Noncompetition Agreements with Independent Contractors

1099 form.jpgMost non-compete agreements are between an employer and employee. But what about independent contractors? Can a company restrict an independent contractor’s ability to compete once the contract has ended?

The relationship between a company and its independent contractors is inherently different than that of its employees. For instance, independent contractors by definition maintain a greater degree of control over how they accomplish tasks and traditionally work with a lesser degree of supervision.

Independent contractors also are not subject to certain employee protections, such as workers compensation benefits and wage laws, and are responsible for paying their own income taxes. Perhaps most importantly, independent contractors generally do not receive the investment of knowledge, resources and contacts that employees obtain from companies which necessitate protections from future unfair competition.

The Delaware Court of Chancery has ruled that noncompetition agreements can be enforced against independent contractors, but with certain limitations. In a written opinion from Chancellor Chandler, the Court noted that the legitimate economic interests of a company in restricting “substantially similar” activities of an independent contractor will be more limited than they would be with respect to an employee. EDIX Media Group, Inc. v. Mahani, C.A. No. 2186-N (Del. Ch., Dec. 12, 2006).

According to the Court, preventing an independent contractor from engaging in any activities that are “substantially similar” to the company’s activities raises the risk that a contractor in an independent business may be forced entirely from employment in a given industry. This runs afoul of the traditional concern of the Court for the preservation of competition, and suggests strongly that enforcement of substantially similar provisions in non-competition clauses will be both inequitable to the contractor and against public policy.

The Court indicated, however, that noncompetition agreements that prohibit independent contractors from directly competing in the same line of business may be enforceable. The bottom line appears to be that noncompete agreements can be used for independent contractors in Delaware, but that special attention must be given to the scope of restrictions.

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