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IN THE COURT OF APPEALS OF IOWA No. 1-582 / 10-2114 Filed November 23, 2011 MICHAEL JON SUTTON, Plaintiff-Appellee, vs. IOWA TRENCHLESS, L.C., Defendant-Appellant. ________________________________________________________________ Appeal from the Iowa District Court for Guthrie County, Gary C. Kimes, Judge.

Iowa Trenchless, L.C. appeals the district court's judgment granting declaratory relief from a covenant not to compete to Michael Sutton and denying its breach of contract counterclaim. REVERSED AND REMANDED.

Edmund J. Sease and Jeffrey D. Harty of McKee, Voorhess & Sease, P.L.C., Des Moines, for appellant. Matthew J. Hemphill of Bergkamp & Hemphill, P.C., Adel, for appellee.

Heard by Sackett, C.J., and Vaitheswaran and Tabor, JJ.

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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. I. BACKGROUND AND PROCEEDINGS. Iowa Trenchless was

formed in November of 2002 by Michael Sutton, Jason Clark, and Clark's father. Sutton and Clark each contributed $33,000 to the company, received a thirty percent interest, and were the working partners of the company as they both had prior experience with trenchless construction. Clark's father contributed $44,000 to the company, received a forty percent interest, and was mainly a non-working advisor and financial partner. The purpose of the company was to engage in trenchless boring where pipe and cable could be laid underground without the need to dig open pits. The business plan for the company provided for Clark to manage the office work

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including networking to find jobs, bidding new work, and managing the finances. Sutton was responsible for the equipment maintenance, employee safety, and field supervision. While Clark would initially bid the work, Sutton was most often on site during the construction project. 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, I, Michael Jon Sutton, will not, without the express written approval of Iowa Trenchless, L.C., compete with Iowa Trenchless, L.C. for a period of seven (7) years from the date of this agreement within a three hundred fifty mile (350) mile radius of Des Moines, Iowa, directly or indirectly, solicit, offer to provide, or provide any services similar to those Iowa Trenchless, L.C. has offered its customers during the last year, or work for or become associated with any of Iowa Trenchless, L.C.'s competitors as an employee, independent contractor, officer, director, investor, or in any other capacity involving trenchless methods, such as, but not limited to, auger boring, utility tunneling, micro tunneling, and sliplining. During the term of this non-compete, I, Michael Jon Sutton, will not, without the express written approval of Iowa Trenchless, L.C., for the purpose of doing business, have contact with any

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customer or potential customer with whom I had contact while associated either as a member or employee of Iowa Trenchless, L.C. I, Michael Jon Sutton, will not during the term of this noncompete agreement, directly or indirectly solicit any of Iowa Trenchless, L.C.'s employees or independent contractors, for the purpose of hiring them or inducing them to leave their position with Iowa Trenchless, L.C. 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 five-year 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 non-compete. 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 formed his own construction company, performing dirt work and underground utility work. Sutton claims at the time he left his employment with Iowa Trenchless, he had no interest in doing trenchless work. In 2009 and 2010 the construction industry dried up due to economic conditions, so Sutton went to work for Rognes Construction. Sutton filed a declaratory judgment action in August of 2009, seeking to have the covenant not to compete declared unconscionable, unenforceable, and

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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. II. STANDARD OF REVIEW. 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

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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 of errors at law. We are bound by the district court's findings of fact if they are supported by substantial evidence. Id. III. COVENANT NOT TO COMPETE STANDARD. Iowa Trenchless

asserts this case involves an issue of first impression on the issue of whether the same strict construction rules for an employer-employee covenant not to

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compete also apply to covenants between business owners upon the sale of their business interest. Iowa Trenchless urges us to adopt a different, less-stringent standard, which would provide more deference to the contracts owners execute when selling their business interest. Sutton asserts the issue is not a matter of first impression, but that our court in Rasmussen Heating & Cooling v. Idso, 463 N.W.2d 703, 704 (Iowa Ct. App. 1990), addressed the issue, and applied the same standard to owner-to-owner contracts as to employer-employee contracts. The district court agreed with Sutton and cited Rasmussen when it found a covenant not to compete between owners "is not examined under a different standard." While we agree with Sutton and the district court that the issue is not a matter of first impression in Iowa, we disagree that Rasmussen addresses the issue.1 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. 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

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While Rasmussen involved a covenant not to compete ancillary to a business purchase agreement, our court was not asked to address the standard of review for covenants between owners versus covenants between employers and employees. 463 N.W.2d 703, 704

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