A common concern for business owners in the last few years has been if they can continue to enforce agreements with post-employment provisions such as nonsolicitation and noncompete restrictions. Many employers and employees have questioned whether such agreements are valid at all, and if recent activity at the federal level has dramatically changed the utility of these kinds of agreements.
Nonsolicitation Agreements in Nebraska, Iowa, and South Dakota
Traditionally, state laws have governed whether nonsolicitation agreements are enforceable.
In Nebraska, nonsolicitation agreements are enforceable as long as they are narrowly drafted to protect the employer against “unfair competition” from former employees. This is commonly interpreted by Nebraska courts as allowing employers to prohibit former employees from soliciting the clients and the employees they worked with to come work for them or a competitor for a reasonable period of time. In Nebraska, if a nonsolicitation agreement is broader than reasonably necessary to protect the employer’s valid interests, an employer runs the risk of the agreement being unenforceable as a whole. If this happens, a former employee could go after clients they worked with, as well as their prior colleagues, with impunity.
Nonsolicitation agreements are enforceable in Iowa under similar circumstances. In Iowa, courts will look at the circumstances of an employee’s separation from a company as a potential factor in deciding whether to enforce a nonsolictation agreement. While terminating an employee without cause weighs against enforcement of a nonsolicitation agreement, it does not automatically invalidate it. However, in the event an employee is terminated in breach of the employment agreement, the nonsolicitation agreement is more likely to be deemed unenforceable. Iowa courts may rewrite overly broad and otherwise unenforceable nonsolicitation agreements, but they also retain the authority to invalidate agreements that are unreasonably oppressive or demanding.
South Dakota has allowed nonsolicitation agreements under similar terms as Nebraska and Iowa. In South Dakota, employers can generally prohibit former employees from soliciting the customers they did business with for a period of two (2) years after their employment ends in the same territory that they covered for their employer. Similar to Iowa, however, South Dakota courts will evaluate an otherwise-enforceable nonsolicitation agreement for reasonableness where an employee has been terminated without cause. South Dakota courts may also rewrite otherwise-unenforceable nonsolicitation agreements to comply with South Dakota law and allow them to be enforced as rewritten.
Noncompete Agreements in Nebraska, Iowa, and South Dakota
Noncompete agreements are broader than nonsolicitation agreements and often attempt to restrict former employees from working in the same business or providing the same services as they did for their former employer. For example, an employer’s agreement might attempt to restrict a medical device salesperson from selling medical devices that compete with their former employer’s devices in the same territory that they sold them for their former employer. These restrictions are not based on specific customer or employee relationships.
As a general matter, noncompete agreements are not enfroceable in Nebraska. Depending on the circumstances, these types of agreements will be enforceable in Iowa and South Dakota, subject to court interpretation and potential limitations.
In the context of the sale of a business, noncompete agreements will generally be enforced in Nebraska, Iowa, and South Dakota. We recommend always drafting and enforcing noncompete agreements and nonsolicitation agreements in connection with the sale of a business. The agreements serve to protect the goodwill you are purchasing, which is often one of the most valued assets in the sale.
FTC Rulemaking
In May of 2024, the Federal Trade Commission attempted to ban noncompete agreements, with the exception of pre-existing noncompete agreements with “senior executives.” Under the FTC’s final rule, senior executives were defined as individuals that were in a policy-making position who earned at least $151,164 in the previous year or its equivalent if they only worked for part of the year. The FTC rule does not apply to noncompete agreements that are entered into in connection with the sale of a business.
Litigation challenging the FTC’s authority to take these actions was immediately filed; a nationwide injunction currently prohibits the FTC from enforcing the rule. The FTC initially pursued appeals, but it is not clear if the agency will continue its legal challenges. As a result, there is no current ability of the FTC to enforce the May 2024 rule except on a case by case basis through its own enforcemnt efforts, which it is not currently pursuing.
Instead, the FTC has been directed to address the following:
- Non-compete agreements that may “impose unnecessary, onerous, and often lengthy restrictions on former employees’ ability to take new jobs in the same industry after they leave their employment.”
- Labor-contract termination penalties, which employers may use to “impede their workers from switching to a competing employer by imposing unjustified fees when workers want to end their contracts.”
This is a much more narrow mandate that is consistent with the FTC’s role prior to its attempted rulemaking.
The FTC rule is unlikley to play a meaningful role in employer efforts to enforce noncompete agreements under applicable state law.
Final Thoughts
Noncompetition and nonsolicitation agreements are valuable tools that can still be used by employers to protect themselves from former employees who attempt to enage in unfair competition. If you have questions about noncompete or non solicitation agreements, consider consulting with a qualified Labor and Employment attorney.