Title: DOBBINS DEGUIRE TUCKER v RUTHE
Citation: N/A
Docket Number: 85-086
State: Montana
Issuer: Montana Supreme Court
Date: November 6, 1985

NO. 85-86 IN THE SUPREME COURT OF THE STATE OF MONTANA 1985 DOBBINS, DEGUIRE & TUCKER, P.C., Plaintiff and Appellant, RUTHERFORD, MacDONALD & OLSON, a partnership, et al., Defendants and Respondents. APPEAL FROM: District Court of the Fourth Judicial District, In and for the County of Missoula, The Honorable Douglas Harkin, Judge presiding. COUNSEL OF RECORD: For Appellant: Worden, Thane & Haines; Ron.ald A. Bender, Missoula, Montana For Respondent: Plulroney, Delaney & Scott; P. Mars Scott, Missoula, Montana Submitted on briefs: June 28, 1985 ~ ~ ~ i d ~ d : November 6, 1985 NQV 6 - 1985 Filed. M r . J u s t i c e Fred J. Weber d e l i v e r e d t h e Opinion o f t h e Court. Dobbins, DeGuire & Tucker, P.C., (Dobbins) sued Ruth- e r f o r d , MacDonald and Olson (defendants) a s a p a r t n e r s h i p and i n d i v i d u a l l y , f o r v i o l a t i o n of a p u b l i c accounting employment c o n t r a c t . The c o n t r a c t r e q u i r e d payment t o Dobbins i f defendants obtained c e r t a i n c l i e n t s o f Dobbins w i t h i n 12 months a f t e r employment termination. Upon motion of defendants t o d i s m i s s t h e complaint f o r f a i l u r e t o s t a t e s u f f i c i e n t f a c t s upon which r e l i e f could be g r a n t e d , t h e Missoula County D i s t r i c t Court dismissed t h e complaint. Dobbins appeals. W e r e v e r s e . The s o l e i s s u e on appeal i s whether t h e District Court e r r e d i n di-smissing Dobbins' complaint. The complaint a l l e g e d t h e following f a c t s : Retween November 1978 and October 1980, defendants signed w r i t t e n employment c o n t r a c t s w i t h Dobbins under which each agreed t h a t c e r t a i n r e s t r i c t i o n s would apply following t e r m i n a t i o n o f employment. The c o n t r a c t s i n p e r t i n e n t p a r t s t a t e d : 5. I f t h i s Agreement. i s terminated and Emp1.oyee e n t e r s i n t o a p u b l i c accounting b u s i n e s s f o r h i m s e l f , i n p a r t n e r s h i p w i t h one o r more accountants . . . Employee a g r e e s a s follows: a . To pay t o employer an amount equal t o one hundred p e r c e n t (100%) o f t h e g r o s s f e e s b i l l e d by Employer t o a p a r t i c u l a r c l i e n t o v e r t h e twelve month p e r i o d immediately preceding such t e r m i n a t i o n which was a c l i e n t o f Employer w i t h i n t h e twelve month p e r i o d p r i o r t o Employee's leaving Employer's employment, b u t which c l i e n t i s t h e r e a f t e r w i t h i n one y e a r of d a t e o f t e r m i n a t i o n served by Employee, Employee's p a r t n e r s , . . . b. Such sum s h a l l be paid i n monthly i n s t a l l m e n t s over a t h r e e y e a r p e r i o d , t h e f i r s t such i n s t a l l m e n t being due within t h i r t y (30) days o f t h e d a t e when Employee, Employee's p a r t n e r s , . . . does work f o r a p a r t i c u l a r c l i e n t , and which payments, e x c l u s i v e of t h e i n i t i a l pay- ment s h a l l i n c l u d e i n t e r e s t a s h e r e i n a f - ter s t a t e d . c. Such sum s h a l l b e a r i n t e r e s t a t t h e r a t e o f e i g h t p e r c e n t (8%) p e r annum on t h e d e c l i n i n g balance which i n t e r e s t s h a l l commence t h e d a t e f i r s t payment i s due. Employee o r h i s a u t h o r i z e d repre- s e n t a t i v e s s h a l l be allowed t o prepay any such amounts i n f u l l , o r i n p a r t , without p e n a l t y , provided t h a t i f paid only i n p a r t , t h a t t h e monthly i n s t a l l m e n t s t h e r e a f t e r r e q u i r e d sha 11 n o t be reduced. d. Employee a g r e e s t h a t he s h a l l provide a l l records necessary t o c a r r y o u t t h e i n t e n t of t h i s Agreement and s h a l l r e p o r t immediately t o Employer when s e r v i c e s have been provided a p a r t i c u l a r c l i e n t . 6 . Employee e n t e r s i n t o t h i s Agreement w i t h f u l l understanding o f t h e n a t u r e and e x t e n t covered by t h e restrictive agree- ments contained i n t h e immediately pre- ceding paragraph, and Employee r e a l i z e s t h a t because o f t h e unique n a t u r e o f t h e b u s i n e s s , t h i s Agreement would n o t be e n t e r e d i n t o without t h e Agreements contained h e r e i n . . . . One of t h e defendants worked f o r Dobbins u n t i l September 3 0 , 1983; t h e o t h e r two u n t i l October 31, 1983. While employed by Dobbins, t h e defendants became acquainted w i t h Dobbins' c l i e n t s . I n November 1983, t h e defendants opened a p u b l i c accounting o f f i c e i n Missoula where t h e Dobbins-office i s located. F i n a l l y , t h e complaint a l l e g e s t h a t t h e defendants have been engaged, and a r e now engaged, d i r e c t l y and i n d i r e c t l y through o t h e r s , i n a c c e p t i n g and s o l i c i t i n g accounting work from Dobbins ' c l i e n t s . The complaint a ].so a l l e g e s t h a t Dobbins h a s demanded an accounting, which t h e defendants have refused t o give. The complaint p r a y s for an accounting and payment o f t h e sum determined t o be due p l u s 8 p e r c e n t i n t e r e s t . The i s s u e o f whether t h e D i s t r i c t Court e r r e d i n d i s m i s s i n g Dobbins' complaint t u r n s on whether t h e above-quoted p r o v i s i o n s o f t h e employment c o n t r a c t a r e enforceable. Section 28-2-703, MCA, provides i n p e r t i n e n t p a r 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 q e n e r a l l void. ~ n y c o n t r a c t by-which anyone i : r e s t r a i n e d from e x e r c i s i n g a lawful p r o f e s s i o n , t r a d e , o r b u s i n e s s o f any kind, otherwise t h a n i s 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. Section 28-2-704, MCA, i n substance provides t h a t one who sells t h e goodwill o f a b u s i n e s s may a g r e e t o r e f r a i n from c a r r y i n g on a s i m i l a r b u s i n e s s under c e r t a i n c o n d i t i o n s w i t h i n c e r t a i n a r e a s . I n a s i m i l a r manner, S 28-2-705, MCA, i n substance provides t h a t on d i s s o l u t i o n of a p a r t n e r s h i p , p a r t n e r s may a g r e e t h a t a p a r t n e r may n o t c a r r y on a s i m i l a r b u s i n e s s w i t h i n t h o s e a r e a s . A s pointed o u t by t h e D i s t r i c t Court, n e i t h e r 55 28-2-704 o r -705 i s a p p l i c a b l e i n t h e p r e s e n t case. The D i s t r i c t Court r e l i e d on J. T. M i l l e r Co. v. Made1 (1978) , 176 Mont. 4 9 , 575 P. 2d 1321., i n reaching i t s conclu- s i o n t h a t t h e c o n t r a c t p r o v i s i o n s w e r e void under § 28-2-703, MCA. I n Madel, an insurance salesman signed an employment c o n t r a c t with t h e following covenants: The Employee a g r e e s and covenants t h a t f o r a p e r i o d o f f i v e (5) y e a r s a f t e r t h e t e r m i n a t i o n o f t h i s Agreement, he w i l l n o t d i r e c t l y o r i n d i r e c t l y own, manage, o p e r a t e , c o n t r o l , be employed by, p a r t i c i p a t e i n o r be connected i n any manner w i t h t h e ownership, management, o p e r a t i o n o r c o n t r o l o f any b u s i n e s s which sells c r e d i t l i f e , c r e d i t a c c i d e n t , h e a l t h o r o t h e r insurance t o any customer of t h e Employer w i t h whom t h e Employee has a t any t i m e had any d e a l i n g s on behalf o f t h e Employer; c o n t a c t o r s o l i c i t any customers o f t h e Employer with whom t h e Employee has a t any t i m e had any d e a l i n g s on behalf o f t h e Employ- e r ; o r s e l l o r d e l i v e r t o any customers of t h e Employer any insurance s o l d by t h e Employee while an Employee o f t h e Em- ployer a s set o u t i n t h i s c o n t r a c t . Madel, 1 7 6 Mont. 51, 575 P.2d 1322. The covenant e f f e c t i v e l y p r o h i b i t e d t h e insurance salesman from engaging i n t h e s a l e of insurance i n any manner f o r a period o f 5 y e a r s . T h i s Court concluded t h a t t h e r e s t r i c t i v e covenant d i d n o t q u a l i f y under t h e s t a t u t o r y exceptions o f what i s now S 28-2-703, MCA, and t h a t accordingly, t h e s t a t u t e p r o h i b i t e d t h e r e s t r a i n t a s s e r t e d i n t h e covenant. With regard t o t h e use o f c o n f i d e n t i a l information, t h i s Court pointed o u t t h a t t h e insurance salesman d i d nothing more than t o c o n t a c t banks, which w e r e obviously known and open t o a l l vendors o f c r e d i t l i f e i n s u r a n c e , and t h a t no p r i v i l e g e d information was r e q u i r e d . There a r e s t a t e m e n t s made i n Made1 which a r e s u f f i c i e n t l y broad t o support t h e conclusion o f t h e D i s t r i c t Court t h a t any t y p e o f a r e s t r i c t i o n upon t h e e x e r c i s e o f a lawful p r o f e s s i o n must be i n v a l i d a t e d . However, i n Madel t h e covenant n o t t o compete was, i n e f f e c t , an a b s o l u t e p r o h i b i t i o n upon Madel's r i g h t t o engage i n t h e b u s i n e s s o f s e l l i n g insurance. W e c o n s t r u e t h e holding i n Madel a s being l i m i t e d by t h a t f a c t . I n c o n t r a s t t o Madel, here t h e c o n t r a c t does n o t on i t s f a c e p r o h i b i t t h e defendants from engaging i n t h e b u s i n e s s o f p u b l i c accounting. I n f a c t , t h e c o n t r a c t does n o t even d i r e c t l y r e s t r a i n t h e defendants from e x e r c i s i n g o r engaging i n t h e p r o f e s s i o n o f p u b l i c accounting. The c o n t r a c t c o n t a i n s n e i t h e r area nor t i m e l i m i t a t i o n s on d e f e n d a n t s ' p r a c t i c e o f accounting. I n a d d i t i o n , it does n o t p r o h i b i t t h e defendants from u s i n g c o n f i d e n t i a l informa t i o n o b t a i n e d i n t h e course o f t h e i r employment a t Dobbins a s a b a s i s f o r s e c u r i n g Dobbins' c l i e n t s . I n substance, t h e c o n t r a c t r e q u i r e d payment o f a f e e i f t h e defendants obtained a Dobbins' c l i e n t w i t h i n 1 2 months a f t e r t h e i r employment w i t h Dobbins c e a s e d . On i t s f a c e , t h a t i s n o t a n u n r e a s o n a b l y l o n g p e r i o d . I n a d d i t i o n , an amount e q u a l t o 100% o f t h e g r o s s f e e s b i l l e d b y Dobbins o v e r th.e 1 2 month p e r i o d p r e c e d i n g t e r m i n a t i o n must b e p a i d i n m o n t h l y i n s t a l l m e n t s o v e r a t h r e e y e a r p e r i o d . T h i s s u g g e s t s t h a t t h e amount o f t h e fee and t h e method o f payment on t h e f a c e o f t h e c o n t r a c t d o n o t a p p e a r u n r e a s o n a b l e . I n a s i m i l a r manner, t h e r e q u i r e m e n t for t h e payment o f i n t e r e s t a t t h e r a t e o f 8 % d o e s n o t a p p e a r u n r e a s o n a b l e o n its f a c e . W e conclude. t h a t t h e c o n t r a c t p r o v i s i o n s between Dobbins and t h e d e f e n d a n t s a r e n o t c o m p a r a b l e t o t h e c o n t r a c t p r o v i s i o n s i n Madel. I n O ' N e i l l v. F e r r a r o ( 1 9 7 9 ) , 1 8 2 Mont. 214, 596 P.2d 1 9 7 , t h i s C o u r t c o n s i d e r e d a l e a s e p r o v i s i o n u n d e r w h i c h t h e l a n d l o r d a g r e e d it would n o t p e r m i t a c o m p e t i n g f u l l s e r v i c e r e s t a u r a n t t o b e m a i n t a i n e d a t t h e Bozeman H o t e l . The C o u r t c o n c l u d e d t h a t t h e c o v e n a n t p r e v e n t e d t h e o p e r a t i o n o f a Mexican food r e s t a u r a n t i n t h e same h o t e l and t h a t 5 2 8 - 2 - 7 0 3 , MCA, d i d n o t r e q u i r e a v o i d i n g o f a l l r e s t r i c t i o n s on e n g a g i n g i n a t r a d e . The C o u r t a d o p t e d a t e s t b y w h i c h r e a s o n a b l e c o v e n a n t s a r e t o be d i s t i n g u i s h e d from u n r e a s o n a b l e r e s t r a i n t s : T h r e e t h i n g s a r e e s s e n t i a l . . . [ f o r a r e a s o n a b l e ] c o v e n a n t : " (1) it must b e p a r t i a l o r r e s t r i c t e d i n i t s o p e r a t i o n i n r e s p e c t e i t h e r t o t i m e o r p l a c e ; ( 2 ) it must b e o n some good c o n s i d e r a t i o n ; and ( 3 ) it m u s t be r e a - s o n a b l e , t h a t i s , it s h o u l d a f f o r d o n l y a f a i r p r o t e c t i o n t o t h e i n t e r e s t s o f t h e p a r t y i n whose f a v o r it i s made, and must n o t b e s o l a r g e i n i t s o p e r a t i o n a s t o i n t e r f e r e w i t h t h e i n t e r e s t s o f t h e - p u b l i c . " E l d r i d g e v. J o h n s t o n ( 1 9 5 2 ) , 1 9 5 O r . 379, 245 P.2d-239, 250. O ' N e i l l , 182 Mont. 218-19, 596 P.2d 199. Although O ' N e i l l was d e c i d e d i n t h e c o n t e x t o f t r a d e , w e conclude t h a t s i m i l a r p r i n c i p l e s should b e a p p l i e d i n t h e p r e s e n t c a s e . The D i s t r i c t C o u r t r e f e r r e d t o t h e a n n o t a t i o n i n 13 A.L.R. F o u r t h 661. W e n o t e t h e g e n e r a l c o n c l u s i o n o f t h a t a n n o t a t i o n is c o n s i s t e n t w i t h o u r h o l d i n g i n t h e p r e s e n t c a s e . The a n n o t a t i o n p o i n t s o u t t h a t i n t h e absence o f a c o n t r o l l i n g s t a t u t e t h e e n f o r c e a b i l i t y o f a covenant n o t t o compete, a n c i l l a r y t o t h e withdrawal o f a p a r t n e r from a n a c c o u n t i n g f i r m , depends upon whether t h e r e s t r i c t i o n i s r e a s o n a b l y r e l a t e d t o t h e l e g i t i m a t e b u s i n e s s i n t e r e s t of t h e remaining p a r t n e r s and i s n o t unduly burdensome t o t h e covenantor o r t h e p u b l i c . F o r t h e a s s i s t a n c e o f t h e D i s t r i c t Court i n t h e e v e n t of t r i a l , w e s t a t e t h e f o l l o w i n g r u l e t o b e a p p l i e d i n d e t e r m i n i n g whether a covenant i s a r e a s o n a b l e r e s t r a i n t on t h e p r o f e s s i o n o f p u b l i c accounting: (1) The covenant should b e l i m i t e d i n o p e r a t i o n e i t h e r a s t o t i m e o r p l a c e ; ( 2 ) t h e covenant should b e based on some good c o n s i d e r a t i o n ; and ( 3 ) t h e covenant should a f f o r d a r e a s o n a b l e p r o t e c t i o n f o r and n o t impose an u n r e a s o n a b l e burden upon t h e employer, t h e employee o r t h e p u b l i c . T h i s t e s t r e q u i r e s a b a l a n c i n g o f t h e competing i n t e r e s t s o f t h e p u b l i c a s w e l l a s t h e employer and employee. W e hold t h a t t h e w r i t t e n c o n t r a c t p r o v i s i o n s d o n o t c o n s t i t u t e a r e s t r a i n t p r o h i b i t e d by § 28-2-703, MCA. W e r e v e r s e and remand w i t h i n s t r u c t i o n s t h a t t h e complaint s h a l l be r e i n s t a t e d by t h e D i s t r i c t Court and f u r t h e r p r o c e e d i n g s had c o n s i s t e n t w i t h t h i s o p i n i o n . We concur: - -9' ief Justice