Eighth Circuit Finds Independent Contractor Noncompete Agreement to be Unenforceable
The Eighth Circuit Court of Appeals[1] ruled last week that an Iowa company in the business of selling fertilizer, nutrients, and crop-management services could not enforce a noncompetition agreement against a former independent contractor, a sales representative.[2] In AG Spectrum Co. v. Elder, the noncompetition provision prohibited the sales representative from competing with the company for three years if either party ended the contractual relationship.[3] The court found that the company did not show that the noncompetition provision in its independent contractor agreement was reasonable – the governing test under Iowa contract law.[4] In Iowa, the ultimate goal of enforcing noncompetition agreements is to prevent unjust enrichment.
Important to the Eighth Circuit’s determination of reasonableness were the findings that the noncompete provision was not necessary to protect the company’s business and that the company failed to establish that the information and training it provided to its former sales representative gave him an unfair advantage. Also, it appeared that the purchasers who the sales representative had sold the company’s product to, were the sales representatives own customers, not the company’s and that enforcing the noncompete would unfairly force the sales representative to rebuild a customer base from scratch.
While the Eighth Circuit found that the noncompetition agreement at issue in this particular case was unenforceable, the court did not go so far as to hold that noncompetition agreements are always unenforceable against independent contractors.
Enforceability of NonCompetition Agreements Under Colorado Law
Colorado courts have held that noncompetition agreements may be enforceable against independent contractors in some circumstances.[5] In Colorado, the enforceability of noncompetition agreements, whether against an employee or an independent contractor, generally is void unless certain narrowly tailored exceptions are met.[6] These exceptions apply where the noncompetition agreement is: (1) a contract for the purchase and sale of a business or the assets of a business; (2) a contract for the protection of trade secrets; (3) a contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years; or (4) executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.[7] In addition, all noncompetition agreements are assessed for reasonableness, and what is reasonable will depend on the facts of each case.[8]
So, how does a company enforce a noncompete agreement in Colorado? First, the noncompete must meet one of the narrowly tailored exceptions found in the statute.[9] Then, the court must find that the noncompete is reasonable as to its geographic scope and duration.
To be reasonable, a noncompete agreement must not be broader than necessary to protect the promisee’s legitimate interests, and it must not impose hardship on the promisor. Noncompete agreements for terms up to five years and within distances of 100 miles have been upheld; however, whether a particular noncompete agreement is reasonable is highly dependent on the specific facts of each case.[10]
Moreover, the validity of a noncompetition provision is determined as of the time the agreement is entered into, and not as of any time thereafter. This is especially relevant for the executive and management personnel exception for noncompete provisions, because while not qualifying as executive and management personnel when they enter into employment contracts, the same employees could later be promoted to key positions in the company.
To guard against such a situation, an employer may, and typically should, enter into new employment agreements as its employees take on additional responsibilities. For it is the employer, rather than the employee, that has the obligation to protect the employer’s best interests. Therefore, employers may benefit by regularly reviewing the noncompetition agreements signed by its employees and having their employees sign new noncompetition agreements (prepared or reviewed by an employment attorney), when, and if, they rise to key positions in the company.
[1] The Eighth Circuit hears appeals from federal courts in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.
[2] AG Spectrum Co. v. Elder, No. 16-3113, 2017 WL 3271303 (8th Cir. 2017).
[3] Id. at *1.
[4] Iowa courts only enforce noncompete provisions 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 burden of proving reasonableness lies with the employer seeking to restrain competition, and such determination always depends on the particular circumstances of each case. In AG Sprectrum Co., the main point of conflict between the parties was whether the court or the jury was to decide whether the agreement was reasonable. The Eight Circuit, predicting how the Iowa Supreme Court would rule, answered that the question was to be decided by the court, as “the ultimate question of enforceability is one of law rather than fact.” AG Sprectrum Co., 2017 WL 3271303, at *3.
[5] See Colorado Supply Co., Inc. v. Stewart, 797 P.2d 1303, 1305 (Colo. App. 1990).
[6] C.R.S. § 8-2-113. This reflects a public policy in Colorado that generally does not favor noncompetition agreements. DBA Enters., Inc. v. Findlay, 923 P.2d 298, 302 (Colo.App.1996).
[7] C.R.S. § 8-2-113.
[8] Zeff, Farrington & Assocs., Inc. v. Farrington, 449 P.2d 813, 814 (Colo. 1969); Lucht’s Concrete Pumping, Inc. v. Horner, 255 P.3d 1058 (Colo. 2011).
[9] C.R.S. § 8-2-113.
[10] See Reed Mill & Lumber Co., Inc. v. Jensen, 165 P.3d 733 (Colo. App. 2006).