Case Title: WESTERN MONT CLINIC v JACOBSON

Citation: 

Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1976-01-09T00:00:00Z

Document:
No. 13024 I N THE S U P R E M E COURT O F THE STATE OF MONTANA W E S T E R N M O N T A N A CLINIC, P l a i n t i f f and Appellant, DAVID P. JACOBSON, M.D., Defendant and Respondent. Appeal from: D i s t r i c t Court of t h e Fourth J u d i c i a l D i s t r i c t , Honorable Jack L. Green, Judge presiding. Counsel of Record : For Appellant : Boone, Karlberg and Haddon, Missoula, Montana Karl R. Karlberg argued, Missoula, Montana For Respondent : Garlington, Lohn and Robinson, Missoula , Montana Sherman V. Lohn argued, Missoula, Montana Lawrence F. Daly argued, Missoula , Montana Filed : Submitted: November 5, 1975 M r . J u s t i c e Wesley C a s t l e s delivered t h e Opinion of t h e Court. This is an appeal from a summary judgment f o r defendant entered on t h e ground t h a t a r e s t r i c t i v e covenant a g a i n s t compe- t i t i o n v i o l a t e d t h e l a w s of Montana and was n o t within t h e s t a t - utory exceptions contained i n s e c t i o n s 13-808 and 13-809, R.C.M. 1947. The s o l e i s s u e on t h i s appeal i s whether t h e r e s t r i c t i v e covenant contained i n A r t i c l e XX of t h e A r t i c l e s of Association of t h e Western Montana C l i n i c , an unincorporated a s s o c i a t i o n , i s enforceable. O n June 30, 1948, t h e Western Montana C l i n i c , a s a p a r t - nership of physicians p r a c t i c i n g medicine i n Missoula, w a s d i s - solved and A r t i c l e s of Association w e r e executed by t h e former p a r t n e r s , forming an "unincorporated Association" f o r t h e p r a c t i c e of medicine, a t t h e same l o c a t i o n and under t h e same name a s t h e former partnership. From t h a t day forward, t h e new Association has continued without d i s s o l u t i o n . Physicians associated with t h e C l i n i c may be divided i n t o two main groups: employees and members. T r a d i t i o n a l l y a new doctor i s made an employee f o r a period of one o r two years, and then he is required t o become a member. That s t a t u s of "member" is f u r t h e r subdivided i n t o " j u n i o r " and "senior" members. A t t h e t i m e s i n question t h e C l i n i c was composed of some 2 5 member physicians and 6 employee physicians p r a c t i c i n g various medical s p e c i a l i t i e s , together with numerous o t h e r medical and a d m i n i s t r a t i v e employees. Defendant, Doctor Jacobson, is a licensed orthopedic surgeon who became an employee of t h e Western Montana C l i n i c on approximately January 1, 1968. O n approximately January 1, 1970, i n accordance with t h e e s t a b l i s h e d p o l i c y of t h e C l i n i c , defend- a n t was required t o purchase $5,200 of stock i n t h e Western Mon- tana C l i n i c Building Corporation and thereby was accepted as a junior member of t h e C l i n i c . The Western Montana C l i n i c and The Western Montana C l i n i c Building Corporation a r e s e p a r a t e l e g a l e n t i t i e s . Approximately two y e a r s later, again following C l i n i c policy, defendant w a s required t o purchase an a d d i t i o n a l $5,200 of stock i n t h e Building Corporation and became a s e n i o r member of t h e C l i n i c . O n August 1, 1973, defendant withdrew from t h e C l i n i c f o r a l l e g e d professional reasons and e s t a b l i s h e d a p r i v a t e prac- tice l i m i t e d t o orthopedic surgery a t Professional V i l l a g e i n Missoula. Defendant a l s o maintains smaller p r a c t i c e s a t S t . Joseph's Hospital i n Polson, Montana, and a t t h e Student Health Center a t t h e University of Montana. This controversy a r o s e from a demand by t h e C l i n i c t h a t defendant pay it 30% of t h e gross proceeds from h i s medical p r a c t i c e f o r t h e t h r e e years following August 1, 1973. This provision was contained i n t h e Articles of Association. Defend- a n t refused, and t h e C l i n i c f i l e d t h i s a c t i o n . I n h i s motion f o r summary judgment, defendant a s s e r t e d simply t h a t by v i r t u e of t h e unique provisions of A r t i c l e XX and o t h e r c l a u s e s i n t h e C l i n i c ' s A r t i c l e s of Association, t h i s par- t i c u l a r r e s t r i c t i v e covenant f a i l s t o come within Montana's narrow s t a t u t o r y exceptions permitting such agreements and is t h e r e f o r e an i l l e g a l c o n t r a c t i n r e s t r a i n t of t r a d e , unenforceable i n t h i s S t a t e . The s t a t u t e s involved here a r e : 13-807, R.C.M. 1947. "Contract i n r e s t r a i n t of t r a d e void. Any c o n t r a c t by which anyone i s r e s t r a i n e d from e x e r c i s i n g a lawful profession, t r a d e , o r bus- i n e s s of any kind, otherwise than i s provided f o r by t h e next two s e c t i o n s , i s t o t h a t e x t e n t void." 13-808, R.C.M. 1947. "Exception i n favor of sale of good w i l l . One who sells t h e good w i l l of a bus- i n e s s may agree with t h e buyer t o r e f r a i n from carrying on a s i m i l a r business within a s p e c i f i e d county, c i t y , o r p a r t t h e r e o f , so long as t h e buyer, o r any person deriving t i t l e t o t h e good w i l l from him, c a r r i e s on a l i k e business t h e r e i n . " 13-809, R.C.M. 1947. "Exception i n favor of p a r t - nership agreements. P a r t n e r s may, upon o r i n a n t i c i p a t i o n of a d i s s o l u t i o n of t h e partners hi^. - .. . agree t h a t none of them w i l l c a r r y on a s i m i l a r business within t h e same c i t y o r town where t h e partnership business has been t r a n s a c t e d , o r within a s p e c i f i e d p a r t thereof." A r t i c l e I1 of t h e A r t i c l e s of t h e C l i n i c provides: "ARTICLE I1 - AN UNINCORPORATED ASSOCIATION "The p a r t i e s hereto hereby a s s o c i a t e themselves together f o r t h e p r a c t i c e of medicine and surgery a s an unincorporated Association which s h a l l be known and designated a s 'The Western Montana C l i n i c ' . This Association s h a l l be endowed t o t h e e x t e n t permissible by law with a l l t h e a t t r i b u t e s of a corporation, and s h a l l be t r e a t e d a s a corporation f o r purposes of t a x a t i o n , and a l l o t h e r purposes, s u b j e c t , however, t o t h e requirement of t h e law t h a t t h e r e l a t i o n s h i p between t h e members of t h e Association as physicians and surgeons and t h e i r p a t i e n t s s h a l l be d i r e c t , per- sonal and c o n f i d e n t i a l . I n a l l m a t t e r s r e l a t i n g t o t h e f i s c a l and business management of t h e Association, It i s seen from t h i s language, and from t h e undisputed h i s t o r y of operation, t h a t a s between defendant D r . Jacobson and t h e C l i n i c , t h e C l i n i c s h a l l be t r e a t e d a s a corporation and t h e a r t i c l e s ex- p r e s s l y deny a p a r t n e r s h i p r e l a t i o n s h i p a s contemplated by t h e exception contained i n s e c t i o n 13-809. Thus, t h e language of t h e r e s t r i c t i v e covenant does not f a l l within t h e p a r t n e r s h i p excep- t i o n of 13-809. A r t i c l e s XX and X X I of t h e C l i n i c provide: "ARTICLE XX - M E M B E R S RESTRICTED I N RIGHT TO RE- ENGAGE I N PRACTICE Amended and subscribed t o 2 November 1967 "Each Member of t h i s Association (whether now a Member o r afterwards becoming a Member; whether a Senior o r Junior Member) does hereby agree t h a t i n t h e event of h i s separation from t h i s Associa- t i o n , i n any manner o r f o r any cause o t h e r than f o r d i s a b i l i t y , he w i l l thereby and thereupon be s e l l i n g t o t h e Association and t h e remaining Members thereof h i s i n t e r e s t i n t h e good w i l l of s a i d Association, and i n view of t h e f a c t t h a t t h e r e a f t e r such separating Member w i l l no longer be a Member i n t h e Association, and f o r t h e pro- t e c t i o n of t h e good w i l l aforesaid, t h e s a i d Members aforesaid, including Members h e r e a f t e r joining t h e Association, agree t h a t i n t h e event t h a t any of them withdraws from t h i s Association o r i s expelled therefrom he w i l l not engage i n , o r c a r r y on t h e p r a c t i c e of medicine o r surgery within t h e county of Missoula, s t a t e of Montana, f o r t h e period of t h r e e years from t h e d a t e of such separation, o r f o r t h e period during which t h e s a i d Association o r its o t h e r Members c a r r y on t h e p r a c t i c e of medicine o r surgery within s a i d county, whichever period be t h e s h o r t e r . * * *" "In order t o assure continuity of t h e Association without impairment of i t s c a p i t a l , which might re- s u l t i f a Member were e n t i t l e d t o a d i v i s i o n of a s s e t s upon h i s death, retirement, withdrawal o r expulsion, t h e Association i s c r e a t i n g t h e R e t i r e - ment o r Pension Plan t o provide retirement b e n e f i t s and death b e n e f i t s t o i t s Members, t h e t e r m s of which plan a r e r e f e r r e d t o h e r e a f t e r . Therefore, each present and f u t u r e Member does hereby renounce any and a l l claims t o any d i v i s i o n of t h e a s s e t s of t h e Association upon h i s death, retirement, withdrawal o r expulsion p r i o r t o t h e termination of t h e Asso- c i a t i o n , and agrees t o accept i n l i e u thereof t h e b e n e f i t s , i f any, payable under such plan." W e consider now t h e language of t h e exception i n s e c t i o n 13-808 t o t h e law a g a i n s t c o n t r a c t s i n r e s t r a i n t of t r a d e when such c o n t r a c t is i n conjunction with t h e s a l e of good w i l l of a business. I n other words, does A r t i c l e XX come within t h e ex- ception t o permit such a contract? The C l i n i c ' s p o s i t i o n , simply s t a t e d , i s t h a t A r t i c l e s XX and X X I state t h a t i n exchange f o r a member joining t h e C l i n i c without c o s t , and thus be e n t i t l e d t o an immediate l u c r a t i v e share i n an established p r a c t i c e , he agrees t h a t on termination, he sells and t r a n s f e r s whatever i n t e r e s t he has, including goodwill, without c o s t ; and, must not compete with t h e C l i n i c f o r t h r e e years to assure the effective retention of goodwill by the Clinic. On the other hand, defendant's position is that at the moment each member joins the association, he relinquishes "any and all claims to any division of the assets" in exchange for benefits under the association retirement and pension plans; and that included in the items thus relinquished is any claim to goodwill he might have at the time of his withdrawal from the association. In other words, upon admission of a member, he buys nothing, and at the time of his retirement or death, he takes out nothing; thereby, reasons defendant, there has been no sale of goodwill sufficient to bring the exception contained in section 13-808 into play. Put another way, defendant could not sell any goodwill to the association because as a result of Arti- cle XXI, all the assets of the Clinic, including goodwill, were already owned by the association. Goodwill, goes this argument, is an incident to and inherent in the business and may not exist separate from the business. Sections 67-1111, 67-1112, R.C.M. 1947; Wylie v. Wylie Permanent Camping Co., 57 Mont. 115, 187 P. 279. Then, defendant defines sale as used in section 13-808, as defined in sections 74-101 through 74-106, R.C.M. 1947. This Court in Jenson v. Olson, 144 Mont. 224, 227, 395 P.2d 465, stated our rule: "A covenant not to compete is a restrictive cov- enant in restraint of trade and is valid only in certain lines of enterprise and only if it con- stitutes a reasonable restriction on the freedom to do business. Sections 13-807, 13-808, 13-809, R.C.M. 1947." Defendant in his brief states: " * * * a profes- sional man who sells his practice and his goodwill may agree not to compete, if there is a consideration and a legitimate sale of goodwill involved." Then he goes on to reassert that there was no "legitimate" sale of goodwill by virtue of Article XXI of the Articles of Association because technically Dr. Jacobson had no goodwill to sell, and was paid nothing for it. Defendant cites Haas v. Hodge, 171 Cal.App.2d 478, 340 P.2d 632, 635. California had identical statutes to Montana's. In Haas two physicians entered into an agreement whereby one Dr. Hodge disclaimed any right or claim to any "professional practice herein mentioned and referred to and to the goodwill thereof." Dr. Haas was attempting to enforce an anticompetitive covenant by claiming it came under the exception for agreements ancillary to the sale of goodwill. The California District Court of Appeals, Division 2, refused to enforce the covenant saying: "Whatever may be the technical status flowing from the contract, it remains true that the last paragraph operates as a present renouncement of any interest in the 'professional practice' of Dr. Haas or the goodwill thereof. This left Dr. Hodge with no inchoate right to future accru- ing goodwill, for the practice belonged to Dr. Haas and the goodwill belonged to him as an incident to ownership of the practice, present and future. * * * "Defendant could not sell the present or future goodwill of the business in this instance, for the business and its goodwill belonged to plain- tiff Haas." In this case, because of Article XXI, defendant had no goodwill from the business to sell to the Association. Definitions for "sale" and related terms are given in sections 74-101 through 74-106, R.C.M. 1947. These statutes provide that in order for there to be a sale, or an agreement to sell, there must be payment, or agreement to pay pecuniary consideration--a price--in exchange for the transfer to another of an interest in property. In Interrogatory No. 9, dated Aug- ust 26, 1974, defendant asked the Clinic to specifically describe the terms of the alleged sale of goodwill; when did it take place; what was the consideration; how was it paid? The Clinic's ans- wer merely pointed to Article XX. When t h e Montana l e g i s l a t u r e carved o u t two exceptions t o t h e p r o h i b i t i o n a g a i n s t c o n t r a c t s i n r e s t r a i n t of t r a d e , it d i d so c a r e f u l l y , w i t h f u l l awareness t h a t t h e r e was l e g i t i m a t e p u b l i c i n t e r e s t i n favor of allowing r e s t r i c t i v e covenants a n c i l l a r y t o t h e s a l e of a business. But t h a t p u b l i c i n t e r e s t e x i s t s only when t h e r e is a genuine sale of goodwill. Obviously, t h e language of A r t i c l e XX was d r a f t e d i n an e f f o r t t o achieve p r o t e c t i o n under s e c t i o n 13-808, R.C.M. 1947. However, no " s a l e " of anything took p l a c e a t t h e t i m e of d e f e n d a n t ' s d e p a r t u r e ; and t h e s e l f - s e r v i n g language t o t h e c o n t r a r y i n A r t i c l e XX i s con- t r a d i c t e d by every s i n g l e f a c t and circumstance surrounding t h e o r g a n i z a t i o n and o p e r a t i o n of t h e Western Montana C l i n i c and t h e withdrawal of defendant Doctor Jacobson. While numerous c a s e s a r e c i t e d i n both b r i e f s , they do not apply t o our s i t u a t i o n where t h e exception under t h e s t a t u t e i s sought. For a c o l l e c t i o n of c a s e s on V a l i d i t y and Construction of Contractual R e s t r i c t i o n s on Right of Medical P r a c t i t i o n e r t o Practice, I n c i d e n t t o S a l e of P r a c t i c e , see Anno. 6 2 ALR3d 918. W e hold t h a t t h e r e was no sale of goodwill under t h e s t a t u t e and t h u s t h e r e s t r i c t i v e covenant i s unenforceable. Having examined t h e i s s u e s , and f i n d i n g no e r r o r , w e a f f i r m . ----- . ' ,/ Chief J u s t i c e