Court Opinion

ID: 878716
Source: CourtListenerOpinion
Date Created: 2013-06-04 22:52:11.878105+00
Date Added: 2024-06-11T12:39:22.229032
License: Public Domain

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 : 6, 1985
                                                                 November

     NQV 6
Filed.       - 1985
Mr.   J u s t i c e F r e d J. Weber d e l i v e r e d t h e O p i n i o n o f t h e C o u r t .

        Dobbins,        DeGuire       &    Tucker,       P.C.,      ( D o b b i n s ) s u e d Ruth-

e r f o r d , MacDonald and Olson ( d e f e n d a n t s ) 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 o f a p u b l i c a c c o u n t i n g employment

contract.               The    contract          required        payment          to   Dobbins    if

defendants         obtained         certain         clients       of    Dobbins        within     12

months       after        employment             termination.              Upon        motion     of

defendants         to    dismiss          the    complaint        for     failure        to   state

sufficient         facts      upon        which     relief       could      be     granted,      the

Missoula        County        District          Court      dismissed          the      complaint.

Dobbins a p p e a l s .       W e reverse.

        The s o l e i s s u e on a p p e a l i s w h e t h e r t h e D i s t r i c t C o u r t

e r r e d i n di-smissing Dobbins' complaint.

        The c o m p l a i n t a l l e g e d t h e f o l l o w i n g f a c t s :

        Retween         November          1978     and     October        1980,        defendants

s i g n e d w r i t t e n employment c o n t r a c t s w i t h Dobbins u n d e r which

e a c h a g r e e d t h a t c e r t a i n r e s t r i c t i o n s would a p p l y f o l l o w i n g

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

stated:

           5.  I f t h i s Agreement. i s t e r m i n a t e d and
           Emp1.oyee e n t e r s i n t o a p u b l i c a c c o u n t i n g
           business f o r himself, i n partnership with
           one o r more a c c o u n t a n t s            ...
                                                           Employee
           agrees a s follows:

           a.      To pay t o employer a n amount e q u a l t o
           one hundred p e r c e n t ( 1 0 0 % ) 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
           t w e l v e month p e r i o d p r i o r t o Employee's
           l e a v i n g E m p l o y e r ' 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 o f
           d a t e o f t e r m i n a t i o n s e r v e d by Employee,
           Employee's p a r t n e r s ,          ...
           b.      Such sum s h a l l b e p a i d i n monthly
           installments over a three year period,
           t h e f i r s t s u c h i n s t a l l m e n t b e i n g due
           w i t h i n t h i r t y ( 3 0 ) d a y s 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 stated.

           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 b a l a n c e which             interest
           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 r e p r e -
           s e n t a t i v e s s h a l l b e a l l o w e d t o p r e p a y any
           s u c h amounts i n f u l l , o r i n p a r t , w i t h o u t
           penalty, provided t h a t i f paid only i n
           part,          that       the      monthly        installments
           t h e r e a f t e r r e q u i r e d sha 1 1 n o t b e r e d u c e d .

           d.      Employee a g r e e s t h a t h e s h a l l p r o v i d e
           a l l records necessary t o carry out 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
           i m m e d i a t e l y 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 u n d e r s t a n d i n g o f t h e n a t u r e and
           e x t e n t c o v e r e d by t h e r e s t r i c t i v e a g r e e -
           ments c o n t a i n e d i n t h e immediately pre-
           c e d i n g p a r a g r a p h , 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 b e
           entered          into       without          the    Agreements
           contained herein.             ...
O n e of t h e d e f e n d a n t s 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 O c t o b e r 3 1 ,      1983.       While employed

by   Dobbins,        t h e d e f e n d a n t s became        acquainted w i t h Dobbins'

clients.         I n November         1 9 8 3 , t h e d e f e n d a n t s opened a p u b l i c

accounting o f f i c e           i n Missoula       where t h e Dobbins-office                 is

located.         Finally,        t h e complaint a l l e g e s t h a t t h e defendants

have      been      engaged,        and      are       now    engaged,          directly      and

indirectly         through         others,        in     accepting          and      soliciting

a c c o u n t i n g work    from Dobbins '          clients.          The c o m p l a i n t a ].so

a l l e g e s t h a t Dobbins h a s demanded an a c c o u n t i n g , which t h e

d e f e n d a n t s have r e f u s e d t o g i v e .     The c o m p l a i n t p r a y s for a n

a c c o u n t i n g and payment o f t h e sum d e t e r m i n e d t o b e due p l u s 8

percent i n t e r e s t .

        The      issue      of     whether       the     District         Court       erred    in

dismissing          Dobbins'          complaint           turns        on         whether     the

above-quoted          provisions           of     the      employment           contract      are
enforceable.             S e c t i o n 28-2-703,       MCA,     provides i n pertinent

part:

           Contracts 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 tby-which        anyone i :
           restrained             from      exercising         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
           k i n d , o t h e r w i s e t h a n i s p r o v i d e d f o r by
           28-2-704 o r 28-2-705,                 is t o t h a t extent
           void.

        Section       28-2-704,       MCA,     in    substance provides              t h a t one

who s e l l s t h e g o o d w i l l     of   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 u n d e r c e r t a i n c o n d i t i o n s

within certain areas.                 I n a s i m i l a r manner,        S 28-2-705,         MCA,

i n s u b s t a n c e p r o v i d e s 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

business within those areas.                     A s p o i n t e d o u t by t h e D i s t r i c t

Court,      neither       5 5 28-2-704         or    -705      is    applicable         in    the

present case.

        The D i s t r i c t C o u r t r e l i e d on J. T .         M i l l e r Co. v .    Made1

(1978) , 176 Mont. 49,   5 7 5 P.2d 1321., i n r e a c h i n g i t s c o n c l u -

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 i n s u r a n c e salesman        s i g n e d a n employment

c o n t r a c t with t h e following covenants:

           The Employee a g r e e s and c o v e n a n t s t h a t
           f o r a period o f f i v e (5) years 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, h e 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,
           operate,             control,         be      employed       by,
           p a r t i c i p a t e i n o r b e c o n n e c t e d i n any
           manner w i t h t h e o w n e r s h i p , 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 s e l l s 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 i n s u r a n c e t o any customer
           o f t h e Employer w i t h whom t h e Employee
           h a s a t a n y t i m e had a n y d e a l i n g s on
           behalf           of    the    Employer;          contact o r
           s o l i c i t a n y c u s t o m e r s o f t h e Employer
           w i t h whom t h e Employee h a s a t any t i m e
           had any d e a l i n g s on b e h a l f 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 c u s t o m e r s
           of t h e Employer a n y i n s u r a n c e s o l d by t h e
           Employee w h i l e a n 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. 5 1 , 575 P.2d 1322.           The c o v e n a n t e f f e c t i v e l y

p r o h i b i t e d t h e i n s u r a n c e s a l e s m a n from e n g a g i n g i n t h e s a l e

of   i n s u r a n c e i n a n y manner f o r a p e r i o d                  of    5 years.          This

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      the    s t a t u t o r y exceptions          of     what         i s now S 28-2-703,

MCA,      and      that        accordingly,            the     statute            prohibited           the

r e s t r a i n t a s s e r t e d i n t h e covenant.                With r e g a r d t o t h e u s e

of 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           n o t h i n g more t h a n         t o c o n t a c t banks,

which w e r e o b v i o u s l y known and open t o a l l v e n d o r s o f c r e d i t

life      insurance,           and        that    no    privileged                information         was

required.

        There        are        statements             made         in       Made1       which        are

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

C o u r t 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

l a w f u l p r o f e s s i o n must b e i n v a l i d a t e d .         However, i n Madel t h e

covenant         not      to     compete         was,         in       effect,          an    absolute

p r o h i b i t i o n upon M a d e l ' s r i g h t t o e n g a g e 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 h o l d i n g i n Madel a s b e i n g

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, h e r e t h e c o n t r a c t d o e s n o t on i t s

f a c e p r o h i b i t t h e d e f e n d a n t s from e n g a g i n g i n t h e b u s i n e s s o f

public       accounting.              In     fact,      the    contract            does      not     even

d i r e c t l y r e s t r a i n t h e d e f e n d a n t s from e x e r c i s i n g o r e n g a g i n g

in     the     profession            of    public       accounting.                  The      contract

contains         neither       area       nor    time    limitations               on    defendants'

p r a c t i c e of accounting.                In addition,               it d o e s n o t p r o h i b i t

t h e d e f e n d a n t s 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 c o u r s e 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 s u b s t a n c e , 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

the defendants obtained                     a Dobbins'         c l i e n t within            1 2 months
after      their       employment          with       Dobbins      ceased.              On    its    face,

that     is n o t an unreasonably                       long period.              In    addition,         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         period       preceding          t e r m i n a t i o n must         be paid      in

monthly 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 period.                    This suggests

t h a t t h e a m o u n t o f t h e fee a n d t h e m e t h o d o f p a y m e n t o n t h e

face      of     the     contract         do     not      appear      unreasonable.                  In    a

s i m i l a r manner,        t h e requirement             for t h e payment o f i n t e r e s t

a t t h e r a t e of         8% does n o t appear unreasonable on its face.

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 defendants a r e n o t comparable 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.

        In     O'Neill       v.    Ferraro           (1979),    1 8 2 Mont. 214,    596 P.2d
197, t h i s Court considered a l e a s e p r o v i s i o n under which t h e

l a n d l o r d a g r e e d it w o u l d 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

concluded          that      the     covenant           prevented          the    operation          of    a

Mexican          food        restaurant            in     the      same          hotel        and    that

528-2-703,              MCA,       did       not        require        a     voiding            of     all

restrictions            on    engaging i n a             trade.        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 :

             Three t h i n g s a r e e s s e n t i a l          ...        [for a
             reasonable] covenant:

             " (1) it m u s t b e p a r t i a l o r r e s t r i c t e d i n
             its operation i n respect e i t h e r t o t i m e
             or place;              ( 2 ) i t must b e o n some good
             c o n s i d e r a t i o n ; a n d ( 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 protection t o the interests o f the
             p a r t y i n w h o s e f a v o r it i s m a d e , a n d m u s t
             not be s o large i n its operation a s to
             -n t e r f e r e
             i                     with         the   interests of            the
             public."               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 . 3 7 9 , 2 4 5 P.2d-239,            250.
O'Neill,         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 c o n c l u d e 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 case.

         The      District       Court      referred            to   the         annotation       in    13

A.L.R.        Fourth      661.      We    note t h e general                 conclusion o f         that

annotation           is    consistent        with         our    holding           in   the   present

case.          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 of          a

control 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 not t o

compete,         ancillary        to     t h e withdrawal            of      a    partner     from a n

accounting           firm,       depends      upon        whether           the    restriction          is
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           partners       and      is    not      unduly           burdensome        to       the

covenantor o r t h e public.

         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 C o u r t i n t h e e v e n t of

trial,         we       state    the      following             rule        to     be   applied         in

d e t e r m i n i n g w h e t h e r a c o v e n a n t 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 profession of p u b l i c accounting:

               (1) The c o v e n a n t s h o u l d b e l i m i t e d i n
              operation e i t h e r a s t o t i m e o r place; (2)
              t h e c o v e n a n t s h o u l d b e b a s e d o n some good
              consideration;              and      (3)       the   covenant
              should a f f o r d a reasonable p r o t e c t i o n f o r
              and n o t impose a n u n r e a s o n a b l e b u r d e n
              upon t h e e m p l o y e r , t h e e m p l o y e e o r t h e
              public.

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.

         We     hold      that    the     written         contract           provisions        do      not

constitute          a     restraint       prohibited            by     §   28-2-703,       MCA.        We

r e v e r s e a n d remand w i t h i n s t r u c t i o n s t h a t t h e c o m p l a i n t 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