It is fairly uncommon for a circuit court to opine on the reasonableness of a restrictive covenant. In Ag Spectrum Co. v. Elder, No. 16-3113, 2017 U.S. App. LEXIS 14128 (8th Cir. Aug. 2, 2017), the Eighth Circuit issued a decision holding that an independent contractor’s non-compete was unreasonable and unenforceable.
Applying Iowa law, the Eighth Circuit explained that reasonableness depends on the circumstances, including consideration of several factors such as: (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 and sophistication of employer-provided training and the nature of the business; and (4) matters of basic fairness. The Court stated that the fundamental goal is to prevent unjust enrichment.
In this case, Ag Spectrum’s 3-year noncompete provision with independent contractor Vaughn Elder was unreasonable for three reasons:
First, it was not reasonably necessary to protect Ag Spectrum’s business (selling fertilizer, nutrients and crop-management services). Essentially, like any ordinary reseller, Elder purchased Ag Spectrum product and sold it at a markup. Ag Spectrum did not offer any special training and support, and Elder’s knowledge of Ag Spectrum’s product did not give him an advantage after he left his arrangement with the company. Importantly, as an independent contractor, Elder made and developed his own contacts. In such a situation, the noncompete allowed Ag Spectrum not to protect a proprietary customer base, but instead to capture customers that Elder himself had provided.
Second, the provision burdened Elder out of proportion to the benefit to Ag Spectrum because enforcing the provision would have required him to rebuild his customer base from scratch. Although Elder conceivably could have sold noncompeting products to his same customers or sold competing products to new customers, such a workaround would have been unreasonable given how little protectable benefit Ag Spectrum had in the parties’ independent-contractor relationship.
Finally, there was no evidence that restricting Elder’s business would harm the public.
Accordingly, the Eighth Circuit held that requiring Elder to forsake the customers that he had brought to Ag Spectrum as an independent contractor would be unreasonable under the circumstances, and thus the noncompete was unenforceable.