808 N.W.2d 744
Iowa Ct. App.2011Background
- Iowa Trenchless, L.C. appeals a district court decision granting Sutton declaratory relief striking the covenant not to compete after a business sale.
- Sutton sold his membership interests for $200,000; approximately $59,000 was for goodwill and the non-compete.
- The non-compete lasts seven years within a 350-mile radius of Des Moines and restricts various competitive activities and customer contact.
- Sutton remained employed as a field supervisor for Iowa Trenchless after the sale, then left in 2008 to form his own company and later worked for Rognes Construction.
- The district court found the covenant was unreasonable and unenforceable and denied Iowa Trenchless’s counterclaims; the court also stayed further enforcement.
- The court later remanded to determine attorney-fee recovery related to enforcing the covenant; the appeal challenges both enforceability and breach claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard of review for owner-to-owner covenants | Iowa Trenchless favors a stricter standard, arguing owner-to-owner covenants are less deferential. | Sutton argues Rasmussen applies identical standard to owner-to-owner covenants and employer-employee covenants. | Owner-to-owner may permit broader restraint but remains subject to reasonableness. |
| Enforceability of the seven-year/350-mile restraint | Covenant reasonably protects purchaser's goodwill and operates within actual service areas. | Covenant was excessively broad in time and geography and should be limited. | Covenant upheld as reasonable given owner-to-owner context and scope. |
| Effect on public interest | Enforcement does not harm public interests since it does not create a monopoly and protects legitimate business interests. | Public interest concerns justify limiting restraints that could hinder competition. | Public interest not prejudiced; no public-harm finding. |
| Breach and damages on counterclaim; attorney fees | Sutton breached by soliciting employees/customers and by employment with a competitor; fees recoverable if covenant enforced. | No proved damages or breaches; conflicts in witness testimony undermine breach claim. | No damages proven for breach; attorney fees for enforcement may be recoverable; remand for fees amount. |
Key Cases Cited
- Lamp v. American Prosthetics, Inc., 379 N.W.2d 909 (Iowa 1986) (three-factor reasonableness test for covenants not to compete)
- Haggin v. Derby, 229 N.W. 257 (Iowa 1930) (flexible restraint test; fair protection without public harm)
- Uptown Food Store, Inc. v. Ginsberg, 123 N.W.2d 59 (Iowa 1963) (lease-not-to-compete rationale within city limits)
- L.H. Henry & Sons v. Rhinesmith, 260 N.W.9 (Iowa 1935) (sale-related covenants enforceable within local area)
- Swigert & Howard v. Tilden, 97 N.W. 82 (Iowa 1903) (sale of goodwill and restraint in specified territory enforceable)
- Rasmussen Heating & Cooling v. Idso, 463 N.W.2d 703 (Iowa Ct.App. 1990) (addressed owner-to-owner vs employer-employee standards (contextual))
- Ehlers v. Iowa Warehouse Co., 188 N.W.2d 368 (Iowa 1971) (historical basis for reasonableness in covenants)
- Baker v. Starkey, 144 N.W.2d 889 (Iowa 1966) (scope of restraint in owner-to-owner covenants)