Opinion
No. 5-389 / 04-876
Filed August 17, 2005
Appeal from the Iowa District Court for Woodbury County, Jeffrey A. Neary, Judge.
Both parties appeal from a judgment in this dispute over a covenant not to compete. AFFIRMED ON APPEAL; AFFIRMED ON CROSS-APPEAL.
Charles T. Patterson, Jeff W. Wright, and Joel D. Vos of Heidman, Redmond, Fredregill, Patterson, Plaza, Dykstra Prahl, L.L.P., Sioux City, for appellant.
Maurice B. Nieland and Karrie R. Hruska of Rawlings, Nieland, Probasco, Killinger, Ellwanger, Jacobs Mohrhauser, L.L.P., Sioux City, for appellee.
Heard by Mahan, P.J., and Zimmer and Brown, S.J.
Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2005).
Howard Vlieger was a customer of Farm For Profit, Research and Development, Inc., (FFP) and became a distributor for FFP in 1994. FFP sells a line of farm products and procedures designed to reduce the use of commercial fertilizers and chemicals. Vlieger's relationship with FFP turned sour and eventually ended. Vlieger then began distributing products sold by FFP's competitors.
In February 2002, Vlieger filed a petition that (1) alleged negligence and breach of contract for delivery of "bad product" by FFP, (2) sought damages for a business plan stolen by FFP's head, William Lashmett, (3) sought recovery under the doctrine of quantum meruit for advertising and promotion expenses incurred by Vlieger, and (4) sought a declaratory judgment stating the covenant not to compete was not enforceable. FFP answered and counterclaimed, seeking damages for breach of the covenant not to compete, misappropriation of trade secrets, and intentional interference with contract relationships. FFP also sought an injunction enforcing the covenant not to compete.
The legal issues were submitted to a jury, and equitable issues submitted to the court. The jury did not award damages to either party, and the court declined to award damages for Vlieger's quantum meruit claim or enforce the covenant not to compete. FFP appealed, and Vlieger cross-appealed. After considering the issues presented (five on FFP's appeal and four on Vlieger's cross-appeal) and the sizable appendix (nine volumes totaling 3803 pages), we affirm on the appeal and on the cross-appeal.
We recite further facts when necessary to our discussion of the legal issues presented.
I. Scope of Review
This case involves both legal and equitable claims. We review the district court's rulings on the request for injunctive relief de novo. Iowa R. App. P. 6.4. As the quantum meruit claim was tried to the court and not submitted to the jury, we review it de novo as well. See, e.g., Iowa Waste Sys., Inc. v. Buchanan County, 617 N.W.2d 23, 30 (Iowa Ct.App. 2000). We give weight to, but are not bound by, the district court's findings of fact. Iowa R. App. P. 6.14(6)( g).
Regarding the legal issues, we review a district court's jury instructions for the correction of errors at law. Estate of Hagedorn v. Peterson, 690 N.W.2d 84, 88 (Iowa 2004). A jury verdict is binding if supported by substantial evidence. Iowa R. App. P. 6.14(6)( a). If a ruling on a motion for new trial is based on a discretionary ground, we review for an abuse of discretion; however, if the ruling is based on a legal ground, we review for the correction of errors at law. Hansen v. Central Iowa Hosp. Corp., 686 N.W.2d 476, 480 (Iowa 2004).
II. Issues on FFP's Appeal
Four of the five issues on FFP's appeal concern Vlieger's contention that his further performance of the contract, including the covenant not to compete, is not required because of FFP's breach of the implied covenant of good faith and fair dealing. The jury and the district court were so persuaded and, after considering FFP's arguments on appeal, we are as well.
A. Whether the Evidence Created a Jury Question Concerning FFP's Alleged Breach of the Implied Covenant of Good Faith and Fair Dealing.
FFP argues Vlieger presented insufficient evidence to permit the jury to consider whether it breached the implied covenant of good faith and fair dealing. Viewing the record in the light most favorable to the party seeking submission of the theory, see Bride v. Heckart, 556 N.W.2d 449, 452 (Iowa 1996), we disagree. We conclude substantial evidence supports submitting this question to the jury. Estate of Hagedorn, 690 N.W.2d at 90.
Every contract contains an implied covenant of good faith and fair dealing. Engstrom v. State, 461 N.W.2d 309, 314 (Iowa 1991); Restatement (Second) of Contracts § 205, at 99 (1981) (hereinafter Restatement). This covenant is breached when a party to a contract acts in a manner that is offensive to "community standards of decency, fairness and reasonableness." Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 34 (Iowa 1982) (citing Restatement § 205 cmt. a, at 100). "Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified." Restatement § 205 cmt. d, at 100. Whether this covenant is breached, as well as the appropriate remedy, depend on the circumstances of each case. Id. § 205 cmt. a, at 100.
When considering the record in the light most favorable to Vlieger, we conclude a jury question was created. While Vlieger points to several incidents that allegedly support his theory (including corporate governance complaints and troubles with regulatory agencies in Minnesota, Pennsylvania, and South Dakota), several of which were irrelevant to the question of whether FFP breached its contract with Vlieger, we only need to discuss two relevant instances: (1) the theft of a business plan from Vlieger, and (2) the failure of FFP to deliver prepaid product to Vlieger. We find it significant that these two incidents occurred in rapid succession.
Vlieger had developed a business plan for Verity Farms, Inc., a natural meat company in which he was involved. In 2001, the head of FFP, Bill Lashmett, went to Vlieger's home and farm, while Vlieger was not present, and took a copy of the business plan. In a taped telephone conversation in September 2001, Lashmett admitted stealing the business plan and stated nobody told him he could take it. He attempted to justify his actions by stating nobody told him he could not take the business plan. Vlieger testified Lashmett sounded as if he were "bragging" that he had taken the plan. At trial, Lashmett testified Vlieger's hired man stated he could take the business plan. The jury found FFP improperly acquired the Verity Farms business plan, but awarded no damages.
Additionally, Vlieger paid for product in or around October 2001, which FFP refused to ship. Lashmett told Vlieger he would not ship the product until Vlieger signed a new distributor contract. Vlieger had to obtain these products from another dealer, according to his testimony, at a loss. He testified he was required to do so to meet his obligations to his customers. FFP contends it eventually shipped this product.
When these two instances are considered, we conclude Vlieger was entitled to have his claim that FFP breached the implied covenant of good faith and fair dealing submitted to the jury. This evidence would support a conclusion that FFP treated Vlieger in a manner offensive to "community standards of decency, fairness and reasonableness." Kooyman, 315 N.W.2d at 34.
FFP argues a jury question was not created because these two incidents "either caused no damage or were cured" before Vlieger began competing with FFP. FFP also argues Vlieger was not denied any benefit due to him under the contract. We think these arguments are not dispositive. First, neither argument really addresses whether the evidence justified submission of the issue to the jury; even if the breaches alleged were cured or curable, the fact that a breach was cured does not eliminate all consequences flowing from the breach. See, e.g., Restatement § 242 cmt. a, at 244 (stating remedies may be available for even cured breaches). Second, while FFP admits it "delayed" shipping the prepaid product in October 2001, it argues it cured this breach by shipping the product at a later date. A jury could have permissibly rejected this argument, however, based on Vlieger's testimony that he suffered a financial loss due to this "delay." Finally, the evidence would support a conclusion that FFP's actions denied Vlieger the benefits for which he bargained, most significantly the implied term requiring FFP to treat him in a manner comporting with "community standards of decency, fairness and reasonableness." Kooyman, 315 N.W.2d at 34.
The evidence justified submitting this issue to the jury.
B. Whether the District Court Erred in Failing to Instruct the Jury that a Material and Total Breach of the Implied Covenant of Good Faith and Fair Dealing Would Be Required Before Vlieger's Performance Would Be Excused.
The jury was instructed if it found FFP breached the implied covenant of good faith and fair dealing it should find for Vlieger on FFP's breach-of-contract claim. On appeal, FFP argues the jury should have been required to determine whether FFP's breach of the implied covenant was material. See, e.g., Orkin Exterminating Co. v. Burnett, 259 Iowa 1218, 1224, 146 N.W.2d 320, 325 (1966) (material breach required before covenant not to compete is unenforceable). Vlieger argues FFP did not preserve error on this issue. Our supreme court has recently stressed "the importance of preservation of error for appeal," thus we must closely examine Vlieger's argument. Bill Grunder's Sons Constr., Inc. v. Ganzer, 686 N.W.2d 193, 194 (Iowa 2004). After doing so, we are compelled to agree with him.
During the discussion of the jury instructions, counsel for FFP objected to the proposed instructions in the following manner:
[W]e object to number — Instructions Numbers 26 and 27. I will make objection and exception to each of those for the following reasons: They are not a correct statement of Iowa law. The submission of a claim of breach of the implied covenant and good faith and fair dealing is not a proper instruction under Iowa law. There's nothing to distinguish this case so as to engender a jury question on that. There is no sufficient competent evidence to demonstrate any, quote, bad faith, close quote.
And for that reason, Instruction Number 25 and the following instruction now Number 26 and the following Instruction Number 27 all are improper.
The thrust of the objection is focused on Instruction Number 26 because it suggests that some lack of good faith and fair dealing might well allow [the jury] to excuse any breach or any nonperformance by the other party. Again, there is no case law, no statutes or substance for any such theory. . . . The way in which you're instructing . . . takes out the entire claim with that threshold showing. That's not a correct statement of Iowa law. It isn't a fair reflection of contract principles under any jurisdiction. And for those reasons these instructions should not be submitted.
There are alternate instructions that simply say Vlieger's claim of performance could be excused if FFP breached the contract and then you could create arguments about good faith. But to suggest that there is a, quote, threshold covenant of — implied covenant of good faith and fair dealing that in and of itself would, quote, eliminate a party's ability to enforce a contract. It's just not a correct statement of Iowa law.
We conclude these statements were insufficient to alert the district court to the objection FFP now makes.
Iowa Rule of Civil Procedure 1.924 requires parties who object to jury instructions to specify their grounds for objection prior to the submission of the case to the jury, with no further or additional objections at trial or on appeal. "The objection must be sufficiently specific to alert the district court to the basis for the complaint so, if error does exist, the court may correct it before placing the case in the hands of the jury." Riniker v. Wilson, 623 N.W.2d 220, 228 (Iowa Ct.App. 2000). "A party may not amplify or change an objection on appeal." Boham v. City of Sioux City, 567 N.W.2d 431, 438 (Iowa 1997) (emphasis added) (citation omitted). As a general rule, a statement that an instruction "is not the law of Iowa" is `"not sufficiently definite' to preserve error." Estate of Hagedorn, 690 N.W.2d at 91 (citing Grefe Sidney v. Watters, 525 N.W.2d 821, 825 (Iowa 1994)).
While conceding its objections to the jury instructions "could have been made more clearly," FFP argues they were clear enough to inform the court that the instructions lacked a key element: a materiality requirement. Even when viewed under the most favorable light, we cannot agree for several reasons.
First, Vlieger is correct in noting that FFP never requested the district court to instruct the jury that a material breach was required before it could consider finding for Vlieger on FFP's claims. Second, we have considered the "alternate" instruction proposed by FFP, and do not see how it differs on this point from the instruction actually given. The "alternate" instruction states Vlieger's performance "could be excused if FFP breached the contract" and the parties would argue good faith. Like the instruction actually given, the alternate instruction does not specify the severity of a breach that would excuse performance. Under both instructions, any breach of the contract would excuse performance. The alternate instruction suffers from the same defect about which FFP now complains. Viewing the alternate instruction alongside the instruction actually given, we cannot conclude FFP fairly alerted the district court to the legal theory it now advances. Finally, FFP's arguments below could easily be taken to be an argument that a lack of good faith would never excuse another party's performance, especially considering the alternate instruction, which apparently differentiates between contract breaches and a lack of good faith. It is certainly conceivable that the district court understood this to be FFP's objection. If that were the case, FFP's argument below is (1) inconsistent with the law, see Restatement § 205, and (2) more importantly, inconsistent with the theory it now advances.
In attempting to demonstrate it preserved error, FFP points to statements from the district court that indicate the district court understood FFP's objections to the jury instructions. We cannot say this helps FFP as the district court did not explain what its understanding was, so we have no way of knowing whether the district court's understanding of FFP's objection was the same as the objection FFP now advances on appeal.
FFP complains the jury instructions held it and Vlieger to different standards for breaches of contract. Specifically, it points to the jury instruction requiring FFP to prove Vlieger materially breached the contract before it could recover from him. From our review of the record, we do not find FFP raised this argument before the district court, even after the jury's forewoman requested further explanation of the concept of "material breach . . . in layman's terms." Moreover, this argument highlights the ease with which FFP could have raised its materiality argument in the district court, as that concept was already embodied in instructions on its theory of recovery against Vlieger.
After reviewing the arguments presented, we conclude FFP's arguments are either raised for the first time on appeal or impermissible amplifications of arguments raised below. See Boham, 567 N.W.2d at 438. The objections made were not "sufficiently specific to alert the district court to the basis of the complaint." Riniker, 623 N.W.2d at 228. This alleged error was not preserved for our review.
C. Whether the District Court's Jury Instructions and Verdict Form Gave Undue Emphasis to Vlieger's Theory of the Case.
FFP argues the jury instructions and verdict form placed undue emphasis on Vlieger's argument that FFP's lack of good faith and fair dealing excused performance of his obligations under the contract, including compliance with the covenant not to compete. We conclude these arguments were not preserved for our review or have no merit. Reading the jury instructions as a whole, as we must, see Kiesau v. Bantz, 686 N.W.2d 164, 175 (Iowa 2004), we do not believe these instructions gave undue emphasis to the fighting issue in this case.
FFP complains about Jury Instructions 25, 26, and 27, as well as Special Verdict Interrogatory 1. Instruction 25 informs the jury that it must find for Vlieger if FFP breached the implied covenant of good faith and fair dealing. Instruction 26, with slight changes in wording, provides the same information. Instruction 27 states: "Implicit in every contract is a covenant of good faith and fair dealing. `Good faith' refers to honesty in fact in the conduct performed pursuant to the contract." Finally, the first question in the special verdict form stated: "Is the Distributor Contract between FFP and Howard Vlieger unenforceable due to FFP's lack of good faith and fair dealing?"
FFP first argues the district court erred in giving both Instruction 25 and 26, which are identical statements of the law. While we ordinarily would closely scrutinize this argument, see Sonnek v. Warren, 522 N.W.2d 45, 50 (Iowa 1994) (stating repetition of an otherwise correct instruction to the point of "undue emphasis" may be reversible error), we deem this issue waived. Iowa R. Civ. P. 1.924. FFP never objected to the instructions as being repetitive. Moreover, assuming error was preserved, FFP has not shown that an apparently inadvertent repetition of a single jury instruction placed "undue" emphasis on this theory to the point of entitling FFP to relief on appeal.
We find FFP's complaint about Instruction 27 is without merit. The district court did not err in defining "good faith" for the jury. The definition was not otherwise embodied in the instructions, so Vlieger was entitled to have it provided to the jury. See Kiesau, 686 N.W.2d at 175.
Finally, we do not conclude asking the jury to consider the issue of good faith first in its decision-making process is reversible error. Given the importance of the issue, it is logical for the jury to consider it first. FFP has not cited any authority for its position that placing a question first on the verdict form places undue emphasis on the issue, and we do not consider it to do so. Rather, we conclude the special verdict form was fair. Cf. Kiesau, 686 N.W.2d at 175 (stating that jury instructions are sufficient if they "fairly cover" the issues).
The jury instructions and verdict form did not place undue emphasis on the issue of good faith. FFP is not entitled to relief on this issue.
D. Whether the District Court Should Have Enforced The Covenant Not to Compete.
FFP argues the district court should have granted it injunctive relief by enforcing the covenant not to compete, notwithstanding the jury's verdict. We decline to do so, for several reasons.
First, the jury found the contract was unenforceable due to FFP's lack of good faith and fair dealing. Enforcing the covenant not to compete would have placed the district court in direct conflict with the jury's finding. Although the jury arguably may not have been properly instructed on this issue, that issue was waived, as noted above. To avoid compromising a litigant's right to a jury trial, and based on collateral estoppel principles, where legal issues and equitable issues share common questions of fact in the same lawsuit, a jury should ordinarily determine the legal issues first, and its determination would be binding on the district court when the court considers the equitable claims. See Snider v. Consolidation Coal Co., 973 F.2d 555, 559 (7th Cir. 1992); see also Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 334, 99 S. Ct. 645, 652, 58 L. Ed. 2d 552, 564 (1979).
Furthermore, although the district court considered itself precluded from differing from the jury's factual determinations, the court expressly found it would reach the same result as the jury in an independent evaluation of the evidence and would conclude the covenant not to compete was not enforceable. Were we to accept FFP's invitation to conduct a de novo review of this factual issue, we, like the district court, would agree with the jury and conclude that Vlieger's obligations under the distributorship contract, including the covenant not to compete, were discharged. Restatement § 205, at 99-104, §§ 241-42, at 237-50.
FFP places great weight on its argument that Vlieger suffered no financial harm because of its actions. Assuming this to be true, this is not outcome-determinative, for this is only one factor to consider in evaluating whether a breach is material, see id. § 241(a), at 237, and whether the material breach discharges future obligations, see id. § 242(a) cmt. b, at 244-45. In answering these two questions, we are also required to consider whether a party acted consistent with the implied covenant of good faith and fair dealing. In determining whether a contract breach is material, a breach of the implied covenant is a "significant circumstance." Id. § 241(e) cmt. f, at 237, 241-42. Such a breach is also relevant to determining whether future performance is discharged. Id. § 242 cmt. b, at 245. In addition, a breach is more likely to be considered material when it is uncertain whether the party in breach will cure that party's failure. Id. § 241(d) cmt. e, at 237, 241. Finally, such uncertainty is a factor in determining whether further obligations are discharged. Id. § 242 cmt. b, at 245. These factors weigh strongly in favor of excusing Vlieger's further performance under the contract.
FFP demands an accounting for damages caused by Vlieger's competition, and demands a judgment for $546,557.00. Because the jury and the district court determined Vlieger's performance under the contract was excused, FFP's request is denied.
We affirm the district court on this issue.
E. Whether the District Court Should Have Granted FFP a New Trial.
Finally, FFP argues it is entitled to a new trial because the jury's verdict in favor of Vlieger on its claim of intentional interference with contractual relationships is not supported by substantial evidence. We conclude it was. The record contains sufficient evidence to permit the jury to conclude a number of things that would defeat FFP's claim. See Iowa R. App. P. 6.14(6)( a).
F. Conclusion.
On FFP's appeal, we affirm the district court in all respects.
III. Issues on Vlieger's Cross-Appeal
Vlieger advances four arguments on his cross-appeal. While he preserved error on his arguments, we conclude he is not entitled to the relief he seeks.
A. Whether Vlieger Is Entitled to A Recovery, Based On Quantum Meruit, For Advertising and Promotional Expenses.
The distributorship contract states Vlieger was to bear the costs of advertising and promotion. He now seeks to recover the amounts he spent to promote FFP, under the theory of quantum meruit. The district court reasoned that in view of the express provision in the contract providing for Vlieger to bear these promotional costs, Vlieger could not have reasonably expected FFP to be responsible for them. See Iowa Waste Sys., 617 N.W.2d at 30 (expectation of compensation is element of quantum meruit claim). Furthermore, Vlieger has failed to show that any of this money was expended subsequent to FFP's breach of this contract. We conclude the district court was correct in not granting this relief.
Additionally, Vlieger argues he is entitled to reimbursement from FFP for monies spent to promote American Growers Foods. He bases this argument on minutes of an FFP board meeting, during which Bill Lashmett stated distributors should expend monies to promote American Growers Foods and those funds "would be paid by" FFP. Giving these minutes a reading most favorable to Vlieger, we reject his argument. American Growers Foods is a separate corporation and not a party to the litigation. For that reason, Vlieger has not shown he is entitled to recover in quantum meruit. See, e.g., Iowa Waste Sys., 617 N.W.2d at 30 (stating that a party seeking recovery in quantum meruit must prove services were performed for the party from whom recovery is sought "and not some other person"). Finally, even under a most charitable view of the board minutes on which Vlieger relies, we cannot conclude that Vlieger has proven the circumstances of this case would give FFP reason to understand reimbursement would be required, see id., especially in light of the contract provisions requiring FFP distributors to pay all promotion costs.
Vlieger has failed to demonstrate that justice requires a recovery in quantum meruit.
B. Whether Vlieger is Entitled To Damages For The Taking of the Verity Farms Business Plan.
Vlieger argues the jury's award of no damages must be overturned. We conclude otherwise. The jury's conclusion is supported by substantial evidence, most significantly Vlieger's concession, on cross-examination, that he was not damaged by Lashmett's taking of one copy of a business plan that Vlieger was circulating to the general public. While Vlieger may be entitled to nominal damages for this tort, see Wing v. Seske, 109 N.W. 717, 717-18 (Iowa 1906), we will not remand solely for an award of nominal damages. See id. C. Whether the District Court Erred in Dismissing Bill Lashmett from this Lawsuit.
Vlieger argues the district court should not have dismissed Bill Lashmett from this action, based on two contentions: (1) Lashmett stole his business plan for Verity Farms, and (2) Lashmett refused to give him the results of a soil test, which cost Vlieger $1,695.00 to have done. We are not persuaded by either of these arguments.
With respect to the taking of the business plan we need not consider whether Lashmett should have been a party, given the jury's determination that Vlieger was not damaged by that act. With respect to the soil test, we do not consider this incident, as it was not a claim advanced in Vlieger's petition as a basis for recovery.
D. Whether the Jury's Verdict on Vlieger's "Bad Product" Claim is Supported By Substantial Evidence.
Vlieger asserts he is entitled to a judgment for $20,000.00, based on his estimate of lost sales due to receipt of bad product from FFP. Generously assuming that a jury would undoubtedly conclude the product was in fact "bad," we conclude the jury could permissibly reject Vlieger's allegation that he sustained damage.
While parties are entitled to testify regarding the value of their claims, see Beneficial Fin. Co. v. Reed, 212 N.W.2d 454, 459 (Iowa 1973), a fact-finder need not accept as true all of a party's testimony, even uncontradicted testimony, see Missman v. Iowa Dep't of Transp., 653 N.W.2d 363, 367 (Iowa 2002). Based on the present record, we conclude a jury could permissibly reject Vlieger's allegations of damage.
E. Conclusion.
On Vlieger's cross-appeal, we affirm the district court in all respects.
IV. Summary and Disposition
We have considered all issues presented, whether or not discussed in this opinion. We affirm on the appeal and the cross-appeal. The clerk shall assess one-half of the costs to each party.