Mutual Loan Co. v. Pierce

• Decision Date: 26 July 1954
• Docket Number: No. 48554,48554
• Citation: 65 N.W.2d 405,245 Iowa 1051
• Parties: MUTUAL LOAN CO. v. PIERCE.
• Court: Iowa Supreme Court

Page 405

65 N.W.2d 405

245 Iowa 1051

MUTUAL LOAN CO. v. PIERCE.

No. 48554.

Supreme Court of Iowa.

July 26, 1954.

Shull & Marshall, Sioux City, for appellant.

Sifford & Wadden, Sioux City, and George W. Leamer, South Sioux City, Neb., for appellee.

MULRONEY, Justice.

Plaintiff Loan Company sought an injunction against its former employee, Donald C. Pierce, to restrain the latter from a violation of the restrictive covenant in the employment contract. The employment contract was entered into on March 17, 1952 when defendant entered plaintiff's employ in the city of Sioux City, Iowa. It states that the employer is 'engaged in the personal loan and installment finance business in various locations' and the contract makes the term 'employer' include a subsidiary corporation. The contract of employment was for one year and thereafter it stood renewed unless one party gave notice to the contrary, but it could be terminated by either party giving the other two weeks notice, and by the employer without notice, by paying one-fourth month's salary to employee.

Paragraph 4 of the contract provides in part as follows: 'Employee covenants and agrees (which covenant is the essence of this contract) that during the life of this contract and for twelve (12) months from the date he ceases to be in the employ of the Employer, regardless of the cause thereof:

'(a) Not to communicate or divulge to or use for the benefit of any person any of the business secrets used by the Employer in and about its business, nor will he disclose to any person the methods of conducting the business of the Employer or of advertising same or any other information obtained by the Employee by virtue of his employment;

'(b) That he will not directly or indirectly, either as principal, partner, agent, employee, stockholder, director, officer or in any other manner or capacity whatsoever, enter into the personal loan or installment finance business or department of a bank or any other business in connection with employer, in any city or town in which he has been working while in the employment of this Employer. * * *'

Defendant commenced work for the plaintiff on the date of the contract, working in their headquarters office at 512 Fifth Street in Sioux City, Iowa at a salary of $225 a month. The contract was silent as to the particular position for which defendant was hired but the vice-president and manager of the company stated defendant was engaged as a 'manager-trainee' which he explained meant he would take a training course until 'the employee satisfies the executives and supervisors that he is qualified to manage an office.' The training course consisted in work in the various departments of plaintiff's business. His first training was what is called the outside work; the work of appraising security at the customer's home, making credit investigation, and collecting delinquent accounts. He was then brought into the office where he interviewed customers applying for loans, handled insurance in connection with loans, and telephoned delinquent customers and secured credit investigations by telephone. The company manager said 'he was taught some of the general functions of the inside workings of the office, and in both cases (outside work and work in the office) he was in contact with a good share of our customers.'

His salary was raised until in March, 1953 he was being paid $290 a month plus a car allowance. In the early part of March, 1953 he was transferred to South Sioux City, Nebraska where he worked for the Postal Finance Company, a wholly owned subsidiary of plaintiff, doing about the same inside and outside work that he had done in Sioux City, Iowa except that here most of his work was inside and he could, on occasions when the manager was absent, close loans. He was transferred back to Mutual's office in Sioux City, Iowa and his salary increased to $325 a month in July or August, 1953. On November 3, 1953 he was discharged without notice--the company paying him one-fourth of one month's salary. About a week later defendant entered the employ of Western Finance Company, a personal loan company, operating in South Sioux City, Nebraska. Defendant testified his position is 'collection manager' and he said it is about the same as assistant manager and, 'approximately the same that I had when employed by Mutual Loan Company.' The defendant is married and has three children, the oldest four, and when he started with Western he was paid $250 a month and at the time of trial his salary was $275 a month, and he was $1,200 in debt.

The trial court denied the injunction stating: '* * * the evidence in this case is not such as to warrant the belief that the present employment of defendant endangers the interests of plaintiff. The work of the defendant is of an ordinary kind. Wherefore the restrictive covenant is not of equitable cognizance.' Plaintiff appeals.

I. The vice-president and manager of plaintiff company, plaintiff's only witness, stressed the fact that while defendant was employed by Mutual he had access to customer lists and he learned the company's 'secret and unique' method of doing business. He said all of their employees (in excess of 100 in Sioux City) sign such employment contracts as is here involved. The record indicates the information made available to defendant would be available to all of their office employees. But in any event there is no evidence to show defendant divulged or used any of plaintiff's business secrets and plaintiff admits the only clause of the contract that is involved is 4(b). This clause prohibited defendant from engaging in the personal loan or installment finance business as an employee, in competition with Mutual in a city or town in which he worked when he was with Mutual. He worked in South Sioux City, Nebraska four or five months out of the twenty months he was with Mutual and he is now engaged in the same work in South Sioux City as an employee for a company in competition with Mutual's wholly owned subsidiary. The sole question in the case is whether the restrictive covenant in this contract will be enforced by the injunction.

II. Not all restrictive covenants in hiring contracts will be enforced. The agreement not to engage in a competing business on leaving employment is an agreement in restraint of trade, and it is unenforceable unless reasonably necessary to protect the employer.

The rule announced in 17 C.J.S., Contracts, § 254, is: 'Covenants incident to a contract of employment, by which an employee agrees not to * * * engage in competition after the employment, while not viewed with the same indulgence as restrictions incident to a contract of sale, will be sustained if they are no wider than reasonably necessary for the protection of the employer and do not impose undue hardship on the employee.'

The general rules governing the enforce-ability of such contracts in partial restraint of trade are all stated in our opinion in Brecher v. Brown, 235 Iowa 627, 17 N.W.2d 377, with citations to, and quotations from, supporting authorities found in the prior opinions of this court, and decisions of other courts, and text statements in Corpus Juris Secundum and Restatement of the Law of Contracts.

It comes down to a question of reasonableness. The restraint will be enforced if reasonably necessary to afford a fair protection to the business interests of the party in favor of whom it is given. It is to be strictly construed and the restriction must be no greater than necessary to protect the interests of the employer. It must not be oppressive to the employee or create undue hardship on him, out of proportion to the benefits which the employer may in reason expect to secure. Brecher v. Brown, supra; Swigert &amp Howard v. Tilden, 121 Iowa 650, 97 N.W. 82, 63 L.R.A. 608, 100 Am.St.Rep. 374; Haggin v. Derby, 209 Iowa 939, 229 N.W. 257; 13 C.J.S., Contracts, §§ 246 and 247; Restatement Law of Contracts, § 515; Rapalee v. Malmquist, 165 Iowa 249, 145 N.W. 279.

A study of the law on this subject--and the cases are legion--shows clearly that in such injunction suits, equity is in the field of protecting unfair competition. The courts will not enjoin the taking of the...