Ehlers v. Iowa Warehouse Co.

Decision Date17 June 1971
Docket NumberNo. 54628,54628
Citation188 N.W.2d 368
PartiesGene M. EHLERS, Appellant, v. IOWA WAREHOUSE COMPANY, Appellee.
CourtIowa Supreme Court

Keith, Gallagher, Lybbert & Martin, Waterloo, for appellant.

Newman, Redfern, McKinley & Olsen, Cedar Falls, and Shuttleworth & Ingersoll, Cedar Rapids, for appellee.

STUART, Justice.

By this action in equity for a declaratory judgment, plaintiff sought to have two noncompetitive covenants in his employment contract with defendant corporation declared void and unenforceable. Defendant counterclaimed for injunctive relief to prohibit plaintiff's violation of the covenants. The first covenant (paragraph 6 of the employment contract) prohibited plaintiff from disclosing his compiled list of defendant's customers to any third party or using it directly or indirectly in a competitive business after the termination of his employment. No time limit was stated. The second covenant prohibited plaintiff from engaging in a competitive business within 150 miles of defendant's business location in Waterloo for a period of two years.

The trial court found the first covenant was unreasonable because there was no time limit and concluded it could not be enforced. He found the second covenant was reasonable under the circumstances and enjoined employee 'from violating the provisions of paragraph twelve of the contract of employment and he is more particularly enjoined from directly or indirectly engaging in, participating in, owning, managing, soliciting for, controlling, being employed by or connected with any truck leasing or rental business within a radius of one hundred fifty miles from the present location of defendant's business in Waterloo, Iowa, for the period ending on May 14, 1972'.

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. Baker v. Starkey, supra, 259 Iowa at 493, 144 N.W.2d at 897; Cogley Clinic v. Martini, supra; Mutual Loan Co. v. Pierce, supra.

On appeal plaintiff contends: (1) under Iowa law covenants in restraint of trade in employment contracts must stand or fall as written and the court cannot modify the agreement by separating the bad from the good and enforcing a reasonable part of the covenant even if the covenants are separately stated and are grammatically severable; (2) enforcement of the covenant found in paragraph 12 should be denied in any event as it is unreasonable as to the area covered and the interest of defendant to be protected.

I. In view of the position we take here, it is unnecessary to discuss these propositions separately. 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.

In Brecher v. Brown we held a covenant not to complete in the practice of veterinary medicine within a 25 mile radius of the employer's business after termination of the employment without a limit on time was not reasonably limited to the protection of appellant's interests and imposed undue hardship on appellee and consequently was against public policy. We refused to enforce the covenant to the extent deemed reasonable saying: 'We are not at liberty to write a new contract for the parties or to modify the one they wrote. It must be upheld as written or rejected.' We quoted from Samuel Stores, Inc. v. Abrams (1919), 94 Conn. 248, 108 A. 541, 9 A.L.R. 1450: "Covenantees (in contracts of this character between employer and employee) desiring the maximum protection have, no doubt, a difficult task. When they fail, it is commonly because, like the dog in the fable, they grasp too much, and so lose all." 235 Iowa at 633, 17 N.W.2d at 380.

The overruling of a 'landmark' case and the departure from a rule of such long standing requires substantial justification. We believe logic, equity and the modern authorities support the change in our position.

The rule stated in Brecher v. Brown has been considered the majority rule. 2 Restatement of Contracts, § 518, pp. 1004--1005. However, the increasing number of courts that are adopting the rule advocated by Williston and Corbin (6A Corbin on Contracts, §§ 1390, 1394; 5 Williston on Contracts (Rev.Ed.), §§ 1659, 1660) leaves this classification in doubt. Baker v. Starkey, supra, 259 Iowa at 492, 144 N.W.2d at 896. A partial list of these jurisdictions includes the following: Hill v. Central West Public Service Co. (5th Cir. 1930), 37 F.2d 451; Roane, Inc. v. Tweed (1952), 33 Del.Ch. 4, 89 A.2d 548, 41 A.L.R.2d 1; McQuown v. Lakeland Window Cleaning Co. (Fla.App.1962), 136 So.2d 370; Metropolitan Ice Co. v. Ducas (1935), 291 Mass. 403, 196 N.E. 856; Redd Pest Control Company v. Heatherly (1963), 248 Miss. 34, 157 So.2d 133, 135--136; Solari Industries, Inc. v. Malady (1970), 55 N.J. 571, 264 A.2d 53, 56 (and citations); Igoe v. Atlas Ready-Mix Inc. (N.D.1965), 134 N.W.2d 511; Ramey v. Combined American Insurance Co. (Texas Civ.App.1962), 359 S.W.2d 523; Wood v. May (Wash.1968), 438 P.2d 587; Fullerton Lumber Co. v. Torborg (Wis.1955), 270 Wis. 133, 70 N.W.2d 585.

Two recent Iowa decisions, while not applying the rule we herein adopt to the facts and circumstances of the case before the court at the time, indicate a sympathetic attitude toward such rule. In Baker v. Starkey, supra, 259 Iowa at 492--495, 144 N.W.2d at 896--897, we stated the rule and discussed the authorities but concluded by saying: 'However, we do not believe the approach suggested, meritorious as it may be under appropriate circumstances, should be applied in the present case. The validity of the contract in each case must be determined on its own facts and a reasonable balance must be maintained between the interest of the employer and the employee.' 259 Iowa at 495, 144 N.W.2d at 897--898. See also Kunz v. Bock (Iowa, 1968), 163 N.W.2d 442, 446.

The problems of noncompetitive covenants in employment contracts and in the sale of going businesses have been extensively and intensively explored by the courts and legal writers. See the comprehensive treatment given the subject in Arthur Murray Dance Studios of Cleveland, Inc. v. Witter (Ohio Court of Common Pleas, 1952), 105 N.E.2d 685. The opinion does not, however, reach the specific problem of partial enforcement of indivisible covenants.

We have had our share of problems in this area. Kunz v. Bock (Iowa, 1968), 163 N.W.2d 442; Orkin Exterminating Co., Inc. v. Burnett (1967), 259 Iowa 1218, 146 N.W.2d 320; Baker v. Starkey, supra; Nelson v. Leaders (1966), 258 Iowa 919, 140 N.W.2d 921; Federated Mutual Implement & H. Ins. Co. v. Erickson (1961), 252 Iowa 1208, 110 N.W.2d 264; Mutual Loan Co. v. Pierce, supra; Larsen v. Burroughs (1938), 224 Iowa 740, 277 N.W. 463; Sioux City Night Patrol v. Mathwig (1938), 224 Iowa 748, 277 N.W. 457; McMurray v. Faust (1937), 224 Iowa 50, 276 N.W. 95; Haggin v. Derby (1930), 209 Iowa 939, 229 N.W. 257; Swigert & Howard v. Tilden (1903), 121 Iowa 650, 97 N.W. 82.

The arbitrary rule of 'all or nothing at all' in the enforcement of noncompetitive agreements has, in some cases, led to results of questionable equity. Cogley Clinic v. Martini, supra (doctor was prevented from practicing anywhere in the Council Bluffs-Omaha area); Brecher v. Brown, supra (veterinary was permitted to practice within 100 feet of his former employer); Larsen v. Burroughs, supra (doctor prohibited from practicing in area for 10 years); Beit v. Beit (1948), 135 Conn. 195, 135 Conn. 413, 63 A.2d 161, 65 A.2d 171, 10 A.L.R.2d 734 (note in 23 Conn.Bar Jour. 40); see discussion in Solari Industries, Inc. v. Malady, supra, 264 A.2d at 60. Some courts, in order to avoid inequities, have indulged in doubtful construction of the provisions of the contracts, Haggin v. Derby, supra, 209 Iowa at 945--947, 229 N.W. at 260; Universal Electric Corp. v. Golden Shield Corp. (1st Cir. 1963), 316 F.2d 568; Plunkett Chemical Co. v. Reeve (1953), 373 Pa. 513, 95 A.2d 925, 43 A.L.R.2d 91, 93; or have applied the legalistic 'blue pencil rule' which permits a noncompetitive covenant to be partially enforced if the words which make it unreasonable can be stricken and still leave a grammatically meaningful reasonable restriction. See: Solari Industries, Inc. v. Malady, supra, 264 A.2d at 57; Wood v. May (Wash.1968), 438 P.2d 587, 590--591.

Corbin and Williston have long contended that partial enforcement of a restrictive covenant should not rest on the divisibility of reasonable and unreasonable portions of the covenant. They urge that there should be partial enforcement of restrictive covenants whenever possible without injury to the public or injustice to the parties.

'Public policy should go no farther in invalidating business contracts fairly entered into than necessity requires.' Williston, Note on Beit v. Beit, 23 Conn.Bar Jour. 40, 42.

'In the best considered modern cases, however, the court has decreed enforcement as against a defendant whose breach has occurred within an area in which restriction would clearly be...

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