8th Circuit: Noncompete for Independent Contractor Went Too Far
In a hot-off-the-presses decision from the 8th Circuit that was handed down on August 2, 2017, the appellate court, interpreting Iowa law, affirmed a trial court's holding that Ag Spectrum's non-compete agreement with its independent contractor, Vaughn Elder, was unreasonable, and therefore unenforceable, as a matter of law.
The Facts of Ag Spectrum Company v. Vaughn Elder
In 2000, Elder (the defendant) became a sales representative for Ag Spectrum (the plaintiff), an Iowa business that sells, among other things, fertilizer, and crop-management services. Five years later, Elder altered his arrangement with plaintiff, and instead of continuing as their employee, his role changed to that of an Ag Spectrum “Area Manager.”
The parties' agreement memorializing this relationship stipulated that Elder:
- would no longer be an Ag Spectrum employee
- would not be deemed an Ag Spectrum employee for tax purposes
- would not be permitted to participate in any Ag Spectrum employee benefits packages
- would not be covered by Ag Spectrum's workers' compensation policy
- would have no authority to bind Ag Spectrum to any agreements with third parties
The Non-Compete Provision
The agreement also contained a provision whereby Elder was barred from marketing to, selling to, or consulting with its customers about similar products for three years after terminating the Agreement.
In September 2012, Elder ended the parties' agreement, and then began competing with plaintiff. Two and half years later (with only 9 months to go on the non-compete), Ag Spectrum sued Elder for violating the noncompete clause. Elder moved for summary judgment, contending that the provision was unenforceable under Iowa law.
What the Trial Court Did
The trial court agreed with Elder's position, finding that the non-compete provision was indeed unenforceable. In reaching this conclusion, the trial court relied on Elder's testimony that “virtually all” of his sales were to people he had “developed relationships with over the course of [his] life” or to his dealers, and that only 2 of Elder's customers came to him via Ag Spectrum.
The Critical Fact Upon Which the Ag Spectrum Court Relied
After going through a lengthy analysis and holding that the court, rather than a jury, had the right to determine the enforceability (or, more properly in this context, the unenforceability) of the non-compete clause, the Ag Spectrum court then affirmed the trial court's holding. A careful reading of this decision makes it fairly clear that the appellate court's decision to invalidate the non-compete provision hinged on this critical fact:
"In this situation, the noncompete provision allows Ag Spectrum not to protect a proprietary customer base, but rather to capture customers that someone else provided."
In other words, Ag Spectrum couldn't demonstrate any legitimate business interest that it was trying to protect, because the customers that were being targeted were never Ag Spectrum's to begin with - they were Elder's.
What the Ag Spectrum Court Didn't Do
Importantly, and as a final note and caveat, I am constrained to point out that the Ag Spectrum court specifically declined to announce a bright-line, per se rule holding enforceable any non-compete clause that is asserted against an independent contractor.
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