Orkin Exterminating Co. (Arwell Division) v. Burnett

• Citation: 146 N.W.2d 320,259 Iowa 1218
• Decision Date: 15 November 1966
• Docket Number: No. 52307,52307
• Parties: ORKIN EXTERMINATING COMPANY, Inc., (ARWELL DIVISION), Appellant, v. Robert H. BURNETT, Appellee.
• Court: Iowa Supreme Court

Page 320

146 N.W.2d 320

259 Iowa 1218

ORKIN EXTERMINATING COMPANY, Inc., (ARWELL DIVISION), Appellant, v. Robert H. BURNETT, Appellee.

No. 52307.

Supreme Court of Iowa.

Nov. 15, 1966.

Rehearing Denied Jan. 10, 1967.

Harris, Thoma, Schoenthal, Davis & Hockenberg, Des Moines, for appellant.

Irish & Skinner, Altoona, for appellee.

LARSON, Justice.

This suit in equity is sought to enjoin the violation of a restrictive covenant in a contract of employment entered into on January 2, 1962, between the defendant Burnett and Arwell, Inc., an exterminating company doing business in Polk County, Iowa. On May 1, 1965, plaintiff-company acquired Arwell, Inc. and became assignee of the contract involved herein.

The sole issue presented by this appeal is whether under the circumstances plaintiff is entitled to have the covenant not to compete contained in the 1962 contract enforced by a court of equity.

The trial court held the contract had been breached by plaintiff's wrongful conduct prior to its termination, that plaintiff had not done equity, that enforcement of the covenant would be unjust and work an unjust hardship or oppression on defendant, that defendant was therefore not bound by the terms of the restrictive covenant in the contract, and concluded that injunctive relief should be denied. We cannot agree.

The 1962 employment contract, Exhibit P-1, was voluntarily executed by the parties. Both performed under its terms until February 24, 1966. Among its various provisions relating to wages, territory, and duties, we find the following:

'Representative agrees that on the termination for any cause whatsoever of his employment with the Company, he will not, for a period of three (3) years, directly or indirectly engage in the same or similar or competitive line of business carried on by the Company or work for any individual, firm or corporation engaged in such business or similar or competitive line of business, nor will he in any way, directly or indirectly, attempt to hire the Company's employees, or take away any of the Company's business or customers or destroy, injure or damage the good will of the Company with its customers within a ten (10) mile radius of any city, town, village or other area in which he may have worked while employed by said Company.

'Representative further agrees that in the event that the Company, its successors or assigns, shall bring an action for the enforcement of any or all provisions of this covenant not to compete, and if the Court shall find on the basis of the evidence introduced in said action that this agreement is unreasonable either as to the three year period or as to the area or communities covered herein, then the Court shall make a finding as to what is reasonable and shall enforce this agreement by judgment or decree to the extent of such finding.

'The parties further agree that this agreement shall remain in full force and effect for one year from date representative is employed by said Company and shall continue from year to year thereafter except that the employment of the Representative may be terminated by either party, at any time hereafter, by giving the other party notice of his or its intention to terminate same.'

It appears that pursuant to execution of the contract defendant was given eight weeks training, which included methods of exterminating insects, bookkeeping, and general company methods of operation. He was then assigned to an established route in and near East Des Moines, where he remained until their relations were severed February 28, 1966. On February 24th and 25th defendant was advised by the plaintiff that the old contract with Arwell, Inc., would be null and void as of February 28, 1966, and that a new Orkin contract, effective March 1, 1966, slightly different, would be offered those representatives who had been working under the old contract. The terms of this contract were disclosed and discussed at a meeting held in Carroll, Iowa, February 24, 1966, but no contracts were submitted or signed at that time. The terms of the new contract were unacceptable to defendant and he refused to attend any more meetings or sign the contract offered to him. Shortly thereafter he began contacting and soliciting the accounts he had serviced for the plaintiff-company, and freely admitted starting a competing business and did successfully pirate some of his former employer's accounts.

I. Of course, our review in this equity action is de novo. Rule 334, Rules of Civil Procedure. The scope of review, we have said, is the entire action. Uptown Food Store, Inc. v. Ginsberg, 255 Iowa 462, 465, 123 N.W.2d 59, 1 A.L.R.3d 765, and citations. Defendant does not seriously challenge the legality of restrictive covenants in general, and does not question the reasonableness of the area and time limitations in this covenant not to compete.

Contracts of employment whereby employees come into personal contact with their employer's customers and agree not to enter into competition with the business of the employer are usually held valid and enforceable, especially where the restrictive covenants are for a limited time and within a limited area. We have so held many times. See Federated Mutual etc. Ins. Co. v. Erickson, 252 Iowa 1208, 1212, 110 N.W.2d 264, and cases cited. The rationale is that such covenants are necessary for the protection of the employer's business. Cogley Clinic v. Martini, 253 Iowa 541, 112 N.W.2d 678, and citations. In Smithereen Co. v. Renfroe, 325 Ill.App. 229, 59 N.E.2d 545, a case also involving a pest control business, the court upheld and enforced a covenant not to compete for a term of five years within the city of Chicago. In Annotation, 43 A.L.R.2d 94, § 25, page 162, it is stated: 'The principle of customer-contact protection finds its expression in the general rule that the territorial restraint in a covenant not to compete will, generally-speaking, be considered reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer's customers.' Here that area was within ten miles of any city, town, village, or other area in which the defendant may have worked while employed by the plaintiff. It was shown to include several small towns and one farm east of Des Moines, as well as the east half of Des Moines. We are satisfied the area included and the period of three years set out were not unreasonable or unfair.

II. Covenants not to compete, as a general rule, are enforceable in Iowa. Where the basic contract is fair and equitable, such covenants do not violate public policy. They include contracts between employer and employee, as well as those relating to business sales and professional services. Thus, where the restrictive covenant is reasonably necessary for the protection of the employer from loss of business caused by the acts of the employee as a result of confidential knowledge acquired by training and service in the employer's business, it is usually enforceable in equity. See Uptown Food Store, Inc. v. Ginsberg, supra; Cogley Clinic v. Martini, supra; Federated Mutual etc. Ins. Co. v. Erickson, supra; Mutual Loan Co. v. Pierce, 245 Iowa 1051, 65 N.W.2d 405; Brecher v. Brown, 235 Iowa 627, 17 N.W.2d 377; and many others. Also see 28 Am.Jur., Injunctions, § 108 and § 109, pages 301--303.

Where, as here, the covenant not to compete is based upon an agreement to instruct, direct, hire and pay the employee a salary, and grants other benefits in return for servicing designated area company accounts, and where the contract itself recites that the covenant not to compete is a major inducement in the employment, we must conclude there was a valid consideration and this contract is not lacking in mutuality. The trial court so found and we agree. In the absence of bad faith or a showing that there was an employer intent that the employment was only to be long enough to bind the employee and prevent him from working elsewhere in competition with the employer, covenants reasonable as to time and area are generally upheld and enforced by equitable proceedings. Wark v. Ervin Press Corp., 48 F.2d 152 (7th Cir.1931); Granger v. Craven, 159 Minn. 296, 199 N.W. 10, 52 A.L.R. 1356; McAnally v. Person, 57 S.W.2d 945 (Tex.Civ.App.1933); Smithereen Co. v. Renfroe, supra; Annotation, 43 A.L.R.2d 94, § 25, page 162.

The original contract here was voluntarily executed in 1962 and performed for over four years to the apparent satisfaction of both parties. Even when plaintiff-assignee became a party to the contract in May 1965, the relationship appears to have been satisfactory and was faithfully performed by each. Thus, unless plaintiff has forfeited or lost some rights, has breached the agreement in some material aspect, or has done something unfair or unjust to defendant in relation to the agreement, a court of equity would not be justified in refusing to enforce this restrictive covenant. Obviously it is defendant's burden to prove such breach or misconduct in order to invoke the discretionary power of the equity court, as he is the one who asserts it. Cogley Clinic v. Martini, supra; McAnally v. Person, supra.

III. It would appear, then, the nub of this controversy is whether the evidence adduced is sufficient to sustain a finding that plaintiff breached the original contract prior to its legal termination, or that its conduct in terminating the old contract and in requiring a new and different one to retain an employee-employer relationship was so unreasonable and unjust as to justify the refusal of equitable relief under the clean-hands doctrine. In its letter of February 25, 1966, to all Arwell representatives, district managers and supervisors, which was sent to defendant, it stated:

'Enclosed is your new employment contract, which you'll note became effective on March 1, 1966. By now your District Manager or...