's rights; and (3) is it prejudicial to the public interest?" Partial enforcement comes from Ehlers v. Iowa Warehouse Company, which Lamp describes as having "in effect, overruled a line of prior Iowa cases which had held that a covenant which was too restrictive to be enforced could not be modified to salvage the enforceable provisions", and which adopted the rule that, unless the facts and circumstances indicate bad faith on the part of the employer, the court "will enforce noncompetitive covenants to the extent they are reasonably necessary to protect his legitimate interests without imposing undue hardship on the employee when the public interest is not adversely affected." Two limits travel with the test. Employer bad faith is a stated condition of partial enforcement, not a gloss on it. And Ehlers states the three-part test only after recognising "a distinction between a noncompetitive covenant in the sale of a business and one in an employment contract and because of countervailing policy considerations will not enforce the latter as freely", so an employment covenant is measured less indulgently than one given on the sale of a business.
The trap
Partial enforcement is discretionary, and it has to be asked for. Lamp held the covenant "swept too broadly to be enforced as written": it barred competition within 100 miles of any of the employer's Iowa offices, and "The evidence does not show such an extensive restriction is reasonably necessary to protect American Prosthetics", and then refused to narrow it, although the employer did argue in the alternative "that, in the event the court should find the restrictive covenant to be too broad to be enforced, it could modify it to allow partial enforcement", because "while Ehlers allows for modification of such agreements, it does not require a court to do so sua sponte", and because "A mere reference in a trial brief to the possibility of partial enforcement, without a pleading or rule 179(b) motion to pinpoint the issue, was not sufficient to preserve it for appeal." The record reads as a checklist of what to do instead: "The issue of partial enforcement was never raised by the pleadings in district court, although it was mentioned in a trial court brief." and "It did not file a motion under Iowa Rule of Civil Procedure 179(b) to bring the issue to the court’s attention." The Court added that "a court must necessarily approach the issue of modification with a certain degree of reluctance" and held that "failure to raise the issue in district court waived it for purposes of appeal." So an employer that pleads enforceability as written and raises partial enforcement first in a trial brief loses the covenant entirely: American Prosthetics lost on reasonableness and then lost modification too, for want of a pleading or a rule 179(b) motion. Plead partial enforcement in the alternative. Iowa also has no general non-compete statute in the published sections searched, so there is no earnings threshold and no review period to comply with, the limits are the three-part test and what the pleadings preserved.
12 authorities
The words that state the rule
In deciding whether to enforce a restrictive covenant, the court will apply a three-pronged test: (1) Is the restriction reasonably necessary for the protection of the employer’s business; (2) is it unreasonably restrictive of the employee’s rights; and (3) is it prejudicial to the public interest?
The words that state the rule
The problem with this approach is that, while Ehlers allows for modification of such agreements, it does not require a court to do so sua sponte.
The words that state the rule
A mere reference in a trial brief to the possibility of partial enforcement, without a pleading or rule 179(b) motion to pinpoint the issue, was not sufficient to preserve it for appeal.
The words that state the rule
We now overrule Brecher v. Brown (1945), 235 Iowa 627 , 17 N.W.2d 377 , and adopt the rule that unless the facts and circumstances indicate .bad faith on the part of the employer, we will enforce noncompetitive covenants to the extent they are reasonably necessary to protect his legitimate interests without imposing undue hardship on the employee when the public interest is not adversely affected.
The words that state the rule
While we recognize a distinction between a noncompetitive covenant in the sale of a business and one in an employment contract and because of countervailing policy considerations will not enforce the latter as freely, Baker v. Starkey (1966), 259 Iowa 480, 491 , 144 N.W.2d 889, 895 ; Cogley Clinic v. Martini (1962), 253 Iowa 541, 546 , 112 N.W.2d 678, 681 ; Mutual Loan Co. v. Pierce (1954), 245 Iowa 1051, 1055 , 65 N.W.2d 405, 407 ; Brecher v. Brown (1945), 235 Iowa 627, 631 , 17 N.W.2d 377, 379 ; see also Solari Industries, Inc. v. Malady (1970), 55 N.J. 571 , 264 A.2d 53, 56 ; we will enforce such covenant if it is reasonably necessary for the protection of the employer’s business and is not unreasonably restrictive of employee’s rights nor prejudicial to the public interest.
The words that state the rule
Lamp’s contract of employment, as manager of American Prosthetics’ Mason City *910 office, contained a covenant not to compete with the employer within 100 miles of any of its Iowa offices.
The words that state the rule
American Prosthetics argues that the restrictive covenant was enforceable as written. It has an alternative argument, however, that, in the event the court should find the restrictive covenant to be too broad to be enforced, it could modify it to allow partial enforcement.
The words that state the rule
We agree with the district court, and the court of appeals, that the restrictive covenant swept too broadly to be enforced as written. The evidence does not show such an extensive restriction is reasonably necessary to protect American Prosthetics.
The words that state the rule
In Ehlers this court, in effect, overruled a line of prior Iowa cases which had held that a covenant which was too restrictive to be enforced could not be modified to salvage the enforceable provisions.
The words that state the rule
The issue of partial enforcement was never raised by the pleadings in district court, although it was mentioned in a trial court brief. Following an adverse ruling by the district court in which the issue was not addressed, American Pros-thetics simply filed a notice of appeal. It did not file a motion under Iowa Rule of Civil Procedure 179(b) to bring the issue to the court’s attention.
The words that state the rule
In the face of these principles, a court must necessarily approach the issue of modification with a certain degree of reluctance. We believe in this case that, where the issue was not properly raised in district court, we should not address it for the first time on appeal. Shill v. Careage Corp., 353 N.W.2d 416, 421 (Iowa 1984).
The words that state the rule
We conclude that failure to raise the issue in district court waived it for purposes of appeal. DECISION OF COURT OF APPEALS AND JUDGMENT OF DISTRICT COURT AFFIRMED. All Justices concur except REYNOLD-SON, C.J., who concurs in the result.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.