South Dakota Supreme Court Upholds Non-Solicitation Agreement of Captive Insurance Agent, but Rejects Non-Competition Component In Same Agreement

On March 21, 2018, the South Dakota Supreme Court rendered its decision in Farm Bureau Life Insurance Company v. Dolly. 

In that case, Dolly and Farm Bureau had entered into an agency contract.  Under the contract, Dolly agreed to operate as a captive agent.  As a captive agent, Dolly was limited to selling insurance and financial products produced or approved by Farm Bureau.  Dolly’s agency contract with Farm Bureau included a provision that intended to prevent Dolly from competing with Farm Bureau for 18 months after his agency contract ended.  This provision specifically restricted Dolly from directly or indirectly selling to or soliciting Farm Bureau policyholders.  Thus, in effect, the contract contained both a non-competition provision as well as a non-solicitation provision. 

Despite the restricting provisions in his agency contract, Dolly terminated his agency contract with Farm Bureau and went to sell insurance for a competitor.  Farm Bureau sued Dolly alleging Dolly violated the agency contract by selling to and soliciting Farm Bureau customers.  The trial court initially granted Farm Bureau’s motion for a temporary restraining order, enjoining Dolly from selling to or soliciting Farm Bureau customers.  However, after an evidentiary hearing, the Court removed the “selling” part of its prior ruling, but still enjoined Dolly from soliciting Farm Bureau customers.  In other words, the Court allowed Dolly to sell to Farm Bureau customers so long as Dolly did not solicit them.

Farm Bureau appealed the trial court’s decision arguing that the contract prevented both the selling to and soliciting of Farm Bureau customers and that both were valid under South Dakota law.  In its decision, the Court answered three important questions:

• Is a non-competition agreement between an insurance company and its captive insurance agents, which does not contain language that the agent agrees to abstain from the business of insurance entirely, valid under South Dakota law?
• Is a non-solicitation agreement between an insurance company and its captive insurance agents valid under South Dakota law? Yes.
• Despite a non-solicitation agreement, may a captive insurance agent sell insurance to customers that come to him/her directly?  

The Court began its analysis with the well-established principle that contracts that restrain trade are invalid in South Dakota, subject to few exceptions.  One such exception was at issue in this case.  SDCL 53-9-12 says in relevant part:

A captive insurance agent may agree:

• Not to engage directly or indirectly in the same business or profession as that of the insurer for any period not exceeding two years from the date of termination of the independent contractor's agreement with the insurer; and

• Not to solicit existing customers of the insurer within a specified county, first or second class municipality, or other specified area for any period not exceeding two years from the date of termination of the agreement, if the insurer continues to carry on a like business within the specified area.

In support of the non-competition part of the contract, Farm Bureau argued that SDCL 53-9-12(1) allows insurance companies to prevent captive agents from selling to existing customers.  In rejecting that argument, the Court applied the language in SDCL 53-9-12(1) literally.  The Court reasoned Dolly did not agree to abstain from the insurance business entirely, which is what SDCL 53-9-12(1) allows, and refused to write in the word “sell” to the statute. 

The Court agreed the non-solicitation was valid.  However, the Court specifically found under the non-solicitation Dolly could sell to Farm Bureau customers as long as Dolly did not solicit to the customer first.  Stated differently, the Court found Dolly could sell to Farm Bureau customers so long as the customers contacted Dolly first. 

Takeaways

Hindsight is 20-20.  The decision in Farm Bureau v. Dolly serves to remind us that when drafting contracts that restrain trade, we should not stray from the plain language of the statute that authorizes the restraint of trade in the first place.  In Dolly the Court specifically noted the contract did not restrain Dolly from engaging in the insurance business entirely, which is a restraint the statute allows.  In other words, had Farm Bureau’s agency contract mirrored the language of SDCL 53-9-12(1), the Court would have likely upheld that provision and would have likely enjoined Dolly from working for a competitor in the business of insurance. 

Farm Bureau v. Dolly left open the question of “directly v. indirectly” soliciting customers.  The Court focused on the trial court’s findings of fact that Dolly did not himself initiate the contact with the Farm Bureau customers.  Hence, he did not directly solicit Farm Bureau customers.  However, the Court’s decision does not contain any factual findings as to whether Dolly indirectly solicited Farm Bureau customers.  There are numerous scenarios that may arguably constitute “indirect” solicitation.  Thus, because of the Court’s narrow holding in the Dolly decision, chances are we will see more litigation about non-solicitation agreements similar to the one at issue in this case.

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