The Eighth Circuit Court of Appeals recently weighed in on Iowa law regarding non-competes, and its holding has interesting implications for attorneys in Iowa, and in other states like Minnesota. In Ag Spectrum Co. v. Elder, 865 F.3d 1088 (8th Cir. 2017), the Court held that enforceability and reasonableness of a non-compete provision is a question for the judge and not for a jury under Iowa law. The Court stated that, “the enforceability of a non-compete provision is a public-policy question based on reasonableness… and although reasonableness is fact dependent…the ultimate question of enforceability is one of law rather than fact.”
Ag Spectrum Company sued its independent contractor Vaughn Elder for violating a three-year non-compete provision in his independent contractor agreement. In the District Court, Elder argued the non-compete provision was unenforceable under Iowa law and moved for summary judgment. Ag Spectrum cross-moved for summary judgment as well. The District Court concluded that the non-compete provision was unreasonable and therefore unenforceable as a matter of law. Ag Spectrum appealed, arguing that the issue should have been decided by a jury. As noted, the Eighth Circuit affirmed the District Court and held that the non-compete provision was unreasonable and unenforceable as a matter of law.
Both the facts and procedural history of this litigation are important. Elder began working for Ag Spectrum as an Area Manager in 2005 on an independent contractor basis. He had previously worked as an employee of Ag Spectrum from 2000 to 2005. Under the independent contractor agreement, Elder sold only Ag Spectrum products to customers and dealers in Kansas, Colorado, and Nebraska, in exchange for a 1% loyalty payment from Ag Spectrum every five years.
The Court of Appeals seemed to agree that Elder operated as a true independent contractor, establishing his own customer relationships and product sales. He did not receive a paycheck or employment benefits from Ag Spectrum. In fact, the Court found that Elder “connected his customers to Ag Spectrum – not the other way around.” It is important to note that the Court did not rule than an independent contractor could never be subject to a non-compete. It did, however, suggest that the protectable interest can be different when considering an independent contractor as compared to an employee.
In September 2012, Elder terminated the agreement and soon after began competing with Ag Spectrum. For whatever reason, Ag Spectrum did not sue Elder until January of 2015, roughly nine months before the non-compete was set to expire. Typically, plaintiffs seek to sue out a breach of a non-compete as soon as possible in order to seek injunctive relief. Most non-compete disputes, therefore, are initially decided at the injunction stage, under Rule 65 of the Federal Rules of Civil Procedure, and often settle before trial. Because Ag Spectrum waited so long to initiate suit, however, injunctive relief was not a practical option. Enforceability of the non-compete therefore was therefore argued on summary judgment under Rule 56.
Citing Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 382 (Iowa 1983), the Eighth Circuit used four factors to analyze reasonableness under Iowa law:
- The employee’s closeness to customers;
- The employee’s “peculiar knowledge gained through employment that provides a means to pirate the customer”;
- The amount and sophistication of employer-provided training and the nature of the business; and
- “matters of basic fairness.”
Although the Court of Appeals held that the ultimate determination of reasonableness under Iowa law is to be made by the judge, it is possible that there could be a fact dispute that would require a trial before a judge could rule.
The appellate court noted that other jurisdictions such as Illinois, Virginia, Kansas, North Carolina, Georgia and Oklahoma have reached the same conclusion, but other states like Wisconsin and Florida have gone the other way. The Court in Ag Spectrum did not cite to any Minnesota decisions on this issue. The takeaway for Iowa practitioners is that whether or not a plaintiff seeks an injunction, and whether or not it is successful, ultimate determination of whether a non-compete restriction is valid will usually be determined on summary judgment if the case does not settle and assuming no significant disputed issues of material fact. This poses a challenge for a defendant – if an injunction has been ordered by a judge, if the same judge hear the summary judgment motion, it will probably require some significant new evidence to convince that judge to change his or her mind. Lawyers representing defendants who are independent contractors, however, can find support in this decision that the protectable interest for the plaintiff in such a relationship is narrow.
V. John Ella is licensed in Iowa and Minnesota. He has represented both plaintiffs and defendants in non-compete cases in state and federal court in Iowa and Minnesota. He can be reached at 612-455-6237 or at firstname.lastname@example.org.