Dobbins Deguire Tucker v. Ruthe ( 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 : 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