A recent Iowa U.S. district court decision upheld two-year, geographically reasonable, non-compete agreements signed by 26 veterinarians while they were employed by Iowa Veterinary Specialties, P.C. (IVS), a Des Moines, Iowa clinic they owned. When two of the vets and IVS’s operations manager learned that its sale to ISU Veterinary Services Corporation (VSC) was imminent, they used IVS’s business information and facilities to assist them in opening a competing veterinary clinic. VSC is a non-profit subsidiary of Iowa State University (ISU) which is home to the oldest veterinary college in the U.S. The purchase of IVS was made with public funds and was intended to be part of ISU’s mission to regain and enhance its veterinary college academic preeminence. The acquired assets included the non-compete agreements.
VSC sued the two vets and the operations manager, seeking a preliminary injunction. Except as against the operations manager, who had not signed a non-compete agreement, the injunction was entered. The court held that VSC had met its burden of showing a likelihood of success on the merits and that the balance of the equities favored VSC, and the court concluded that “enforcement of valid non-competition agreements serves the public interest.” However, the court did order VSC either to post a $2 million surety bond or to provide a binding representation from ISU that it will pay any judgment the vets may obtain against the University. ISU Veterinary Services Corp. v. Reimer, 2011 WL 1595337 (S.D. Iowa Apr. 27, 2011).
The vets contended that an injunction would bankrupt them, but the court turned that contention against them by stating it showed that VSC had no satisfactory remedy at law. Moreover, VSC proved that the purchased entity had experienced a decline in its revenue and in the number of its patients since the defendants became competitors, thereby showing how harmful denial of injunctive relief would be.
The court also rejected arguments made by the vets regarding the supposed unfairness or ambiguity of the non-compete agreements, adding that the vets were highly compensated, sophisticated and well-educated, and that the non-compete had substantial monetary significance. So, they should have retained counsel for advice before signing. Assertions that Iowa law prohibits public bodies from competing with private enterprise, and that Iowa’s Veterinary Practice Act prohibited VSC from practicing veterinary medicine, likewise were to no avail.
Iowa law says that “discharge by the employer is a factor opposing the grant of an injunction” to enforce a non-compete agreement. One of the vets had not been offered a position by VSC. However, that individual had “expressed a complete unwillingness to remain” after the acquisition, and so an offer to him of employment would have been futile.
The principal message of the VSC case is that sophisticated signatories to reasonable non-compete agreements have an uphill battle when faced by an injunction action. Nevertheless, a very substantial bond requirement (as here) could prove to be a significant obstacle to enforcement of an injunction.