Ag Spectrum Company v. Vaughn Elder - Eighth Circuit Court of Appeals
Facts: Vaughn Elder ("Elder") became a sales representative for Ag Spectrum ("Ag"), an Iowa business selling fertilizer, nutrients, and crop-management services, in 2000. In 2005, Elder stopped working as an Ag employee and became an Ag "Area Manger." In doing so, he formalized an Agreement with Ag in which he agreed to only sell Ag product in exchange for a 1% loyalty payment every five years. The Agreement further provided he was not an employee for tax purposes, "engaged in [his] own independent business" and thus prohibited from participating in an Ag employee benefit plan, would not be covered by Ag's workers' compensation policy, and would not compete with Ag by marketing to, selling to, or consulting with Ag's customers about similar products for three years following termination of the Agreement.
During the scope of his work, Elder sold Ag product directly through his own efforts and indirectly through dealers working under him. He also ordered, unloaded, managed, paid, and stored Ag product at his own warehouse and a railroad tank facility provided by Ag. Under the terms of the Agreement, Elder did not receive a paycheck or any employment benefits from Ag during the scope of his work. He bought his own commercial and auto insurance and used and maintained his own equipment.
Elder terminated his Agreement with Ag in September of 2012 and soon began competing with Ag. In January 2015, Ag sued Elder for breaching the non-compete provision. Elder and Ag both moved for summary judgment. The district court granted summary judgment in Elder's favor and Ag appealed.
Holding: Under Iowa law, non-competes are enforced 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 employer that seeks to restrain competition has the burden of proving reasonableness, which as the Court pointed out, rarely comes down to a single fact and always depends on the circumstances. Several factors routinely considered: 1) the employee's closeness to customers, 2) the employee's "peculiar knowledge gained through employment that provides a means to pirate the customer", 3) the amount of sophistication of employer-provided training and the nature of the business, and 4) "matters of basic fairness." (That fourth factor is certainly all encompassing, isn't it?)
At the outset, the Court of Appeals stated that it would not hold that non-competes are unenforceable as to independent contractors. However, the Court noted that it would entertain this appeal with an analysis of whether the non-compete was unreasonable (and therefore unenforceable). Ultimately the Court held the non-compete was not reasonably necessary to protect Ag's business. The facts in the record failed to show that Ag had provided training and information that enabled Elder to unfairly compete against Ag. In fact, Ag could not even establish that Elder benefited from the company's goodwill and customer base. The Court held that Elder's being an independent contractor favored his independence in conducting his business and suggested that Elder's customers did not belong to Ag. It subsequently followed that Elder was not an employee working with/for customers provided by Ag...instead Elder was working with/for customers he had, independent of Ag.
Judgment: The Court of Appeals affirmed summary judgment in favor of Elder on the grounds that the non-compete provision was unenforceable as the provision burdened Elder out of proportion to Ag's benefit and would improperly require Elder to forsake the customers he brought to Ag as an independent contractor.
The Takeaway: As always, I caution readers that the law can vary depending on the state/circuit. In addition, remember that in this case, the Court stated that it was not deciding either way whether non-competes were enforceable against independent contractors.
While this opinion was somewhat short and to the point, it is well worth a read for those looking for a clear and concise summary of the facts and analysis of the law in this case. Pay attention to the Court's initial analysis of whether the non-compete was reasonable as to Elder (an independent contractor) based upon the facts in the record. Although I normally prefer these cases to have a bit more caselaw/statutory authority cited, this opinion certainly got right to the point!
Majority Opinion Judge: Chief Judge Smith
Date: August 2, 2017
Opinion: http://media.ca8.uscourts.gov/opndir/17/08/163113P.pdf
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