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Ag Spectrum Co. v. Elder

United States Court of Appeals, Eighth Circuit

August 2, 2017

Ag Spectrum Company Plaintiff- Appellant
Vaughn Elder Defendant-Appellee

          Submitted: April 6, 2017

         Appeal from United States District Court for the Southern District of Iowa - Davenport

          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 court 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 ...

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