Non-compete agreements: Are your company’s enforceable?

Non-compete agreements often come under scrutiny, and a recent case illustrates the connection between reasonableness and enforceability of such contracts. In Ag Spectrum Co. v. Elder, the Eighth Circuit court affirmed a trial court’s ruling that the company’s non-compete agreement with an independent contractor was unreasonable and, therefore, not enforceable

The defendant, Vaughn Elder, had worked as a sales representative for Ag Spectrum, an Iowa business selling fertilizer, nutrients, and crop management services, before becoming an independent contractor. As part of his arrangement with the company, he agreed to sell only Ag Spectrum products in exchange for a loyalty payment. He was no longer an Ag Spectrum employee in any regard; he received no employee benefits or workers’ compensation, and was not authorized to make contracts with third parties on behalf of the company. Elder also signed an agreement not to compete with Ag Spectrum by marketing to, selling to, or consulting with the company’s customers about similar products for three years, a term that began when Elder ended the agreement in 2012.

Soon after, Elder began competing with Ag Spectrum. A few months before the three-year non-compete term was due to expire, the company sued Elder for violating the agreement. Elder moved for a summary judgment, based on the contention that the non-compete provision was unenforceable.

The trial court granted the motion, based primarily on Elder’s testimony that “virtually all” of his sales were to clients with whom he personally developed a relationship. Only two of the customers came to him via Ag Spectrum. The Eighth Circuit affirmed the decision, making clear that the decision to invalidate the non-compete provision hinged on a central fact:

In this situation, the non-compete provision allows Ag Spectrum not to protect a proprietary customer base, but rather to capture customers that someone else provided.

Ag Spectrum, in other words, could not demonstrate that it was trying to protect a genuine business interest, because the customers being targeted were not Ag Spectrum’s, but Elder’s. The panel noted that non-competes are enforceable only when the provision is reasonably necessary to protect the employer’s business and does not unreasonably restrict the contractor’s rights or harm the public interest.

While the Eighth Circuit stopped short of issuing a blanket ruling that all non-competes that bind independent contractors are unenforceable, it said that Ag Spectrum’s restrictions in this case were not reasonable and, in fact, disproportionately burdened Elder when compared to the benefit Ag Spectrum derived from it.

Employers that require non-compete agreements should consult an attorney to be sure the contract is reasonable and enforceable. Reviewing the agreements periodically can protect the company’s best interests. As always, we are happy to help.

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