Case Title: TREASURE CHEMICAL v TEAM LABORATOR

Citation: 

Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1980-03-26T00:00:00Z

Document:
No. 14806 IN THE SUPREME COURT OF THE STATE OF MONTANA 1980 TREASURE CHEMICAL, INC. , a Montana Corporation, and ART FREDRIKSEN, Plaintiff and Appellant, vs. TEAM LABORATORY CHEMICAL CORPORATION I GARY SULLIVAN and DAVID LEINWAND, Defendants and Respondents. Appeal from: District Court of the Thirteenth Judicial District, Honorable C. B. Sande, Judge presiding. Counsel of Record: For Appellant: Terry L. Seiffert argued, Billings, Montana For Respondents: Pedersen, Herndon, Harper & Munro, Billings, Montana Donald Herndon argued, Billings, Montana - ~ - - Submitted: January 17, 1980 Decided: MAR 2 7 'J!? 2 2 7 jq-po Filed: L - M r . J u s t i c e Daniel J. Shea delivered t h e Opinion of t h e Court. P l a i n t i f f s appeal from t h e order of t h e Yellowstone County D i s t r i c t Court which granted judgment a g a i n s t t h e p l a i n t i f f s i n t h e i r a c t i o n t o enforce t h e t e r m s of a covenant n o t t o compete a g a i n s t t h e defendants. The main i s s u e i n t h i s appeal i s whether t h e covenant a g a i n s t competition f a l l s within a s t a t u t o r y exception t o t h e code's p r o h i b i t i o n a g a i n s t r e s t r a i n t s on t r a d e . The p l a i n t i f f s f i l e d a complaint seeking enforcement of a covenant n o t t o compete contained i n a d i s s o l u t i o n of p a r t n e r s h i p agreement made with defendant, Gary Sullivan. The defendants f i l e d s e p a r a t e answers and a j o i n t motion f o r p a r t i a l summary judgment. The c o u r t granted t h e defendants' motion and on March 23, 1979, t h e p a r t i e s f i l e d a s t i p u l a - t i o n t h a t t h e p a r t i a l summary judgment should a c t as a f i n a l judgment a g a i n s t t h e p l a i n t i f f s . On A p r i l 6, 1979, t h e c o u r t found t h a t t h e s t i p u l a t i o n w a s made with good cause and granted judgment t o t h e defendants a g a i n s t t h e p l a i n - t i f f s . The p l a i n t i f f s appeal t h i s judgment. Since t h i s a c t i o n never proceeded t o t r i a l , t h e follow- i n g statement of f a c t s is taken from undisputed f a c t s s t a t e d i n t h e a p p e l l a t e b r i e f s and papers f i l e d by t h e p a r t i e s i n D i s t r i c t Court, P l a i n t i f f , A r t Fredriksen, and defendant, Gary S u l l i v a n , engaged i n t h e sale of i n d u s t r i a l chemicals i n t h e S t a t e of Montana i n 1975. O n A p r i l 13, 1976, they formalized t h e i r r e l a t i o n s h i p i n a p a r t n e r s h i p agreement. S u l l i v a n made sales f o r t h e p a r t n e r s h i p , which w a s c a l l e d Treasure he mi- c a l l u n t i l June 30, 1976 when a d i s s o l u t i o n of p a r t n e r s h i p agreement was signed. The agreement provided that the business should belong to Fredriksen and that he should acquire all of Sullivan's interest in the profits, assets, and goodwill of the partnership. Sullivan was to receive $27,500 for his entire interest in Treasure Chemical and he further agreed not to compete with Fredriksen in the sale of chemicals where the partnership business had been transacted. On the same date, Fredriksen incorporated Treasure Chemical and entered into a sales agreement with Sullivan whereby Sullivan would receive a commission for sales made for the newly formed corporation. Sullivan made sales for Treasure Chemical, Inc., until the fall of 1977 when he terminated his sales representative agreement and acquired an interest in a North Dakota business called Team Laboratory Chemical Corporation. David Leinwand, who also has been named as a defendant in this action, signed a sales representative agreement with Treasure Chemical, Inc., on August 18, 1976. The agreement made Leinwand the exclusive salesman for Treasure Chemical in a large territory of Montana. Leinwand terminated this agreement on September 1, 1978, and thereafter began working with Team Lab. Plaintiffs, Treasure Chemical, Inc., and Art Fredriksen, filed a complaint seeking to enforce the covenant against competition contained in the dissolution of partnership agreement. The complaint named Gary Sullivan, David ~einwand, and Team Laboratory Chemical Corporation as defendants, and sought damages, a temporary restraining order, and a perma- nent injunction against the sale of chemicals by the defen- dants in some thirty-two Montana counties named in the complaint. The defendants filed separate answers and a motion for partial summary judgment. The c o u r t set a d a t e f o r a hearing and t h e p a r t i e s f i l e d b r i e f s on t h e motion. The c o u r t o r d e r f i l e d February 1, 1979 dismissed Treasure Chemical, David Leinwand, and Team Lab from t h e a c t i o n , denied t h e r e q u e s t f o r a temporary r e s t r a i n i n g order, and found t h e covenant n o t t o compete void o u t s i d e t h e B i l l i n g s c i t y l i m i t s . The c o u r t ordered f u r t h e r proceedings t o determine whether Fredriksen w a s e n t i t l e d t o damages f o r breach of t h e covenant. On March 23, 1979 t h e p a r t i e s f i l e d a s t i p u l a t i o n s t a t i n g t h a t no s i g n i f i c a n t s a l e s were made i n B i l l i n g s and t h a t t h e p a r t i a l summary judgment should a c t a s a f i n a l judgment a g a i n s t t h e p l a i n t i f f s . The c o u r t ' s judgment of A p r i l 6, 1979 s t a t e d t h a t t h e s t i p u l a t i o n was made with good cause and granted judgment f o r t h e defendants a g a i n s t t h e p l a i n t i f f s . The p l a i n t i f f s appeal t h i s judgment. The p l a i n t i f f s contend t h e D i s t r i c t Court's determina- t i o n t h a t t h e code l i m i t s t h e operation of a covenant n o t t o compete t o t h e boundaries of a s i n g l e c i t y o r town w a s an unduly narrow c o n s t r u c t i o n of s e c t i o n s 28-2-704 and 28-2- 705, MCA and t h a t t h e s e s e c t i o n s a u t h o r i z e t h e enforcement of any covenant which has reasonable geographic l i m i t a t i o n s . W e do not accept t h e p l a i n t i f f s ' contention. The test of reasonableness provides a general guide t o c o u r t s which do n o t have t h e b e n e f i t of a s t a t u t e governing t h e scope of r e s t r i c t i v e covenants. See Henderson v. Jacobs (1952), 73 Ariz. 195, 239 P.2d 1082, 1086. See a l s o 17 C.J.S. Contracts, 8246, a t 1122 and c a s e s c i t e d t h e r e i n . Here, however, w e are presented with a question of s t a t u t o r y i n t e r p r e t a t i o n . Montana code c o n t a i n s provisions determining t h e geo- g r a p h i c a l range of covenants n o t t o compete. s e c t i o n 28-2- 703, MCA, p r o h i b i t s r e s t r a i n t s on t r a d e : "Any c o n t r a c t by which anyone is 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 business of any kind, otherwise than is provided f o r by 28-2-704 o r 28-2-705, i s t o t h a t e x t e n t void." Exceptions t o t h i s general p r o h i b i t i o n a r e s t a t e d i n t h e following sections: "One who sells t h e goodwill of a business 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 thereof s o long as t h e buyer o r any person d e r i v i n g t i t l e t o t h e goodwill from him c a r r i e s on a l i k e business t h e r e i n . " Section 28-2-704, MCA. " 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 partnership, 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 p a r t n e r s h i p business has been transacted o r within a s p e c i f i e d p a r t thereof." Section 28-2-705, MCA. Sections 28-2-703, e t seq., MCA, have been modeled a f t e r s e c t i o n s 1673, e t seq., C a l i f o r n i a Civ. Code. W e have a l r e a d y determined t h a t our i n t e r p r e t a t i o n of t h e s e s e c t i o n s w i l l be guided by t h e construction given them by t h e Supreme Court of C a l i f o r n i a . See J. T. M i l l e r Co. v. Made1 (1978), Mont. , 575 P.2d 1321, 35 St.Rep. 263. C a l i f o r n i a d e c i s i o n s i n t e r p r e t i n g i t s c i v i l code have concluded t h a t i t s s t a t u t e s should be construed l i t e r a l l y t o deny enforce- ment of covenants t h a t exceed t h e boundaries of a s i n g l e c i t y o r county. Edwards v. Mullin (1934), 220 Cal.Rptr. 7 379, 30 P. 2d 997; Du Bois v. Padgham (1912), 18 C a l ~ ~ a d -48, 123 P. 207; Franz v. B i e l e r (1899), 126 Cal.Rptr. 176, 56 P. 249; C i t y Carpet Beating, E t c . , Works v. Jones (1894), 102 Cal.Rptr. 506, 36 P. 841. The d e c i s i o n i n C i t y Carpet, supra, provides t h e reasoning f o r t h i s i n t e r p r e t a t i o n : "The Code . . . e l i m i n a t e s from t h e controversy a r i s i n g upon such r e s t r i c t i o n t h e question as t o what i s a reasonable t e r r i t o r i a l l i m i t , by s p e c i f i c a l l y d e f i n i n g it, and thus preventing l i t i g a t i o n ; and i n t h i s t h e s t a t u t e i s wise and s a l u t a r y , even though, i n c e r t a i n cases--possibly i n t h i s one,--it g i v e s t h e purchaser less than he bought, and less than he might enjoy without v i o l a t i n g t h e i n t e r e s t s of t h e public." The covenant n o t t o compete contained i n the p a r t i e s ' d i s s o l u t i o n of partnership agreement was n o t limited t o a s i n g l e c i t y . It s t a t e d : ". . . Sullivan, hereby agrees . . . t h a t he, t h e r e t i r i n g partner, w i l l not, . . compete with t h e continuing partner e i t h e r d i r e c t l y o r i n d i r e c t l y i n t h e s a l e of chemicals within t h e same cities o r towns within t h e S t a t e of Montana where t h e partnership business had been transacted f o r a period of t h r e e ( 3 ) years . . ." The p l a i n t i f f s ' complaint named 32 Montana counties i n which t h e partnership allegedly transacted business. Section 28-2-705 governs the r e s t r i c t i v e covenant con- tained i n t h e p a r t i e s ' d i s s o l u t i o n of partnership agreement. This s e c t i o n e x p l i c i t l y l i m i t s such covenants t o t h e bound- a r i e s of a s i n g l e c i t y o r town. The p a r t i e s do not s e r i o u s l y dispute t h e t r i a l c o u r t ' s determination t h a t B i l l i n g s i s t h e l o c a t i o n where t h e p l a i n t i f f s t r a n s a c t business. Therefore, t h e c o u r t ' s order declaring the covenant "void t o t h e e x t e n t t h a t it purports t o operate outside of t h e c i t y l i m i t s of B i l l i n g s " i s affirmed. The p l a i n t i f f s a l s o a s s e r t t h a t material questions of f a c t e x i s t e d when t h e c o u r t granted t h e defendants' motion f o r a summary judgment. They argue t h a t t h e t r i a l c o u r t should have determined whether t h e p l a i n t i f f s - c o n d u c t e d business i n a l l 3 2 counties alleged i n t h e i r complaint and whether Gary Sullivan controlled Team Lab o r merely had an i n t e r e s t i n Team Lab. Neither of these questions a r e m a t e r i a l here i n l i g h t of t h e f a c t t h a t t h e covenant i s r e s t r i c t e d t o t h e c i t y l i m i t s of BillirLgs, and t h a t t h e p l a i n t i f f s ' s a l e of chemicals i n B i l l i n g s is i n s i g n i f i c a n t . W e note i n passing t h a t the decision here might have been e n t i r e l y d i f f e r e n t w e r e t h e r e n o t a s t a t u t e which so c l e a r l y limited t h e scope of covenants n o t t o compete t o a s i n g l e c i t y . I n t e r c i t y and i n t e r s t a t e businesses are common today and under some circumstances, it i s reasonable t o e n f o r c e covenants t h a t cover t h e boundaries of an e n t i r e s t a t e . See Monogram I n d u s t r i e s , Inc. v. Sar I n d u s t r i e s (1976), 134 Cal. Rptr. 714, 64 Cal.App.3d 692; Esmark Inc. v. M c K e e (1978), 118 Ariz. 511, 578 P.2d 190. S e c t i o n s 28- 2-703, e t seq., MCA, w e r e enacted i n 1895, and t o t h e p r e s e n t day have n o t been amended. W e recommend t o t h e l e g i s l a t u r e t h a t it c o n s i d e r whether changes are now a p p r o p r i a t e . Judgment i s affirmed. T J u s t i c e W e concur: Chief J u s t i c e