Ehlers v. Iowa Warehouse Company

BECKER, Justice

(dissenting).

I respectfully dissent.

I. The Iowa law to this date holds a covenant not to compete cannot be upheld in part and rejected in part. “It must be upheld as written or rejected.” Brecher v. Brown, 235 Iowa 627 , 17 N.W.2d 377 *375 (1945). The majority overrules Brecher but allows other cases which state the same rule to stand.

Specifically, Baker v. Starkey, 259 Iowa 480, 483 , 144 N.W.2d 889, 891 (1966) is in fact being overruled by the majority. In Baker we stated:

“ * * * however, it is agreed the only issue presented on appeal is whether a court in equity should partially enforce, to the extent reasonable under the circumstances, a restrictive covenant in a contract of employment which by its written terms is too broad in scope of area or time to be itself reasonable.

“This issue presents the question whether a court will enforce such an agreement in part while holding the remainder invalid.”

It would be difficult to couch the issue here in narrower terms. Both Baker and this case involve employment contracts. While the factual situations as they developed are different, this case and Baker are identical on the relevant issue involved; i. e., whether the court will enforce a covenant not to compete in part while the remainder is held invalid. Baker said, “No”; this court says, “Yes.” Yet Baker is not overruled.

We did not merely quote from Hudson Foam Latex Products, Inc. v. Aiken (App.Div.1964), 82 N.J.Super. 508 , 198 A.2d 136 , we actually said, “We adopt the following language of the New Jersey court-” (Emphasis supplied).

“ ‘It must be remembered that restrictions such as those included in [paragraphs 3 and 4 of the present contract] * * * often go unchallenged. Employees, believing themselves bound by the restrictions in their employment contracts, no matter how broadly stated, may be intimidated by such language to the extent of forbearing gainful employment in positions which ostensibly fall within the covenant, perhaps thereby allowing their best talents to go unused. Employers should not be permitted to include the broadest possible restrictions in an employment contract, thus achieving the greatest possible amount of protection for themselves, to the unreasonable restriction of an employee’s right to use his-skills to the best advantage, and then be enabled to enforce so much and so many of the restrictions as can be found by a court to be reasonable under the circumstances. If such were the rule, it would afford employers an unconscionable advantage over their employees.’ ” (loc. cit. 259 Iowa at p. 495 , 144 N.W.2d at p. 898 ).

If, as the majority concludes, Solari Industries, Inc. v. Malady, 55 N.J. 571 , 264 A.2d 53 , overrules Hudson how can we adopt Solari without repudiating our adoption of the rule in Hudson? It was my understanding that Baker v. Starkey, supra, had settled this matter, at least for the present, as to employment contracts but left the matter somewhat unsettled as to sales contracts. If we are to reverse our field we should clearly so indicate.

Similarly in Kunz v. Bock, 163 N.W.2d 442, 446 (Iowa 1968), we recognized the issue presented in Baker, our prior rejection of the partial enforcement doctrine and said:

“We are not prepared to say that there can be no circumstances under which partial enforcement should be decreed or a contract reformed to express the true agreement but the case at bar does not present such a case.”

Kunz involved the sale of a business, not an employment contract. The reasons for going to the partial enforcement doctrine are much more persuasive in such a case than they are in employment contracts. See Baker v. Starkey, supra, (loc. cit. 259 Iowa at pp. 491, 495, 144 N.W.2d 889 ); Arthur Murray Dance Studios of Cleveland v. Witter, 105 N.E.2d 685, 703, 704 (Ohio Com.Pl.1952). Certainly if we adopt the majority’s present view as to employment contracts we must also adopt the same view as to business sale contracts (although the *376 converse would not necessarily be true). Yet Kunz is contra but not overruled.

The “new trend” adopted by the majority abandons basic tenets of contract construction and interpretation as they apply to covenants not to compete. The tenets involve illegality of restraint of trade, intent as the polestar of contract construction and indivisibility of the covenant. The new approach overrules all prior cases dealing with this type covenant because all were predicated on those three factors.

II. This new principle should be adopted if by partial enforcement and rewriting the contract, as the rule undoubtedly contemplates, a greater fairness in the regulation of business restraints would be achieved. In 23 Conn.Bar Jour. 40, 50 (1949), Professor Williston says:

“ ‘If the arguments in favor of partial enforcement are convincing, no court need hesitate to give them effect. Ample judicial support can be found in the reports.’ ”

The trouble is the arguments are convincing only if our public policies against restraint of trade and changing contracts are severely diluted.

III. We start with the basic tenets that restraints on competition and trade are disfavored in the law. Exceptions are made under narrowly prescribed limitations. Out of these exceptions came the concept that a business man could protect himself against competition from a former employee or a vendor to a reasonable extent. This was to be done by contract — through the normal give and take of contractual bargaining. But if the covenants were found to be an unreasonable restraint on trade or competition, they were to be held void in their entirety as against public policy.

The second principle is equally .important. It was reaffirmed in Baker v. Starkey, supra, by reference to Smith v. Stowell, 256 Iowa 165, 170-172 , 125 N.W.2d 795, 798-799 (1964), the courts will not make a contract for the parties:

“ ‘The court may not rewrite the contract for the purpose of accomplishing that which, in its opinion, may appear proper, or, on general principles of ab-tract justice, or under the rule of liberal construction, make for the parties a contract which they did not make for themselves, or make for them a better contract than they chose, or saw fit, to make for themselves, or remake a contract, under the guise of construction, because it later appears that a different agreement should have been consummated in the first instance, or in order to meet special circumstances or contingencies against which the parties have not protected themselves.’ ”

This language is, of course, subject to the exceptions dealing with reformation which has its own special rules. Reformation is not relied upon in reaching the result portended by the “new trend”.

The thrust of the law in contract interpretation is to reach the intent of the parties. In Hamilton v. Wosepka, 261 Iowa 299, 306 , 154 N.W.2d 164, 168 (1967) we quoted Professor Corbin as follows:

“ ‘The purpose of interpretation as justice requires is always the discovery of actual intention: — the intentions of both parties if they are the same, — the actual intention of one party if the other knew or had reason to know what it was, — but absolutely never to give effect to a meaning of words that neither party in fact gave them, ¡however many other people might have given them that meaning.’ ” (Emphasis supplied).

These two tenets, taken together, have tended to put the bargaining parties, employer vs. employee and vendor vs. vendee, on equal footing when it came time to bargain. While open competition is favored, reasonable restraints may be imposed as fair and necessary protection of the employer or vendor. The parties must make a bargain now in advance and the bargain must be reasonable in time, space, service performed and in relation to the facts of *377 the case. The courts will not remake the terms of the contract for the parties.

It has been said that for every litigated case testing covenants not to compete there are thousands of like covenants that never reach the courts. Harlan N. Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 682. Professor Blake argues there are so many such covenants that the large employers find it necessary to use forms. These forms are not tailored to the individual case. Therefore, the partial enforcement policy is justified because the employer did not really want to overreach. The employee just got caught in someone else’s covenant! A strange rationale for reforming or remaking a contract but fairly typical of the reasoning in this field.

IV. One would hope that under the fairly equalized bargaining position maintained by the classic approach most covenants are in fact reasonable. But we now say it is not necessary that the restraints contained in the covenant be reasonable. The courts, rather than the bargaining parties, will decide what is reasonable and interpret the contract as though the covenant now reads as the court thinks it should read. Put in these rather stark terms it is almost unbelievable that the courts would reach such a conclusion.

An explanation for such a new trend is the nature of the controversies that do reach the courts, as distinguished from the actions under thousands of contracts that do not reach the courts. The legal protagonists are almost invariably both guilty of overreaching. The courts find it hard to allow one to get ahead of the other. To prevent this they are apparently willing to give only lip service to the law’s disfavor of restraint of trade and to the principle that the courts will not change the contract made by manifestation of mutual consent.

The solution makes for better equities in the “tip of the iceberg” cases in litigation— that must be admitted. But what does it do to the bargaining position of the vast majority of nonlitigated cases at the crucial draftsmanship level ? It destroys the balance heretofore maintained by the classic principle.

The limitations on the right to stifle competition by covenants not to compete were designed to prevent overreaching by the dominant party and to protect our competitive system. The majority now removes the sanctions which made such limitations effective at the very time our changing economic and social conditions make it more, not less, important to afford employees and business proprietors the protection of the old rule.

I believe it is a mistake to do so. I would affirm the trial court.

LeGRAND, J., joins in this dissent.