M & F LIVESTOCK, a division of L.L. PARKS LIVESTOCK, INC., Plaintiff-Appellant/Cross-Appellee, vs. STEVE MOHR, Defendant-Appellee/Cross-Appellant.
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IN THE COURT OF APPEALS OF IOWA
No. 9-049 / 08-0872
Filed May 29, 2009
M & F LIVESTOCK, a division of
L.L. PARKS LIVESTOCK, INC.,
Plaintiff-Appellant/Cross-Appellee,
vs.
STEVE MOHR,
Defendant-Appellee/Cross-Appellant.
___________________________________________________________________
Appeal from the Iowa District Court for Carroll County, Ronald H. Schechtman,
Judge.
Appeal and cross-appeal from the district court’s rulings on a covenant not to
compete, a misrepresentation claim, and the amount of a supersedeas bond.
AFFIRMED IN PART AND MODIFIED IN PART ON APPEAL; AFFIRMED ON
CROSS-APPEAL.
Sean P. Moore, Michael R. Blaser, and Elizabeth A. Coonan of Brown, Winick,
Graves, Gross, Baskerville & Schoenebaum, P.L.C., Des Moines, for appellant.
John Werden of Van Dyke & Werden, P.L.C., Carroll, for appellee.
Heard by Sackett, C.J., and Vogel, J., and Nelson, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2009).
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SACKETT, C.J.
M&F Livestock, a division of L.L. Parks Livestock, Inc., appeals from the various
district court rulings in its lawsuit against Steve Mohr. The appellant contends the court
erred (1) in invalidating as unconscionable the non-competition covenant in its
employment agreement with Mohr, (2) in failing to reform the non-competition covenant,
and (3) in calculating the amount of the supersedeas bond.
The cross-appellant
contends the court erred in dismissing his claim for misrepresentation. We affirm in part
and modify in part on appeal. We affirm on cross-appeal.
I.
Background and District Court Proceedings.
Before the events that led to the lawsuit on appeal, Mohr worked as a pig broker
for M&F Trading, Inc., a company in Ontario, Canada, that was owned by Farms.com.
Lawrence Parks owns L.L. Parks Livestock, Inc., which is in the business of buying and
selling feeder pigs. For a time, ending in 2004, Parks was a member of the board of
directors of Farms.com.
In 2006 and 2007 M&F Trading experienced cash flow
problems that led to delays in paying for pigs purchased.
In 2006 Parks began
negotiations with Farms.com to purchase the assets of M&F Trading.
He was
interested in the purchase only if four key employees, especially Mohr, were retained.
On January 16, 2007, Parks sent a letter of intent and an employment agreement 1 to
M&F Trading’s manager, Chris Gehl, to distribute to the other key employees for their
signatures. Gehl e-mailed the documents to Mohr on January 16. Mohr signed the
1
At particular issue in this case are paragraphs seven through nine of the agreement.
Paragraph seven is a covenant not to compete anywhere in the United States or Canada for
one year. Paragraph eight contains covenants not to disclose or interfere. Paragraph nine
contains a covenant not to solicit.
3
letter of intent, initialed the pages of the employment agreement, and returned them.
Parks Livestock advanced $600,000 to M&F Trading, which assisted it in paying its
suppliers in a more timely manner.
Between January 16 and March 30, Mohr and Parks spoke on the phone several
times and met briefly on at least one occasion. Mohr expressed concerns to Parks. On
Friday, March 30, the day set for closing the asset purchase, Parks again spoke with
Mohr, who told him he did not think he was interested in working for a new company.
Parks told Mohr that Mohr had signed the letter of intent and, based on that, Parks had
advanced $600,000 to M&F Trading. After discussion, Mohr indicated he was still on
board. Parks concluded the asset purchase that day, sending an additional $600,000.
Also that day, Mohr signed the articles of incorporation for Mohr Pork, L.L.C.
The articles of incorporation for Mohr Pork were filed on Monday, April 2. On
Tuesday, April 3, Mohr e-mailed his resignation to Gehl “effective immediately.” In his
e-mail Mohr also stated:
Talking to Lawrence [Parks] on Friday, I felt very pressured to stay on with
M&F for a one year period. Which I agreed to do if Big Sky, Jay Clasing,
and Tim Flaherty would agree to sign a contract with M&F Trading. 2 After
our meeting this evening, I learned that they definitely would not go
through M&F. I also told Lawrence Friday before he bought the company
that I would have nothing to do with a do not compete clause. I do not
want to compete.
Parks and Mohr met on April 11. Their accounts of the meeting differ greatly.
Parks testified:
2
Parks testified that Mohr had been working on a contract between a producer, Big Sky, and
finishers, Jade Farms and Tim Flaherty. The contract would have been an asset of M&F
Trading that Parks purchased. On April 12, based on the issues between Parks and Mohr, Big
Sky notified Parks and Mohr in writing that it would proceed with a direct contractual agreement
with the finishers and not get involved in the issues between Parks and Mohr.
4
I drove over to Des Moines to meet with Steve [Mohr] and we were there
probably less than five minutes and Steve, you know, we weren’t getting
along at all and Steve just got up and said, there’s lawyers that will take
care of this and kind of walked out of the restaurant and that was—that
was the end of the conversation. . . .
In contrast, Mohr testified:
[H]e says it took five minutes, I think it took more like two minutes. We sat
down, we each had a pop, he said right off the bat, he says, Steve, I own
you, I bought you, and you’re going to do what I tell you, you’re going to
work for me, and he says after a year, he says you can work for me for
one year and he says I’ll let you quit, but he says whatever you do after
that, you’re going to have to do it through Parks Livestock, so what he was
telling me was that he had bought me, he owned me, and even after the
year is up, evidently for the rest of my life, I had to work through him.
Injunction Proceedings. On April 18, the plaintiff filed a petition against Mohr
alleging breach of contract and misappropriation of trade secrets, and seeking injunctive
relief.
Mohr filed an “answer, affirmative defenses, counter claim, and third party
petition”3 alleging wages due under his contract with M&F Trading, misrepresentation,
abuse of process, violation of good faith and fair dealing, and that the agreements
should be reformed, rescinded, or otherwise made equitable. Following oral arguments
on the request for injunctive relief on June 14, 2007, the district court filed its decision
on July 31, finding the existence of a contract between Mohr and M&F Livestock, that
Mohr directly and materially breached the contract, and that injunctive relief was
appropriate pending a trial on the merits of the contract dispute. The court temporarily
enjoined Mohr from competing with M&F Livestock in Iowa, Nebraska, Minnesota, and
Illinois for a year. It ordered that bond be posted in the amount of $168,750.
3
He named M&F Trading, Lawrence Parks, and Chris Gehl as third-party defendants.
5
Trial. In March of 2008, Mohr settled with M&F Trading and dismissed his claims
against it. In April of 2008, a jury trial on the plaintiff’s claims and the defendant’s
counterclaims was held.4
Prior to submission of the case to the jury, the plaintiff
dismissed its claim that Mohr misappropriated trade secrets. Mohr dismissed his claims
against Gehl. The court granted the plaintiff’s motion for directed verdict on Mohr’s
claims for abuse of process and breach of good faith and fair dealing. It reserved ruling
on the plaintiff’s motion for directed verdict on Mohr’s misrepresentation claim. The only
claim submitted to the jury was the contract claim.
The jury rendered special verdicts. It found the agreement Mohr signed and
initialed in January of 2007 was a valid contract with adequate consideration that was
binding on him when Parks entered into the asset purchase with M&F Trading. It further
found that none of the purported conduct of the parties on March 30 served to abandon
the January agreement, including its covenants not to compete. The jury answered “no”
to the third question, which read, “Do you find that any purported agreement between
the parties on March 30, 2007, incorporated covenants not to compete contained in [the
January agreement], paragraphs 7 and 9?”
On April 24, the court dictated its ruling from the bench, but agreed to formalize
its ruling in writing. In its oral ruling on the injunction and the covenants not to compete,
the court found “absolutely no evidence” to show the geographic area of limitation was
appropriate. It further found the plaintiff’s “gain from the covenant was intentionally and
grossly disproportionate” to the injury the defendant would sustain from enforcement of
4
The trial was not bifurcated. The jury considered the contract claim. The court “sitting in
equity, simultaneously heard the injunctive evidence as offered on the breach of contract claim.”
6
the covenant.
It expressly found “the restraint to be unconscionable and
unenforceable.”
The court dissolved the temporary injunction and concluded the
defendant suffered damages in the amount of $125,000 because of the injunction. It
made judgment in that amount a lien against the $168,750 bond that had been posted.
On April 25, the court filed what was captioned “compliance with Iowa rule
1.933,” that “direct[ed] such judgment on the special verdict and answers as
appropriate.” The court noted “some different understandings of the effect of the jury’s
answer to question #3” resulted from its directions to the jury. The court stated:
[T]he answers to questions 1 and 2 establish a contract, including the
covenants not to compete or solicit. The answer to question 3 does not
alter its findings of facts in questions 1 and 2. It is consistent therewith.
The answer to question 3 is not particularly relevant, but shall stand for
whatever force it may have herein, which seems severely limited.
The court dismissed the plaintiff’s petition and the defendant’s counterclaim and crosspetition. It assessed costs three-fourths to the plaintiff and one-fourth to the defendant.
In its April 28 written ruling on the injunction, the court supplemented its verbal
ruling “for explanatory purposes,” but expressly did “not intend to disturb the jury’s
factual findings” that there “was a valid, enforceable contract . . . and, that any conduct
by the parties on the closing date . . . did not serve to abandon the contract, including
the restrictive covenants.” The court confirmed its refusal “to reform the employment
contract, there being no evidence of its need to protect the employer’s legitimate
interest, [and it was] unreasonably restrictive for the employee, and contrary to the
public’s interest.”
Following the plaintiff’s notice of appeal and the defendant’s notice of crossappeal, the plaintiff requested that the court order a portion of the injunction bond be
7
converted into a supersedeas bond and the balance disbursed to the plaintiff. Following
the defendant’s resistance, the court denied the request and set the supersedeas bond
at $25,000.
The plaintiff moved for clarification of the amount, citing Iowa Rule of
Appellate Procedure 6.7(2), which sets the amount of a supersedeas bond at 110
percent of the amount of a money judgment. Following the defendant’s resistance, the
court considered the award of attorney fees in the amount of $12,400 plus interest in its
calculation of the supersedeas bond, which it set at $15,000.
The plaintiff appeals from the court’s refusal to enforce or reform the covenant
not to compete and its order setting the amount of the supersedeas bond.
The
defendant cross-appeals from the court’s dismissal of his misrepresentation claim.
II.
Scope of Review.
The parties disagree on the scope of review. We consider and review a case in
the same manner as the district court tried the case. Molo Oil Co. v. City of Dubuque,
692 N.W.2d 686, 690 (Iowa 2005).
Although the petition for injunctive relief was
docketed in equity, two of the three counts pled were breach of contract and
misappropriation of trade secrets. Both counts sought money damages. “If, as here,
both legal and equitable relief are demanded, the action is ordinarily classified
according to what appears to be its primary purpose or its controlling issue.” Mosebach
v. Blythe, 282 N.W.2d 755, 758 (Iowa Ct. App. 1979); see also Berry Seed Co. v.
Hutchings, 247 Iowa 417, 422, 74 N.W.2d 233, 237 (1956) (noting cases in which the
remedy is the recovery of money based on breach of contract are usually actions at
law). The defendant requested a jury trial and alleged legal counterclaims. The court
ruled on evidentiary objections, which is “the hallmark of a law trial, not an equitable
8
proceeding.” Sille v. Shaffer, 297 N.W.2d 379, 381 (Iowa 1980). We conclude our
review is for correction of errors at law. Iowa R. App. P. 6.4.
III.
Discussion.
Covenant Enforcement. The plaintiff contends the court erred in refusing to
enforce or reform the covenant not to compete.
Paragraph 11 of the employment
agreement initialed by Steve Mohr provided for enforcement of the covenant not to
compete that was contained in paragraph 7. It gave any court that found the any of the
restrictions “not completely enforceable” because they were not reasonable “the right
and power to interpret, alter, amend or modify any or all of the terms contained herein to
include as much of the scope, time period and geographic area as will render such
restrictions reasonable and enforceable.” The district court refused to reform the terms
because it determined the covenant was unconscionable. In its oral ruling, the court
reviewed applicable case law, then stated:
It appears that this effort at such a ridiculously broad territory,
without restriction to [Mohr’s] sphere of customers, imports a sinister
motive with dishonest purpose, and absence of good faith, bad faith, and
unconscionable from its beginning.
As this court has stated under these circumstances, the court has
no duty to judicially reform Rather, it has a duty to strike it and find
unenforceable paragraphs 7 and 9 in the employment agreement. The
court finds those things set forth that I read relating to oppressiveness and
good faith and equity will not enforce an agreement of this type.
The covenant provided Mohr could not compete for a year in the United States or
Canada in any business “similar to” or in competition with M&F. When imposing the
temporary injunction, the court reduced the area to Iowa and the surrounding states.
However, following the trial on a permanent injunction, the court ruled that even the
reduced area was “far too protective.”
9
In deciding whether to enforce a restrictive covenant, courts apply a threepronged test:
“(1) Is the restriction reasonably necessary for the protection of the
employer’s business; (2) is it unreasonably restrictive of the employee’s rights; and (3)
is it prejudicial to the public interest?” Lamp v. Am. Prosthetics, Inc., 379 N.W.2d 909,
910 (Iowa 1986).
The plaintiff argues the restriction was reasonably necessary to
protect its interests, was not unreasonably restrictive, and was not prejudicial to the
public interest. Concerning enforcement, the defendant argues (1) the jury’s verdict on
question three renders the question of enforcement moot, (2) M&F Livestock is not the
proper party to enforce the covenants, (3) there was no consideration for the
agreement, (4) conditions precedent to the agreement were not met, and (5) the
covenants were unreasonable.
From the arguments in the defendant’s brief and in oral argument, it appears the
defendant has misunderstood the relevance and effect of the jury’s answer to question
three on the jury verdict form. The responses to questions one and two establish a valid
employment agreement containing the covenants. The jury’s answer to question three
does not change that result. The court noted the limited value, if any of the answer to
question three. We conclude the defendant is incorrect in his first three arguments.
The court’s decision did not find evidence of conditions precedent. The defendant is
correct, however, that the covenants are unreasonable.
The plaintiff tacitly argues that it has stepped into the shoes of Mohr’s previous
employer in arguing the restriction was reasonably necessary to protect its interests.
The case law suggests covenants not to compete are to protect an employer from a
former employee pirating away its business, especially when using information and
10
relationships formed while employed. Here, Mohr never really worked for the plaintiff,
so the plaintiff had nothing to protect until it purchased assets of M&F Trading, including
its contracts. This problem with the plaintiff’s argument is similar to the defendant’s
argument that M&F Livestock is not the proper party to enforce the covenants.
The district court properly determined the covenants failed all three prongs of the
test set forth above, so that they were not enforceable as written.
There was no
showing of necessity to prevent Mohr from operating anywhere in North America.
Almost all of his business was between some producers in Canada and finishers in
Iowa, where he lives. The covenants as drafted far exceeded anything necessary to
protect M&F Livestock from Mohr’s operation of a hog brokerage. We affirm the district
court’s conclusion the covenants were unenforceable as written.
Covenant Reformation. The plaintiff also argues the court abused its discretion
in not reforming the covenants to reduce the restrictions to the point they were
enforceable. In Ehlers v. Iowa Warehouse Co., 188 N.W.2d 368, 370 (Iowa 1971), the
supreme court moved away from the prior all-or-nothing approach to enforcing
covenants and allowed for the possibility of restricted enforcement under certain
conditions:
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.
Based on the reasoning in Ehlers, the plaintiff argues the court should have
enforced the covenants to a more limited extent if the court found they were
11
unreasonable in extent—especially because the language of the agreement expressly
gives the court the right to modify the covenants to make them reasonable. Citing
Ehlers, the district court found the covenant restrictions evidenced bad faith on the part
of the plaintiff, undue hardship on Mohr, and a negative effect on the public interest.
Consequently, it refused to reform or modify the covenants, but rejected them entirely.
The plaintiff also cites to Farm Bureau Service Co. v. Kohls, 203 N.W.2d 209,
211 (Iowa 1972), in support of its argument courts will enforce overly-restrictive
covenants “to whatever extent” the court finds reasonable. In this case, however, the
defendant was competing against his former employer in a business he had learned
only from this employer, with customers his employer had provided in a list, and in an
area he had worked only for this employer. The covenant restricted the defendant from
operating in two counties for two years. The court found this unduly restrictive and
remanded the case for entry of a modified restriction to only six townships. In the case
before us, the plaintiff did not teach the defendant the business, did not provide him with
a list of customers, and did not have him operating in an area he had not worked before.
There is no showing of necessity to protect the plaintiff’s business, the exclusion of all of
the United States and Canada is far broader than two counties, and the plaintiff never
truly had the defendant working for it.
Iowa case law allows for reformation of restrictive covenants in limited
circumstances not present here. It does not require reformation. The language of the
agreement allows, but does not require reformation. We conclude the district court did
not abuse its discretion. A reading of the transcript of its oral ruling shows a clearlyarticulated basis for its exercise of discretion.
12
The cases cited by the plaintiff in which courts reformed covenants all relate to
situations similar to Farm Bureau, where a former employee would be competing
against a former employer in an area and business in which the employee had worked
for the employer.
Our prior comments about this type of restriction being more
appropriate to protect M&F Trading, Mohr’s former employer, than M&F Livestock, the
company that purchased assets from M&F Trading, apply to this claim as well. We
affirm the district court’s careful, well-reasoned exercise of discretion.
Supersedeas Bond.
The plaintiff contends the court erred in the amount it
required the plaintiff to post as a supersedeas bond to stay execution of the judgment
during the appeal. It requests that we order the immediate return of the excess amount.
Iowa Rule of Appellate Procedure 6.7(2) provides:
If the judgment or order appealed from is for money, such bond shall be
110 percent of the amount of the money judgment, unless the district court
otherwise sets the bond at a higher amount pursuant to the provisions of
Iowa Code section 625A.9(2)(a). In no event shall the bond exceed the
maximum amount set forth in Iowa Code section 625A.9(2)(b). In all other
cases, the bond shall be an amount sufficient to save appellee harmless
from the consequences of the appeal; but in no event less than $1000.
Iowa Code section 625A.9(2) (2007) provides for a bond exceeding 110 percent of the
amount of the money judgment “upon making specific findings justifying such an
amount,” and sets forth some criteria the court must consider, none of which apply in
the case before us.
The plaintiff posted a bond of $168,750 when the temporary injunction was
imposed on the defendant. Following the trial, the court entered judgment of $125,000
in favor of the defendant and made that amount a lien against the bond. The court also
ordered the plaintiff to pay $12,400 of the defendant’s attorney fees.
The plaintiff
13
moved to convert $151,140 of the injunction bond to a supersedeas bond5 and to have
the excess returned. Following the defendant’s resistance, the court refused to disturb
the injunction bond and set the supersedeas bond at $25,000. The plaintiff moved for
clarification. Following the defendant’s resistance, the court again refused to allow any
use of the injunction bond, but reduced the amount of the supersedeas bond to
$15,000.6 Concerning the injunction bond, the court ruled:
The temporary injunction bond in the sum of $168,750, was filed to
secure a money damage award emanating from the issuance of the
temporary injunction. Injunctive relief is equitable, and, there will be de
novo review. The defendant presented evidence that his damages
exceeded $200,000. That monetary award could be increased, on de
novo review, to an amount exceeding the amount of the present bond,
including accrued interest. That bond is sacrosanct, and, there is no
authority to employ it for an appeal bond.
By the time the court reduced the bond amount from $25,000 to $15,000, the
plaintiff already had posted the $25,000 amount.
The court refused the plaintiff’s
request for a refund of the excess amount.
The plaintiff contends the court’s orders erroneously required it to post $183,750,
an amount it contends exceeds the 110 percent provided for in Iowa Rule of Appellate
Procedure 6.7 by $32,610. It seeks a reversal of the rulings and a refund of what it
believes is excess. The defendant contends error is not preserved and the issue is
moot.
The court’s rulings that separate the money judgment for damages caused by the
injunction from the attorney fee award in calculating the proper amount of the
5
$151,140 = ($125,000 + $12,400) x 110%
The court used the attorney fee award of $12,400 plus interest as the starting point for
calculating a supersedeas bond of 110 percent of the monetary judgment.
6
14
supersedeas bond confuse the issue. The plaintiff is correct that the entire judgment
was for $137,400.
A supersedeas bond of 110 percent would be $151,140.
The
plaintiff has posted $183,750. Although the court has the authority under the code to
order an amount in excess of 110 percent, it did not base its order on that authority or
on the considerations listed in section 625A.9(2). The plaintiff is correct in its calculation
that the proper supersedeas bond amount is $151,140. We direct the clerk of court to
refund the excess $32,610 to the plaintiff.
Misrepresentation Claim. On cross-appeal the defendant contends the court
erred in dismissing his claim based on misrepresentation. He argues he signed the
employment
agreement
that
included
the
restrictive
covenants
based
on
misrepresentations made by M&F Livestock and Lawrence Parks. The district court
concluded the damages claimed were duplicative of those from the harm caused by the
injunction. The defendant claims his damages “were more than just those associated
with being forced out of business.” He seeks a remand for further proceedings on his
claim, but, in the event the damage award based on the injunction is affirmed, does not
seek a new trial.
He admits the award of damages and attorney fees effectuates
substantial justice between the parties and “taken as a whole the trial court should be
affirmed.”
The plaintiff argues the evidence does not support a finding of any
misrepresentations made by M&F Livestock or Lawrence Parks or of any
misrepresentations being the basis for the defendant signing the employment
agreement. At trial, the defendant provided no evidence of any representations made
by M&F Livestock or Lawrence Parks before he signed the employment agreement. He
15
testified the representations “came from people that I worked with for seven years and
trusted a great deal.” The district court correctly concluded this issue would not be
submitted to the jury.
IV.
Summary.
It does not appear that either party challenges the amount of damages or the
attorney fee award. The defendant admits the damages awarded effectuate substantial
justice between the parties.
We affirm the district court’s conclusion the restrictive
covenants were unenforceable as written. We affirm the court’s exercise of discretion
not to reform the covenants. We modify the court’s orders concerning the supersedeas
bond and order the refund of $32,610 to the plaintiff. On cross-appeal, we affirm the
district court’s determination not to submit the misrepresentation claim to the jury.
Costs on appeal are taxed two-thirds to appellant and one-third to crossappellant.
AFFIRMED IN PART AND MODIFIED IN PART ON APPEAL; AFFIRMED ON
CROSS-APPEAL.
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