AG Spectrum Co. v. Elder

• Decision Date: 02 August 2017
• Docket Number: No. 16-3113,16-3113
• Citation: 865 F.3d 1088
• Parties: AG SPECTRUM COMPANY, Plaintiff-Appellant v. Vaughn ELDER, Defendant-Appellee
• Court: U.S. Court of Appeals — Eighth Circuit

865 F.3d 1088

AG SPECTRUM COMPANY, Plaintiff-Appellant

v.Vaughn ELDER, Defendant-Appellee

No. 16-3113

United States Court of Appeals, Eighth Circuit.

Submitted: April 6, 2017

Filed: August 2, 2017

Corrected: August 3, 2017

Counsel who presented argument on behalf of the appellant was Elliott Raymond McDonald, III, of Davenport, IA.

Counsel who presented argument on behalf of the appellee was Mark A. Tarnow, of Moline, IL.

Before SMITH, Chief Judge, SHEPHERD, Circuit Judge, and FENNER,¹ District Judge.

SMITH, Chief Judge.

After leaving its employ, Vaughn Elder contracted with Ag Spectrum Company ("Ag Spectrum") to provide services as an area manager. The arrangement was formalized through an independent-contractor agreement ("Agreement"). The Agreement prohibits Elder from competing with Ag Spectrum for three years if either party ends the relationship. Because Elder developed his own customer base and received only minimal support from Ag Spectrum, we agree with the district court² that the Agreement's noncompete provision is unreasonable and therefore unenforceable. Accordingly, we affirm.

I. Background

In 2000, Elder became a sales representative for Ag Spectrum, an Iowa business selling fertilizer, nutrients, and crop-management services. In 2005, Elder stopped working as an Ag Spectrum employee and became an Ag Spectrum "Area Manager." He formalized this relationship with the Agreement in which he agreed to sell only Ag Spectrum product in exchange for a 1 percent loyalty payment every five years.

The Agreement described Elder's status vis-a-vis Ag Spectrum. He had to supply, at his "sole expense," all the materials needed for his work. He was not an employee for tax purposes. He was to be "engaged in [his] own independent business" and thus was prohibited from participating in any Ag Spectrum employee benefit plan. He was not covered by an Ag Spectrum workers' compensation policy. And he had no authority to contract on Ag Spectrum's behalf. Elder also agreed not to compete with Ag Spectrum by marketing to, selling to, or consulting with its customers about similar products for three years after terminating the Agreement.

Elder served a customer base in Kansas, Colorado, and Nebraska. He sold Ag Spectrum product directly through his own efforts and indirectly through dealers working under him. He testified that "virtually all" of his sales were to people he had "developed relationships with over the course of [his] life" or to his dealers. Only two of Elder's customers came to him through Ag Spectrum.

Elder also handled the Ag Spectrum product as he saw fit. He ordered, unloaded, managed, and paid for it. Elder stored the product at his own warehouse and at a railroad tank facility provided by Ag Spectrum (though operated by Elder). When a customer or dealer ordered product from Elder, it was delivered from the warehouse, the railroad tank facility, or from manufacturers or other storage facilities in other states. None of the out-of-state facilities was owned by Ag Spectrum. Every week Elder filled out an "inventory transfer sheet" to reflect the product he had sold that week. He then had to pay Ag Spectrum for it within 10–14 days. If Elder's customers did not pay, then the loss fell on Elder, not Ag Spectrum.

True to the agreement, Elder never got a paycheck or any employment benefits from Ag Spectrum. He bought his own commercial and auto insurance. He used his own equipment and maintained it himself. His profit was the difference between what he paid Ag Spectrum and what he sold the product for (minus any commissions that he owed his dealers). He paid Ag Spectrum through his own line of credit at a local bank. Elder did, though, receive a yearly award of $1,500 from Ag Spectrum when he sold more than $1 million in product.

Ag Spectrum, for its part, contends that Elder got more than just product to sell. Elder had access to the company's research-backed crop-management tools, including "management zone" mapping for each customer's farm. (Elder responds that "as a matter of habit [he] did not follow Ag Spectrum's recommendations" because they were "mostly irrelevant and incorrect." He says that he did not use the "management zone" mapping because Ag Spectrum would have charged him for it.) Ag Spectrum also trained Elder and his dealers on Ag Spectrum product and provided marketing, accounting, and distribution help. The company provided Elder with the railroad tank facility and with leased railcars to haul product to it, though Elder paid the freight and maintained the facility.

Elder terminated the Agreement in September 2012 and soon began competing with Ag Spectrum. In January 2015, with roughly nine months left in the noncompete term, Ag Spectrum sued Elder for breaching the noncompete provision. Elder moved for summary judgment, contending that the provision was unenforceable under Iowa law. Ag Spectrum cross-moved for partial summary judgment on Elder's breach. The district court granted Elder's motion and denied Ag Spectrum's, concluding that as a matter of law the provision was unreasonable and therefore unenforceable. Ag Spectrum appeals.

II. Discussion

1. What is the Standard for Enforcing Noncompetition Provisions?

We review the district court's summary judgment ruling de novo. Jackson v. Riebold , 815 F.3d 1114, 1119 (8th Cir. 2016). The parties agree that Iowa law governs this dispute. Iowa courts enforce noncompete provisions 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. Iowa Glass Depot, Inc. v. Jindrich , 338 N.W.2d 376, 381 (Iowa 1983). "Essentially, these rules require us to apply a reasonableness standard in maintaining a proper balance between the interests of the employer and the employee." Id.

The employer seeking to restrain competition bears the burden of proving reasonableness, which rarely comes down to a single fact and always depends on the particular circumstances. Id. at 381–82. Several factors go into reasonableness, including: (1) the employee's closeness to customers; (2) the employees'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." Id. at 382 ; see also Revere Transducers, Inc. v. Deere & Co. , 595 N.W.2d 751, 761 (Iowa 1999). At bottom, the goal is preventing unjust enrichment. See Iowa Glass , 338 N.W.2d at 382 (asking whether former employee could "unjustly enrich himself at the expense of his former employer"); Reddy v. Cmty. Health Found. of Man , 171 W.Va. 368, 298 S.E.2d 906, 919 (1982) ("[A]t the heart of all enforceable covenants not to compete is the principle of avoiding unjust enrichment.").

2. Who Determines Enforceability?

A major point of conflict in this appeal is who decides reasonableness—the court or the jury? Ag Spectrum argues that the district court erred by resolving disputed material facts regarding the provision's reasonableness. See Fed. R. Civ. P. 56(a). According to Ag Spectrum, a jury should decide reasonableness. The Iowa Supreme Court has not said whether the enforceability of a noncompete provision is a question for the court or for the jury. Ag Spectrum acknowledges that in some states it is a question for the court. But the company argues that because enforceability depends on reasonableness, it is quintessentially a fact issue for the jury.

Without controlling precedent from the Iowa Supreme Court, we must predict how that court would answer this question. Blankenship v. USA Truck, Inc. , 601 F.3d 852, 856 (8th Cir. 2010). For two reasons, we think that the Iowa Supreme Court would hold that the enforceability of a noncompete provision is a question for the court. First, Iowa has held that a similar issue—whether a liquidated-damages provision is an unenforceable penalty—"is a question of law for the court." City of Davenport v. Shewry Corp. , 674 N.W.2d 79, 85 (Iowa 2004) (quoting Rohlin Constr. Co. v. City of Hinton , 476 N.W.2d 78, 79 (Iowa 1991) ). The enforceability of a liquidated-damages provision, like the enforceability of a noncompete provision, is a public-policy question based on reasonableness.

See Rohlin Constr. , 476 N.W.2d at 80 ("A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy...." (quoting Restatement (Second) of Contracts § 356(1) (1981) )); see also Iowa Glass , 338 N.W.2d at 381 (rules on noncompete provisions "require [courts] to apply a reasonableness standard").

Second, although reasonableness is fact dependent, courts have generally held that the ultimate question of enforceability is one of law rather than fact.² It is true, as Ag Spectrum notes, there is authority to the contrary.³ The majority of courts, however, leave enforceability of noncompete clauses to courts, not juries.⁴ Facts are crucial to the enforceability analysis, but we think that the Iowa Supreme Court would recognize the ultimate question to be for the court. See Frank Harty & Ryan Stefani, Drafting and Enforcing Non-Compete Clauses in Iowa: A Thirty-Year Review , 64 Drake L. Rev. 325, 338 (2016) ("[T]he law of Iowa has developed in the same manner as that of the majority of jurisdictions.").

3. Is This Noncompetition Provision Enforceable?

We now consider whether the district court correctly determined that the provision here is unenforceable. Like the district court, we decline Elder's invitation to hold that noncompete provisions binding independent contractors are per se unenforceable. Instead, balancing the benefits and burdens under the traditional reasonableness test, we conclude that Ag Spectrum's noncompete provision is unreasonable and therefore unenforceable.

First, the provision is not reasonably necessary to protect Ag Spectrum's business. The company contends that the provision's purpose was "to...