SACKETT, C.J.
Iowa Trenchless, L.C. appeals the district court's decision granting declaratory relief from a covenant not to compete to Michael Sutton, a former owner and employee of Iowa Trenchless. Iowa Trenchless contends the district court erred in applying the standards governing the reasonableness of an employer-employee covenant not to compete to this case, which involves a business owner's sale of his interest. Iowa Trenchless asks that we adopt a less stringent review and grant more deference to covenants not to compete between owners, which are ancillary to the sale of a business. It contends if the appropriate standard of review was applied in this case, the covenant not to compete would be found enforceable. In addition, Iowa Trenchless asserts the district court erred in denying its breach-of-contract counterclaim against Sutton. We reverse and remand.
In the summer of 2005, Sutton tired of the travel and sought to sell his shares in the company to Clark and Clark's father, who both tried to dissuade Sutton from leaving the company. The company was approximately two and one-half years old. It had just taken on more debt in order to construct a shop to store and work on equipment, and had purchased land and new equipment. When Sutton insisted on selling his shares, Sutton and Clark settled on a price of $200,000.
A purchase agreement was drawn up by the attorney for the company and provided that approximately $141,000 of the purchase price was for Sutton's membership units and capital account, and approximately $59,000 was for the goodwill of the company and a non-compete agreement. The covenant not to compete stated,
Sutton had the contract reviewed by an attorney and requested Clark and his father sign a personal guarantee for the $200,000 payment, which was done. Sutton, however, maintains that he did not have the ability to negotiate the terms of the covenant not to compete. Sutton states he did discuss the agreement with his attorney and tried to negotiate a fiveyear term on the covenant not to compete instead of the seven-year term, but Clark and his father would not agree. He claims it was a "take it or leave it agreement," and if he wanted to sell his interest in the company, he had to agree to the noncompete. The agreement was signed by all in August of 2005. The money was paid under the agreement.
After selling his portion of the company, Sutton remained employed with the company as a field supervisor for the local projects, which reduced the amount of travel he had previously done. In May of 2008, Sutton left Iowa Trenchless and
Sutton filed a declaratory judgment action in August of 2009, seeking to have the covenant not to compete declared unconscionable, unenforceable, and void. Iowa Trenchless filed its answer and asserted counterclaims against Sutton. Iowa Trenchless claimed the agreement was valid and enforceable, and claimed Sutton breached the terms of the agreement by attempting to hire Iowa Trenchless employees, contacting Iowa Trenchless customers, and working for a competitor of Iowa Trenchless.
Both parties filed motions for summary judgment, which were denied. The case proceeded to a bench trial on September 21, 2010. The district court filed its findings of fact and conclusions of law on November 24, 2010, granting declaratory relief to Sutton, striking down further enforcement of the covenant not to compete, and denying Iowa Trenchless's counterclaims in their entirety. Iowa Trenchless appeals claiming the district court erred in applying the wrong legal standard to the covenant not to compete, and asserting if the correct standard was applied, the covenant would be found enforceable. In addition, Iowa Trenchless claims Sutton breached the terms of the agreement.
The parties disagree as to the appropriate standard of review. Iowa Trenchless asserts its claim that the district court applied the incorrect legal standard should be reviewed for correction of errors at law, but all other issues on appeal should be reviewed de novo as Sutton filed the case in equity. Sutton contends that while he may have initially filed his declaratory judgment action in equity, a review of the case shows it was tried at law, and as such, should be reviewed for correction of errors at law.
We review declaratory judgment actions depending on how the action was tried to the district court. Passehl Estate v. Passehl, 712 N.W.2d 408, 414 (Iowa 2006). "[W]e consider the `pleadings, relief sought, and nature of the case [to] determine whether a declaratory judgment action is legal or equitable.'" Id. (citing Nelson v. Agro Globe Eng'g, Inc., 578 N.W.2d 659, 661 (Iowa 1998)). Whether the court ruled on evidentiary objections is also an important consideration, though it is not dispositive. Id.
While Sutton initially captioned his case in equity, a review of the trial transcript reveals the court ruled on multiple evidentiary objections throughout the two day trial. Ernst v. Johnson Cnty., 522 N.W.2d 599, 602 (Iowa 1994) ("Where there is uncertainty about the nature of a case, a litmus test we use in making this determination is whether the trial court ruled on evidentiary objections."). The court's decision was captioned as "Findings of Fact, Conclusions of Law and Ruling," and not "decree" as is generally the case in equity actions. Citizens Sav. Bank v. Sac City State Bank, 315 N.W.2d 20, 24 (Iowa 1982). Iowa Trenchless did seek an injunction to enforce the covenant not to compete in its counterclaim, but "the fact that injunctive relief was sought is not dispositive of whether an action is at law or in equity, as an injunction may issue in any action." Harrington v. Univ. of N. Iowa, 726 N.W.2d 363, 365 (Iowa 2007). We find the case was tried as a law action below, and as such, our review is for correction
While Iowa Trenchless believes this is a matter of first impression in Iowa, what both parties and the district court failed to ascertain is that Iowa has long held covenants not to compete between business owners as ancillary to a purchase agreement are viewed with more indulgence than covenants not to compete between employers and employees. See Brecher v. Brown, 235 Iowa 627, 631, 17 N.W.2d 377, 379 (1945), overruled on other grounds by Ehlers v. Iowa Warehouse Co., 188 N.W.2d 368 (Iowa 1971). This added indulgence is due to the fact that in a business purchase agreement, the covenant not to compete adds value to the goodwill of the business being sold. Id. In addition, when an owner sells his business, the parties involved are presumed to be in a more equal negotiating position than employers and employees. Id. at 631-32, 17 N.W.2d at 379. A much greater "scope of restraint" is allowed between business owners. Baker v. Starkey, 259 Iowa 480, 491, 144 N.W.2d 889, 895 (1966). See also Thomas v. Thomas Truck & Caster Co., 228 N.W.2d 52, 55 (Iowa 1975) ("In the sale-related covenant not to compete cases we do not apply a `strict construction' as appellee asserts, but do hold the contract, being in restraint of trade and personal liberty, should not be construed beyond its fair import.").
Despite this added indulgence to uphold covenants not to compete that are a part of a business purchase agreement, the factors a court analyzes in determining whether a covenant not to compete is enforceable are the same. In Lamp v. American Prosthetics, Inc., 379 N.W.2d 909, 910 (Iowa 1986), the court applied the following three-pronged test in an employee-employer covenant not to compete: "(1) [i]s the restriction reasonably necessary for the protection of the employer's business; (2) is it unreasonably restrictive to the employee's rights; and (3) is it prejudicial
Haggin, 209 Iowa at 943, 229 N.W. at 259. Iowa Trenchless concedes that the same "reasonableness test" is applied to both employer-employee and owner-to-owner covenants not to compete. It is only the application of the test that is different.
While the district court was correct to apply the three-factor reasonableness test to the covenant at hand, we conclude the district court erred in concluding the analysis of an owner-to-owner covenant does not differ from the analysis of an employee-employer covenant. When applied to owner-to-owner covenants not to compete, the court grants a greater scope of restraint. Baker, 259 Iowa at 491, 144 N.W.2d at 895. This greater scope of restraint does not mean that all owner-to-owner covenants not to compete are enforceable. We still analyze each case to ensure the restriction is not wider in scope than the operation of the business and there is no other good reason to confine the restriction to narrower limits. Uptown Food Store, Inc. v. Ginsberg, 255 Iowa 462, 475, 123 N.W.2d 59, 67 (1963). Thus, we must look to see if the restraint of trade is reasonable to afford Iowa Trenchless sufficient protection, is not overly broad in its restriction of Sutton, and is not injurious to the general public.
Iowa Trenchless urges us to enforce the covenant under the less-stringent standard above. It asserts the 350-mile radius only covers the area that Iowa Trenchless actually performed services as seen in the map it provided to the district court. It also asserts the seven-year restriction is reasonable as the company was young when Sutton left, and the company needed to protect its goodwill and growing reputation. It also claims the covenant was needed to prevent Sutton from competing against it, particularly because Sutton was intimately familiar with the finances, customers, and inner working of the company. We agree.
Iowa courts have not considered the reasonableness of a covenant not to compete
While Sutton asserts he was unable to negotiate the terms of the covenant, he did admit he consulted with his attorney about the covenant prior to executing the agreement. He stated he and his attorney pushed for a five-year term instead of seven. This proposal was rejected by both Clark and his father. Despite this rejection, Sutton still agreed to sign the covenant and accepted the full $200,000 contract price for his ownership interest in the company and his agreement not to compete. We find just because Clark and his father did not agree to Sutton's proposed five-year term, this does not mean the covenant was not negotiated. We do not find the seven-year term unreasonable.
Nor do we find the 350-mile geographic restriction unreasonable. Upon reviewing the exhibits submitted by the parties, it is clear the 350-mile radius covered only those areas where Iowa Trenchless had performed work. In fact, the 350-mile radius did not cover all jobs performed, as Iowa Trenchless did work in northern Minnesota and northern Wisconsin where the restriction did not extend. While no work was documented to have occurred in Illinois or western Indiana, if the geographic scope was reduced to exclude these areas, the reduced radius would not provide protection to Iowa Trenchless in areas it did perform jobs such as Wichita, Kansas, and Appleton, Wisconsin.
The district court found Iowa Trenchless presented no evidence as to why the covenant was still needed for the protection of its business for the remaining two years. The justification for the covenant is determined at the time the covenant was executed. Ehlers, 188 N.W.2d at 373 (stating an employer's burden to show the reasonable necessity of the covenant is ascertained when the employee left company). It is not Iowa Trenchless's burden to continually justify the covenant. So long as it was necessary and reasonable for the protection of the purchaser's business at
The district court also found the covenant was an unreasonable restriction on Sutton's rights as the company Sutton formed after leaving Iowa Trenchless was rendered dormant due to economic conditions and Sutton's inability to use his trenchless skills. The poor economic conditions affected Sutton and Iowa Trenchless equally. Sutton started his business with the knowledge and understanding he would be unable to conduct trenchless activity for the term of the covenant. Just because Sutton's business venture failed, does not mean the covenant was unreasonably restrictive of Sutton's rights. In addition, at the time of trial, Sutton was gainfully employed with another company, Rognes Corporation; thus, the covenant did not "unnecessarily interfere with [Sutton] following any trade or calling for which he is fitted and from which he may earn his livelihood." Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 383 (Iowa 1983).
We also find the public interest was not harmed by this covenant. The covenant did not result in a monopoly or even in a reduction in the number of companies that do trenchless construction. It simply prevented a new company from entering the marketplace. It is hard to see how the public would be harmed by this restriction. See Swigert & Howard, 121 Iowa at 659-60, 97 N.W. at 85 (stating where there is the substitution of one business owner for another, the interest of the general public is infinitesimal).
We find the covenant valid and enforceable considering the greater scope of restraint that is permitted in owner-to-owner covenants not to compete. We reverse the district court's decision granting Sutton's petition for declaratory relief, which found the covenant unreasonable, unconscionable, and unenforceable from November 22, 2010, and we remand to the district court to conduct a hearing to determine the amount of attorney fees Iowa Trenchless is entitled to recover for its efforts to support its claim that the covenant was enforceable.
The district court rejected Iowa Trenchless's claims finding Iowa Trenchless failed to present any evidence as to how it was damaged as a result of the alleged breaches. In addition, with respect to the claim involving the employment of Casey Kirk, the court found both Sutton and Kirk testified Kirk was fired by Iowa Trenchless before he went to work for Sutton, and the court found Kirk made first contact with Sutton. Therefore, the court concluded Sutton did not solicit Kirk, which would have been a violation of the covenant. With respect to Duane Burkhardt, the court found Burkhardt's testimony regarding the conversation he had with Sutton differed substantially from Sutton's testimony. Sutton claimed to have never asked Burkhardt for trenchless work. As a result of this conflict in testimony, the court found Iowa Trenchless failed to carry its burden to prove Sutton breached the covenant not to compete.
Finally, the district court found Iowa Trenchless failed to offer any evidence,
Despite the lack of proof to demonstrate it sustained any damages as a result of the alleged breaches, Iowa Trenchless asserts it should still be able to recover because the covenant not to compete provided for the recovery of attorney fees. The covenant states,
While the contract does provide for the payment of attorney fees, these fees are only payable if Iowa Trenchless is successful in enforcing the terms of the noncompete. If Iowa Trenchless is not successful, it is not entitled to attorney fees. Thus, before we can award attorney fees on the counterclaim, we must determine whether the district court erred in finding Iowa Trenchless failed to meet its burden of proof that Sutton breached the covenant.
In asserting its breach-of-contract claim, Iowa Trenchless had to prove:
Royal Indem. Co. v. Factory Mut. Ins. Co., 786 N.W.2d 839, 846 (Iowa 2010). Offering evidence of damages is essential to proving a claim for breach of contract. Clark, on behalf of Iowa Trenchless, testified during cross-examination that he could not provide the court with any dollar figure in lost profits that resulted from Sutton's alleged breaches. Clark did assert he had to hire and train a new employee to replace Casey Kirk, but offered no evidence from which the court could have ascertained the amount of damages sustained as a result of Sutton's alleged breach.
We find substantial evidence supports the district court's conclusion Iowa Trenchless failed to carry its burden to prove Sutton breached the covenant. Iowa Trenchless offered no evidence to support a claim for damages, which is an essential element of a breach of contract claim. Thus, Iowa Trenchless is not entitled to recover attorney fees incurred in its attempt to prove its breach-of-contract counterclaim. However, as stated above, Iowa Trenchless is entitled to recover the attorney fees it incurred in establishing that the terms of the covenant are enforceable. Thus, this case must be remanded for a hearing on the amount of attorney fees Iowa Trenchless is entitled to recover. We do not retain jurisdiction.