The Eighth Circuit Refuses to Enforce "Unreasonable" Noncompete Agreement Against Independent Contractor Where Customer Relationships Spanned Career Beyond Relationship with Ag Spectrum and Independent Contractor Was Not Unjustly Enriched
The Eighth Circuit Court of Appeals recently held that an Iowa agricultural products company could not enforce a noncompete agreement against one of its independent contractors as it was unreasonable. Ag Spectrum Co. v. Elder, __ F.3d__, 2017 WL 3271303, at *1 (8th Cir. Aug. 2, 2017).
Vaughn Elder ("Elder") became a sales representative for Ag Spectrum, an Iowa business selling fertilizer, nutrients, and crop-management services. Five years later, in 2005, he became an independent contractor of Ag Spectrum serving as an “Area Manager.” He committed to sell only Ag Spectrum product in exchange for a one percent "loyalty payment" every five years. He agreed to a three year noncompete agreement.
Elder sold Ag Spectrum product directly as well as through dealers. Almost all of his sales were to people he had “developed relationships with over the course of [his] life” or to his dealers, except for two customers Ag Spectrum introduced to him. Elder ordered the product, handled it, and paid for it. He stored it in his own facilities at his expense and he delivered the product to his customers from those facilities or others not owned by Ag Spectrum. Elder was obligated to pay Ag Spectrum for the product within 10–14 days of shipment, and if the customer did not pay Elder, he, not Ag Spectrum, bore the loss and Elder would pay through his own line of credit. Ag Spectrum never issued Elder a paycheck or employment benefits and he bought his own insurance and supplied his own equipment. His profit was the difference between what he paid Ag Spectrum and the price he charged his customers.
After Elder resigned his position he continued to service the same customers. Ag Spectrum waited over two years to file suit, with nine months left in the agreement. The District Court granted summary judgment and the appellate court affirmed.
In affirming the summary judgment, the court applied Iowa law governing noncompete agreements applicable to employees acknowledging that it would enforce the agreements only when the provision is reasonably necessary to protect the employer's business and does not unreasonably restrict the employee's rights or harm the public interest. The Court noted that multiple factors and the circumstances would determine whether the noncompete was reasonable and no one fact would control. These factors include (1) the employee's closeness to customers; (2) the employees' “peculiar knowledge gained through employment that provides a means to pirate the customer;” (3) the amount and sophistication of employer-provided training and the nature of the business; and (4) “matters of basic fairness.”
Ultimately the Court reasoned that the goal was to prevent unjust enrichment by the employee at the expense of the employer. Significantly, it also declined to rule that noncompete agreements are automatically unenforceable against an independent contractor as Elder argued.
Nevertheless, the Court noted that in this circumstance it was Elder who provided his long standing customer relationships to Ag Spectrum and not the other way around. The Court further noted that Ag Spectrum had provided no specialized training, trade secrets or customer access that would merit enforcement of a non-compete agreement. The Court also reasoned that enforcing the agreement would disproportionately burden Elder. He would have to build a new client base from scratch when Ag Spectrum had never generated the customers or contributed to securing them in the first place. "Elder's business activity fosters fair competition in the marketplace, not unjust enrichment."
Lessons for Employers
Although this matter concerned an independent contractor, the Court applied the same law applicable to employment relationships. Ag Spectrum lost this case largely because it contributed nothing to the creation and support of the customer relationships.
Employers should be sure to do the following:
- Ensure that your noncompete agreements reflect the spectrum of consideration for the agreement including access to customers, trade secrets, confidential information, training and business support in addition to other consideration.
- Analyze whether the employee is bringing an established book of clients. If so, consider exempting such customers from the noncompete if you will provide little to support the customer relationship. If you will provide customer gifts, support and other financial resources needed to maintain and promote the relationship, you should not exempt the relationship.
- If you have independent contractor relationships, you should also analyze ways to restructure the relationship to promote a basis to enforce the agreement.
- Secure the assistance of experienced counsel to help in crafting the agreements.