Baker v. Starkey, No. 52132

• Court: United States State Supreme Court of Iowa
• Writing for the Court: MASON
• Citation: 144 N.W.2d 889,259 Iowa 480
• Decision Date: 20 September 1966
• Docket Number: No. 52132
• Parties: Howard BAKER, E. D. Huntington, Glenn C. Kreamer, Larry E. Leaverton, Millard K. Mills, Floyd F. Wehrenberg, d/b/a Professional Management Midwest, Appellants, v. Richard G. STARKEY, Appellee.

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144 N.W.2d 889 259 Iowa 480 Howard BAKER, E. D. Huntington, Glenn C. Kreamer, Larry E. Leaverton, Millard K. Mills, Floyd F. Wehrenberg, d/b/a Professional Management Midwest, Appellants,
v.
Richard G. STARKEY, Appellee. No. 52132. Supreme Court of Iowa. Sept. 20, 1966.

[259 Iowa 482]

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Swisher, Cohrt, Swisher, Finch & McCann, Waterloo, for appellants.

[259 Iowa 483] Beecher, Buckmaster, Beecher, Holmes & Lindeman, Waterloo, for appellee.

MASON, Justice.

This is an action in equity wherein plaintiffs, all copartners in a partnership known as Professional Management Midwest, seek to enjoin defendant, a former employee, from engaging in certain lines of endeavor for three years or until February 1, 1967, in several cities and towns in ten states.

Specifically, plaintiffs seek to enforce paragraph 3 of an employment contract entered into between them and defendant October 4, 1963. Defendant asserts the contract

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is unenforceable as an undue restraint of trade because its restrictions both as respects the geographical area involved and the length of time are unreasonable.

The trial court decided the restrictive provisions of the employment contract were reasonable as to the length of time of the restraint (three years), but unreasonable as to the area included; the restrictive covenant, being invalid as a whole, could not be enforced in part, the equities were with defendant and dismissed the case. From this decree plaintiffs appeal.

Several issues were presented upon the trial; however, it is agreed the only issue presented on appeal is whether a court in equity should partially enforce, to the extent reasonable under the circumstances, a restrictive covenant in a contract of employment which by its written terms is too broad in scope of area or time to be itself reasonable.

This issue presents the question whether a court will enforce such an agreement in part while holding the remainder invalid.

I. Professional Management Midwest has its principal office in Waterloo with regional offices in Minneapolis and Kansas City, Missouri.

Plaintiffs are engaged in supplying bookkeeping and management consultant services to practitioners in medicine and dentistry throughout a substantial portion of the midwest. The business dates back to approximately 1949, currently serves approximately 1500 doctors and has a male staff of 42 and female staff of 15.

For sake of brevity, plaintiffs will be referred to as P.M.M. [259 Iowa 484] Under the organization and methods by which it conducts its business, a number of 'consultants' are employed on a base salary and commission basis to make monthly calls on each doctor or dentist served by plaintiffs for the purpose of supervising the accuracy of the financial records of the customer, preparing certain statements of profit and loss and other financial summaries to be presented to the customer, to check and supervise the conduct and business operations of the employees of the customer and to consult with the customer, if desired by him, on a rather broad range of matters pertaining to his practice, personal finances and management.

At appropriate times the 'consultants' assist with the preparation of income tax returns, matters of office layout and design, partnership contracts and relationships, and personal financial and estate planning. The consultants will also advise the customer in connection with insurance matters.

In none of these areas do P.M.M. or the consultants seek to supplant or replace services customarily in the province of other occupations or professions. Neither do they seek to replace the customer's consultation with insurance salesmen or agents in casualty, liability, or life fields. Nor do they seek to replace the customer's relationship with an attorney in connection with partnership agreements and relationships, wills and estate planning.

P.M.M. is not unique in offering this service. Neither is it the first to establish such a business. There are several other medical and dental consultants throughout the United States.

Over the years, and borrowing heavily from many sources, the partners of P.M.M. have developed a set of principles, together with internal operating techniques, which they have systematized and described in a wide range of manuals and pamphlets. The partners have also specialized to some extent among themselves as to the areas in which they have sought to become proficient, and different partners at different times, somewhat on a more or less regular basis, prepare materials in particular fields, such as office management, estate planning and tax matters, which are furnished the consultants for use [259 Iowa 485] in their contact with customers. As the business has evolved

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the partners themselves have little if any direct contact with the customers, but rely upon the consultants operating under supervisors who in turn are responsible to the partners. The consultants are paid on a commission basis up to 40 percent of billings to the customer with the balance going to the partnership.

December 17, 1956, defendant contacted plaintiffs in response to a newspaper advertisement and applied for employment. Following certain testing defendant was employed by plaintiffs and the employment contract was executed December 26, 1956. Defendant was a graduate of Drake University with a degree of Bachelor of Science in business administration, had previous employment as field executive for the boy scouts in Mason City, employment with Remington Rand in Davenport and three years' service as a district executive for the boy scouts in Waterloo, working in an area council which covers a substantial part of northeast Iowa. Defendant was furnished a set of manuals and other materials prepared by P.M.M.

Testimony offered by P.M.M. indicates that after being furnished the manuals in the latter part of December 1956, defendant accompanied another consultant on certain calls to doctors in the Davenport area for a short period in January 1957. From the last week of January to February 22, 1957, he accompanied Mr. George Lehigh on his 'rounds' as he serviced the accounts defendant was to take over upon Lehigh's retirement on the latter date. Thereafter defendant serviced these accounts himself, with substantial consultation with one or the other of the partners. P.M.M.'s evidence also indicates defendant attended monthly training meetings of the consultants during 1957. In addition he had frequent informal conferences with Mr. Mills, an original partner of P.M.M. since deceased. Defendant was provided with manuals and pamphlets dealing with specific matters covered generally in the literature first furnished him and to a certain extent updating this material. He continued his employment throughout subsequent years including 1963, during which time his earnings from P.M.M. rose from $6232.25 in 1957 to $10,183 in 1963.

[259 Iowa 486] Defendant, conceded to be one of the leading consultants and used as a speaker in training meetings held by P.M.M. in 1963, became dissatisfied with his employment status. P.M.M. tendered a new employment contract defendant at first declined to execute, and for several months matters continued at somewhat of a stalemate with several meetings between defendant and one or more of the partners of P.M.M. Finally, just prior to a scheduled meeting to discuss the matter with certain partners on October 4, 1963, he executed the contract, the subject of this lawsuit, which replaced the first agreement.

January 1, 1964, defendant gave P.M.M. 30 days' notice of termination of employment as provided in the contract, also notice of his intention to continue in the same occupation. Acknowledgment of this notice by P.M.M. called attention to the provisions of paragraphs 3, 4 and 5 of the October 4 contract.

Defendant did terminate his employment and remained in the same business in Waterloo and northeast Iowa. At time of trial he had as personal customers 14 doctors or medical partnerships who had been customers of P.M.M., serviced by defendant prior to termination of employment, out of a total of 30 such accounts.

II. Plaintiffs' original petition seeks an injunction to restrain defendant for three years from acting as a consultant in any town or city in the continental United States in which plaintiffs were serving clients at the time of termination of his employment. A division seeking to enjoin defendant from engaging as a consultant within that geographical area assigned to defendant during the period of employment by plaintiffs was added by amendment. The prayer of this division was subsequently stricken and a second amendment filed, seeking to enjoin

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defendant from serving a client within those cities and towns where he was serving a client of plaintiffs prior to termination of his employment or, in the alternative, such other equitable enforcement of the restrictive covenant of the employment contract as might be deemed just and proper. The alternative relief was asked on the theory that even if the contract as written might be so broad as to the area involved as to constitute unreasonable restraint upon defendant, nevertheless, P.M.M.[259 Iowa 487] was entitled to some or substantial relief, and the court should enforce the restrictive covenant to a reasonable extent.

Paragraphs 3, 4 and 5 of the October contract provide:

'3. Upon termination of this agreement, or the employment of Second Party, Second Party hereby agrees not to enter into, work for, solicit for or engage in any way, directly or indirectly, as an individual, employee, officer, partner or other business associate of any proprietorship,...