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IN THE SUPREME COURT OF IOWA
No. 03 / 04-2073 Filed March 16, 2007 CHRISTOPHER ALES, Appellant, vs. ANDERSON, GABELMANN, LOWER & WHITLOW, P.C., f/k/a ANDERSON, GABELMANN, ALES, P.C., Appellee.

Appeal from the Iowa District Court for Scott County, Bobbi M. Alpers, Judge.

An unsuccessful party to an arbitration proceeding appeals a district court decision confirming in part and vacating in part the arbitration award. AFFIRMED IN PART, REVERSED IN PART, AND CASE REMANDED WITH DIRECTIONS.

Michael R. Blaser and Rebecca A. Brommel of Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C., Des Moines, and Richard A. Davidson of Lane & Waterman, LLP, Davenport, for appellant.

Louis R. Hockenberg and Lawrence P. McLellan of Sullivan & Ward, P.C., West Des Moines, for appellee.

2 WIGGINS, Justice. An unsuccessful party to an arbitration proceeding that involved a covenant not to compete appeals a district court decision confirming in part and vacating in part the arbitration award. The district court confirmed the award finding a breach of the covenant not to compete occurred. It also confirmed the damages the arbitrator assessed for the breach. The district court vacated the arbitrator's attorney's fees and costs determination and remanded the case back to the arbitrator to determine an attorney's fees and costs award consistent with its decision. Because we agree substantial evidence supports the arbitrator's determination that the covenant not to compete was breached and the damages he awarded for that breach, we affirm that part of the district court's decision. However, because we find substantial evidence only supported part of the arbitrator's award regarding the attorney's fees and costs, we reverse the judgment of the district court, vacate the portion of the arbitration award regarding the fees and costs not supported by substantial evidence, and confirm the portion of the award regarding the fees and costs supported by substantial evidence. We also remand the matter to the district court to determine an appropriate award for the fees and costs incurred by the prevailing party in the district court and on this appeal. I. Background Facts and Proceedings. Christopher Ales is a certified public accountant. After working for over ten years in the tax department of two corporations, Ales opened his own accounting practice. In December 1998 Ales merged his solo-practice with Anderson, Gablemann, P.C. Anderson, Gabelmann, P.C., now known as Anderson, Gabelmann, Lower, Whitlow, P.C. (AGLW), is a public accounting firm located in Bettendorf, Iowa. AGLW agreed to purchase Ales'

3 customer list for a one-third interest in the firm and a $205,000 promissory note (the "Old Note"). Before coming to AGLW, Ales began working on residential building projects for low-income residents, commonly referred to as section 42 projects. Ales continued to work on section 42 projects while employed by AGLW. By May 2000 friction had built between Ales and his partners. Ales described this as "the beginning of the end," and discussions began regarding Ales leaving AGLW. By December 1 Ales and AGLW entered into an agreement that provided the terms of Ales' separation from AGLW. Under the agreement, AGLW purchased Ales' 1000 shares of stock in the firm, his revalued client list, the Old Note, and Ales' covenant not to compete. Ales received $345,000 in consideration for these assets in the form of a promissory note (the "New Note"). Ales also agreed "upon

reasonable request" to "use commercially reasonable efforts to assist [AGLW] in retaining the clients on the Client List for the mutual benefit of all parties to this Agreement." The covenant not to compete stated for a five-year period Ales promises, within a fifty-mile radius from any office of AGLW established as of December 1, 2000, not to (a) provide like or similar services to those provided by [AGLW] directly or indirectly, to any of [AGLW]'s clients (past or present) or (b) either alone or in association with others, directly or indirectly, organize, own, control, lend financial support to, manage, operate, join, or become associated with, represent, advise, render services to, or become employed by or participate in any entity providing like or similar services to those provided by [AGLW]. Exempt from the covenant not to compete were (1) any activities carried out by Ales, directly or indirectly, in association with his section 42 projects; (2) services provided by Ales to Watts Trucking Service, Inc. and its related

4 entities and individuals; and (3) services provided by Ales to any company in which Ales held a fifty percent or more interest. The agreement also gave AGLW the right to offset against the New Note "an amount equal to the last two year's fees collected by [AGLW] from the client with whom Ales is alleged to have violated the covenant not to compete." The agreement further provided if a dispute regarding the

agreement arose, the parties would submit the dispute to binding arbitration under chapter 679A of the Iowa Code. Finally, the agreement provided the prevailing party in any arbitration proceeding would be entitled to reimbursement from the non-prevailing party of the actual attorney's fees and costs involved in pursuing or defending the claim. After the agreement was signed, Ales remained in the AGLW offices under a new leasing agreement. In February 2001 Ales moved his

operations to his home. Eventually by April or May Ales moved his office to Renwick House, a historic home converted into office space. Renwick

House is located within fifty miles of AGLW's offices. Ales continued to work as a developer of section 42 projects through his various companies. Diane Artioli, a certified public accountant, previously worked as a part-time accountant for AGLW from 1998 to 2001. After leaving AGLW, Artioli began working for another company, but by January 2002 Artioli had opened her own practice. She first rented office space in Davenport. After Artioli opened her office, a number of AGLW clients started requesting her services. At this time, Artioli also started doing work for Ales and his companies. In June 2002 Artioli closed her Davenport office and began to work at Renwick House. On September 17 AGLW notified Ales that it had "determined that [Ales was] in violation of the Covenant Not To Compete . . . by providing like or similar services as those provide by [AGLW], directly or indirectly, to

5 certain of [AGLW]'s clients." AGLW indicated the basis for its finding was that: (1) as of March 8, 2002, clients Erickson Truck/Jack Erickson KCM Construction/Kyle Meier Companies, D & D

Companies,

Chevrolet/Kilberg Companies, Gary Clapp, Richard Yerington, Dr. Margaret Millar, Ed Mowen, Richard Henson, and Roy Harper notified AGLW that Artioli would be providing their professional accounting, tax, and consulting services; (2) Ales continued to hold himself out as a practicing certified public accountant and indirectly started accounting operations by hiring Artioli and another employee to provide accounting or similar services from Ales' offices; and (3) Ales worked directly and/or indirectly and/or in association with Artioli by providing, directly or indirectly, organization, control, financial support, cost-sharing arrangements, management, operating assistance, association, representation, and advisement, as evidenced by Artioli working out of and utilizing staff within Ales' office building; and this evidenced that Ales was participating with Artioli to provide like or similar services to those provided by AGLW. Due to these allegations, AGLW offset the New Note by $154,305, representing the last two years of fees collected by AGLW from the these clients. AGLW sent an additional notice to Ales on July 1, 2003. In this notice, AGLW alleged Ales had violated the covenant not to compete by providing services to the Premier Properties group of corporations and Dr. Alan Kendall. Due to this allegation, AGLW offset the New Note by an additional $46,148, the amount representing the last two years of fees collected from the Premier Properties group. Ales contested both notices. Pursuant to the agreement an arbitration hearing was set. Ales also filed a claim in district court requesting the acceleration of the New Note. Ales alleged AGLW had improperly effectuated an offset of $154,160 without notice at the time the offset was done. Ales also alleged

6 AGLW untimely attempted to cure its default by revising Ales' 1099 tax form for 2002 and reverting to the original amortization schedule. AGLW filed a motion to stay or in the alternative a motion to dismiss Ales' claim. The district court found Ales' claim was not severable from the matters subject to the arbitration and stayed the district court action pending the completion of the arbitration. The case proceeded to arbitration. At arbitration, the parties

stipulated AGLW held the burden of proof as to whether Ales violated the covenant not to compete. The arbitrator considered the evidence and issued a final decision and award on the merits and an interim decision on fees and expenses. In this decision, the arbitrator found: (1) Artioli was a certified public accountant offering accounting services from an office at Renwick House; (2) these accounting services provided by Artioli were like or similar to those provided by AGLW; (3) Artioli's services were offered within fifty miles from the AGLW office and at a time within five years following the withdrawal of Ales from AGLW; (4) Ales controlled, financially supported, and was associated with Artioli's accounting practice and this was a violation of the covenant not to compete; (5) AGLW's interpretation of the damage award is more persuasive and consistent with the clear intent of the parties; therefore, AGLW's interpretation is commercially reasonable and closer to the ordinary and customary construction of the words in question; (6) damages relating to AGLW's claims in its September 17, 2002, letter amounted to $149,570 (less $3920 for the unpaid portion of the Erickson invoices) and that this amount should be subtracted from the New Note as of September 17, 2002; (7) damages relating to AGLW's claims in its July 1, 2003, letter amounted to $49,480.10 and should be subtracted from the New Note as of July 1, 2003; and (8) the lawsuit filed by Ales (and stayed by the district court) is a violation of the arbitration clause in the

7 agreement and AGLW's actions in issuing a 1099 tax form and revised amortization schedule did not constitute a default. The arbitrator awarded AGLW an offset to the New Note of $145,650 as of September 17, 2002, and another $49,480.10 as of July 1, 2003. The arbitrator also decided AGLW was entitled to reimbursement of its reasonable and necessary attorney's fees and costs incurred in the arbitration and in defending against Ales' district court action to accelerate payment of the New Note. However, at the time of this decision, the

arbitrator did not have all of the attorney's fees and costs claimed by AGLW before him. Instead, the arbitrator left AGLW's attorney's fees and costs award unsettled. The arbitrator instructed the parties to confer and

attempt to negotiate and settle the amount of AGLW's award for attorney's fees and costs. However, the arbitrator stated he would conduct a further hearing on fees and costs if requested by either party. At AGLW's request, the arbitrator held a hearing to determine the final award on attorney's fees and costs. The arbitrator adjusted AGLW's claimed fees and costs of over $115,000 to $83,485.08 on the grounds that some of the claimed fees and costs were incurred prior to the arbitration, some were unrelated to the arbitration, some were excessive, and some were duplicative. After making these adjustments to the attorney's fees and costs claimed by AGLW, the arbitrator found there would be a fair allocation of responsibility if Ales paid his own legal fees and costs of $73,312.52 and fifty percent of AGLW's adjusted claim, $41,742.54. The arbitrator

reasoned under the circumstances of this case, having Ales pay $115,055.06 in fees and costs is commercially reasonable and consistent with the "reasonable and necessary" standard of his interim decision. The

8 arbitrator allowed AGLW to offset the New Note by $41,742.54, fifty percent of AGLW's attorney's fees and costs, as of the date of the decision. Ales applied to the district court for a vacation of the arbitration award arguing the arbitrator exceeded his power and authority and/or substantial evidence did not support the arbitrator's findings. AGLW

answered Ales' application and requested an order confirming the arbitration award and entering judgment on the award in favor of AGLW. AGLW also requested an award of attorney's fees and costs for defending Ales' appeal. Further, AGLW applied for vacation of the final award of fees and costs claiming the arbitrator's award of fifty percent of its attorney's fees violated the agreement. The district court considered both applications for vacation of the arbitration award. First, the district court found substantial evidence

supported the arbitrator's findings that Ales violated the covenant not to compete and the damages awarded for that breach. Next, the district court affirmed the authorization of the offsets to the New Note for the damages incurred by AGLW for Ales' breach of the covenant not to compete. In doing so, the district court found the arbitrator did not exceed his authority by creating the offsets because "[t]he covenant not to compete specified the use of an offset if a violation of the covenant not to compete is determined and allow[ed] for reimbursement of attorney's fees and expenses incurred in the resolution of a dispute." Finally, the district court found, based on the specific terms used by the parties in the agreement, the arbitrator exceeded his authority when he reduced AGLW's attorney's fees and costs award by finding the arbitrator had no authority to adjust the attorney's fees and costs. The district court confirmed the arbitrator's findings relating to the breach and the damage award for that breach, vacated the arbitrator's

9 award on attorney's fees and costs, and remanded the case back to the arbitrator as required by Iowa Code section 679A.12. Ales appeals. II. Issues. A party may appeal a district court order regarding an arbitration award, when the order confirms or denies confirmation of an arbitration award or when the order modifies or corrects an award. Iowa Code

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