Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C. , 362 Mont. 496 ( 2011 )


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  •                                                                                           November 22 2011
    DA 11-0147
    IN THE SUPREME COURT OF THE STATE OF MONTANA
    
    2011 MT 290
    DAWN M. WRIGG, CPA,
    Plaintiff and Appellant,
    v.
    JUNKERMIER, CLARK, CAMPANELLA,
    STEVENS, P.C.,
    Defendant and Appellee.
    APPEAL FROM:            District Court of the First Judicial District,
    In and For the County of Lewis and Clark, Cause No. ADV 2009-632
    Honorable Dorothy McCarter, Presiding Judge
    COUNSEL OF RECORD:
    For Appellant:
    Linda M. Deola, Morrison, Motl & Sherwood, Helena, Montana
    For Appellee:
    Sara R. Sexe, Marra, Sexe, Evenson & Bell, P.C., Great Falls, Montana
    Submitted on Briefs: September 7, 2011
    Decided: November 22, 2011
    Filed:
    __________________________________________
    Clerk
    Justice Brian Morris delivered the Opinion of the Court.
    ¶1     Dawn Wrigg (Wrigg) appeals from a declaration of the First Judicial District Court,
    Lewis and Clark County, that Junkermier, Clark, Campanella, Stevens, P.C. (JCCS) could
    enforce its covenant not to compete against Wrigg. We reverse.
    ¶2     Wrigg raises a dispositive issue that we rephrase as follows:
    ¶3     Can an employer enforce a covenant not to compete when the employer ends the
    employment relationship?
    ¶4     Wrigg is a certified public accountant. JCCS is an accounting firm. JCCS hired
    Wrigg as a staff accountant to work in JCCS’s Helena office in 1987. JCCS promoted
    Wrigg to a JCCS shareholder in November 2003. Wrigg signed her first Shareholder
    Agreement (Agreement) in January 2004. The 2004 Agreement expired by its terms. Wrigg
    signed a new Agreement in 2005 and again in 2007. The 2007 Agreement expired by its
    terms on June 30, 2009.
    ¶5     All the Agreements included an identical JCCS covenant. The JCCS covenant’s
    relevant terms stated:
    If this Agreement is terminated for any reason and Shareholder provides
    professional services in a business…in competition with JCCS the Shareholder
    agrees as follows:
    To pay to JCCS an amount equal to one hundred (100%) of the gross fees
    billed by JCCS to a particular client over the twelve month period immediately
    preceding such termination, if the client was a client of JCCS within the
    twelve month period prior to Shareholder’s leaving JCCS’ employment…and
    the particular client is thereafter within one year of date of termination served
    by Shareholder’s partners, or any professional services organization
    employing the Shareholder.
    2
    ¶6     Jerry Lehman, JCCS’s CEO, sent Wrigg a letter in May 2009 in which he informed
    Wrigg that JCCS would not renew Wrigg’s Agreement. The Agreement was set to expire on
    June 30, 2009. The letter stated that this outcome was best for JCCS and Wrigg “[g]iven the
    culture in the Helena office….” The letter also informed Wrigg that JCCS would pay
    Wrigg’s salary through June 30, 2009, although Wrigg’s employment would end
    immediately. Lehman concluded the letter by reminding Wrigg of the JCCS covenant.
    ¶7     Wrigg began seeking employment with other accounting firms.             These firms
    expressed concerns about hiring Wrigg, in part, due to the JCCS covenant. Rudd and
    Company (Rudd) eventually hired Wrigg.           Wrigg accepted this employment with a
    significant pay cut. Wrigg had earned an annual salary of $154,000 while at JCCS. Wrigg
    would earn $87,000 at Rudd. Wrigg agreed to the significant pay cut due to Rudd’s concerns
    about the JCCS covenant.
    ¶8     Wrigg concedes that she worked for, and solicited business from, JCCS’s clients
    within a year of termination. JCCS sent Wrigg a demand letter that sought compensation
    under the terms of the JCCS covenant. Wrigg filed an action for declaratory judgment in
    District Court to determine whether JCCS could enforce the covenant. The District Court
    applied the Dobbins test to determine that the covenant was reasonable, and therefore, could
    be enforced. Wrigg appeals.
    STANDARD OF REVIEW
    3
    ¶9     We review for correctness a district court’s interpretation of law pertaining to a
    declaratory judgment ruling. In re Estate of Marchwick, 
    2010 MT 129
    , ¶ 8, 
    356 Mont. 385
    , 
    234 P.3d 879
    .
    DISCUSSION
    ¶10    Can an employer enforce a covenant not to compete when the employer ends the
    employment relationship?
    ¶11    Montana law strongly disfavors covenants not to compete. Access Organics, Inc. v.
    Hernandez, 
    2008 MT 4
    , ¶ 17, 
    341 Mont. 73
    , 
    175 P.3d 899
    ; see § 28-2-703, MCA. As a
    result, we construe strictly covenants not to compete. Access Organics, ¶ 17. We also read
    covenants in a light most favorable to the employee. Dumont v. Tucker, 
    250 Mont. 417
    , 421,
    
    822 P.2d 96
    , 98 (1991). We void covenants that act as a full restraint on trade and in absence
    of an express statutory exception. Mungas v. Great Falls Clinic, LLP, 
    2009 MT 426
    , ¶¶ 39-
    40, 
    354 Mont. 50
    , 
    221 P.3d 1230
     (citing Dobbins, De Guire & Tucker, P.C. v. Rutherford,
    MacDonald & Olson, 
    218 Mont. 392
    , 396, 
    708 P.2d 577
    , 579 (1985)); § 28-2-703, MCA.
    ¶12    Wrigg agrees that the JCCS covenant imposes a partial restraint on trade. We review
    for reasonableness covenants that impose a partial restraint on trade. Mont. Mt. Prods. v.
    Curl, 
    2005 MT 102
    , ¶¶ 11-15, 
    327 Mont. 7
    , 
    112 P.3d 979
     (citing Dobbins, 218 Mont. at 397,
    708 P.2d at 580). A covenant that restrains trade only partially must meet the following
    three elements in order to be considered reasonable:
    (1) The covenant should be limited in operation either as to time or place;
    (2) the covenant should be based on some good consideration; and
    4
    (3) the covenant should afford reasonable protection for and not impose an
    unreasonable burden upon the employer, the employee, or the public.
    Mungas, ¶ 39 (citing Dobbins, 218 Mont. at 397, 708 P.2d at 580).
    ¶13    The District Court determined that the JCCS covenant satisfied all three elements.
    JCCS covenant is limited in time—one year—and place—Lewis and Clark County and its
    contiguous counties. The District Court also found that consideration accompanied the
    JCCS covenant. Wrigg had accepted the JCCS covenant each time that she signed a new
    employment contract. The District Court further determined that the JCCS covenant
    satisfied the third element as it did not entirely prevent Wrigg from practicing her profession.
    The District Court did not address whether the employer’s termination of the employment
    relationship affected a covenant’s enforcement.
    ¶14    Wrigg primarily disputes the District Court’s failure to consider whether JCCS can
    claim a business interest in the JCCS covenant. Wrigg argues that JCCS must assert a
    legitimate business interest in order to enforce the JCCS covenant. Wrigg suggests that the
    District Court should have concluded that any employer—including JCCS—lacks a
    legitimate business interest in a covenant when it terminates the employment relationship
    without cause.
    ¶15    JCCS provides no case law where a court has enforced a covenant when the employer
    has ended the employment relationship. JCCS also offers no policy argument to offset
    Montana’s public policy against restrictive covenants, especially when an employer
    5
    terminates the employment relationship. JCCS primarily contends instead that our case law
    binds us to rule in its favor.
    ¶16    JCCS relies heavily on Dobbins to argue the reasonableness of the JCCS covenant.
    Dobbins, 218 Mont. at 397, 708 P.2d at 580. JCCS correctly notes that the language in the
    Dobbins covenant mirrors the language in the JCCS covenant. Dobbins, 218 Mont. at 394,
    708 P.2d at 578. JCCS asserts that its use of the language deemed reasonable in Dobbins
    means that the JCCS covenant is per se reasonable. JCCS misinterprets Dobbins.
    ¶17    The accountant in Dobbins left his accounting firm with whom he had signed a
    covenant not to compete. Dobbins, 218 Mont. at 394, 708 P.2d at 578. The firm sought to
    enforce the covenant upon the accountant’s departure. The district court deemed the
    covenant unenforceable as a matter of law. Dobbins, 218 Mont. at 394, 708 P.2d at 578.
    This Court reversed. The Court characterized the covenant as only a partial restraint on trade
    that could be enforced if its terms were reasonable. Dobbins, 218 Mont. at 396, 708 P.2d at
    580. The Court remanded to allow the trial court to make factual findings as to the
    covenant’s reasonableness. Dobbins, 218 Mont. at 397, 708 P.2d at 580.
    ¶18    The Court relied largely on the formulation developed in 13 A.L.R. Fourth 661 to
    guide the district court on remand. The Court sought to balance “the competing interests” of
    the public as well as the employer and the employee. Dobbins, 218 Mont. at 397, 708 P.2d
    at 580. Dobbins accordingly did not determine that enforcement of a covenant that uses the
    same language as the JCCS covenant would be reasonable as a matter of law. Dobbins
    simply held that covenants, like the JCCS covenant, should be subject to a reasonableness
    6
    analysis under appropriate circumstances. These circumstances require that legitimate
    business reasons exist to justify the covenant.
    ¶19    This requirement acknowledges the long standing principle that a covenant that serves
    no legitimate business interest necessarily is oppressive and invalid. Richard A. Lord,
    Williston on Contracts Vol. 6, § 30:4, 164-75 (4th ed., West 2009). This commentator
    recognized that a covenant “must be ancillary to a legitimate business undertaking” to be
    enforced in most jurisdictions based on deep, historical roots of this requirement in English
    and American common law. Lord, § 30:4 at 164-75. Section 188(1)(a) of the Restatement
    (Second) of Contracts, (1981), similarly proposes that a covenant may not be enforced if the
    “restraint is greater than is needed to protect the [employer’s] legitimate interest.” The
    obvious implication is that a covenant without a legitimate interest is unenforceable as it
    necessarily imposes a greater restraint than is needed.
    ¶20    Courts in most jurisdictions have agreed. For example, the New Hampshire Supreme
    Court analyzes a covenant’s enforceability by addressing the reasonableness of a given
    restraint. The court assesses reasonableness, in turn, by trying “to identify the legitimate
    interest of the employer.” Syncom Indus., Inc. v. Wood, 
    920 A.2d 1178
    , 1185 (N.H. 2007).
    Similarly, the Idaho Supreme Court agrees that “[t]he first issue the Court must consider is
    whether [the employer] has a legitimate interest worthy of protection” in assessing a
    covenant’s enforceability. Freiburger v. J-U-B Engrs., Inc., 
    111 P.3d 100
    , 105 (Idaho 2005).
    ¶21    Courts will not enforce covenants if an employer lacks a legitimate business interest.
    The Second Circuit declined to address a covenant’s reasonableness when it determined that
    7
    the employer lacked a legitimate interest in its covenant. Amer. Inst. of Chem. Engrs. v.
    Reber-Friel Co., 
    682 F.2d 382
    , 387 (2d Cir. 1982). An employer lacked a legitimate interest
    in preventing competition from a former employee when the employer’s customer list readily
    was attainable from other sources. Amer. Inst. of Chem. Engrs., 682 F.2d at 387. The
    Pennsylvania Supreme Court similarly declined to enforce a covenant when it determined
    than an employer lacked a “protectable business interest.” Hess v. Gebhard & Co., 
    808 A.2d 912
    , 922 (Pa. 2002). The employer could not claim good will as a legitimate interest when
    the employer had valued the business’s good will at $0 in an earlier contract to purchase the
    business. Hess, 808 A.2d at 922.
    ¶22    We previously have not addressed directly whether an employer must establish a
    legitimate business interest in order to enforce a covenant. The Dobbins test itself does not
    explicitly require that an employer possess a legitimate interest in the covenant. The Court
    in Dobbins cited the ALR’s requirement, however, that a covenant’s restrictions reasonably
    be related to a “legitimate business interest.” Dobbins, 218 Mont. at 397, 708 P.2d at 580.
    Dobbins’s emphasis on an employer’s legitimate business interest leads us to conclude that
    the requirement that an employer establish a legitimate interest in a covenant before we
    review it for reasonableness remains implicit in the Dobbins analysis. We adopt expressly
    the requirement that an employer must establish a legitimate business interest as a threshold
    step to our analysis of the reasonableness of a covenant. This approach comports with the
    disfavor of covenants not to compete expressed in Montana law. Access Organics, ¶ 17;
    § 27-2-703, MCA.
    8
    ¶23    The District Court did not address whether the JCCS covenant served a legitimate
    business interest. Our previous case law has not defined the nature of the business interest
    that a covenant serves. We look instead to other jurisdictions that have analyzed the nature
    of a legitimate business interest.
    ¶24     The Restatement defines a legitimate business interest as an interest that must
    necessarily be enforced to protect the basis of the employer’s bargain. Restatement (Second)
    of Contracts at § 188, cmt. b. An employer possesses a legitimate interest to protect itself
    from an employee appropriating valuable trade information, good will, and customer
    relationships to compete directly against—and take business from—his former employer.
    Guardian Fiberglass, Inc. v. Whit Davis Lumber Co., 
    509 F.3d 512
    , 516 (8th Cir. 2007).
    These legitimate interests necessitate court protection when an employer retains inadequate
    remedies—absent a covenant—to prevent an employee from appropriating this valuable
    information to compete against his former employer. See A.E.P. Indus., Inc. v. McClure, 
    302 S.E.2d 754
    , 763-64 (N.C. 1983).
    ¶25    An employee, correspondingly, has little disincentive to enrich himself by taking
    economic advantage of his employer. A covenant may be necessary, therefore, to prevent an
    employee from exploiting his employment to later compete and capture the employer’s
    market. Rao v. Rao, 
    718 F.2d 219
    , 224 (7th Cir. 1983). This risk can make the covenant
    necessary as the employer may not get the full value of the employment contract if it cannot
    confidently give the employee access to confidential information and client relationships
    9
    needed for the most efficient performance of his job. Restatement (Second) of Contracts at
    § 188, cmt. b.
    ¶26    Courts often enforce a covenant when it protects against an employee using customer
    relationships and information acquired during the employment relationship to compete
    directly against his former employer. United Labs, Inc. v. Kuykendall, 
    370 S.E.2d 375
    , 381-
    82 (N.C. 1988). The employee in United Labs, Inc. worked as a sales representative for a
    chemical company. The sales representative resigned his position with the company to work
    for the company’s competitor.       United Labs, Inc., 370 S.E.2d at 378.         The sales
    representative contacted customers whom he had serviced while employed with the chemical
    company to generate new business. United Labs, Inc., 370 S.E.2d at 378.
    ¶27    The North Carolina Supreme Court recognized that “protection of customer
    relationships and goodwill against misappropriation by departing employees” serves as a
    legitimate protectable interest of the employer. United Labs, Inc., 370 S.E.2d at 381. Good
    will and customer relationships need protection when the customer primarily communicates
    with the employer through the employee. United Labs, Inc., 370 S.E.2d at 381. The Court
    determined that the sales representative had gained extensive personal relationships with the
    company’s customers and intimate knowledge of these customers’ buying needs. United
    Labs, Inc., 370 S.E.2d at 382.
    ¶28    In contrast, courts seem less likely to determine that a legitimate business interest
    exists when an employer needs no covenant to protect customer relationships or valuable
    trade information.   Boisen v. Peterson Flying Serv., Inc., 
    383 N.W.2d 29
    , 33-35 (Neb.
    10
    1986). The employee in Boisen worked as a pilot for an aviation services company. Boisen,
    383 N.W.2d at 31. The company discharged the pilot after four years. Boisen, 383 N.W.2d
    at 32. The pilot sought to establish his own aviation services business after his discharge.
    The Nebraska Supreme Court declined to enforce the covenant. Boisen, 383 N.W.2d at 33-
    35. The court accepted that an employer’s legitimate interest in a covenant prevents an
    employee from using information or relationships with customers acquired during the scope
    of the employment relationship to compete with the employer. Boisen, 383 N.W.2d at 33-
    35. The court refused to enforce the covenant, however, where the pilot had gained no
    valuable trade secrets and had not interacted with any of the company’s customers during his
    employment. Boisen, 383 N.W.2d at 34-35.
    ¶29    These cases demonstrate that a legitimate business interest in a covenant requiresthat
    a restriction on post-employment activities be necessary to protect an employer’s good will,
    customer relationships, or trade information. See Guardian Fiberglass, Inc., 509 F.3d at
    516; Boisen, 383 N.W.2d at 34-35; Restatement (Second) of Contracts at § 188, cmt. b. This
    limitation ensures that businesses will use a covenant only when less restrictive measures
    will not suffice. Wrigg arguably interacted with JCCS’s clients during her employment.
    JCCS never alleges that Wrigg acquired any JCCS trade secrets or intimate knowledge
    regarding any special accounting needs of JCCS’s clients. We turn then to address whether
    JCCS can assert a legitimate business interest to enforce the covenant when it terminated
    Wrigg.
    11
    ¶30    We begin with the premise that Montana law generally disfavors covenants not to
    compete. Access Organics, Inc., ¶ 17; see § 28-2-703, MCA. This disfavor only heightens
    when an employer chooses to end the employment relationship and yet seeks to enforce the
    covenant not to compete. See Morris v. Schroder Capital Mgmt. Intl., 
    859 N.E.2d 503
    , 506-
    07 (N.Y. 2006); see also C. Monitoring Serv., Inc. v. Zakinski, 
    553 N.W.2d 513
    , 520 (S.D.
    1996). A covenant strips an employee of his livelihood. See Mont. Mt. Prods., ¶ 17. Courts
    disfavor this harsh result. As discussed, however, courts will tolerate this restriction on an
    employee’s livelihood under appropriate circumstances when the employee initiates the
    termination. See Morris, 859 N.E.2d at 506-07.
    ¶31    As noted by the New York court in Morris, an employee who contemplates
    terminating his employment faces a choice. The employee may choose to preserve his
    livelihood under an employment contract by remaining with the employer and not
    competing. On the other hand, the employee may elect to risk losing his livelihood by
    leaving his employment voluntarily to engage in competition with his former employer.
    Morris, 859 N.E.2d at 506. The employee makes an informed decision under these
    circumstances about the risks associated with a covenant’s enforcement and voluntarily
    chooses to encounter those risks. Morris, 859 N.E.2d at 506.
    ¶32    No informed decision exists, however, when an employee departs involuntarily.
    Morris, 859 N.E.2d at 507. Enforcement of the covenant could impoverish an employee
    who has done nothing to warrant his termination. Courts have noted that termination creates
    inequitable circumstances for an employee. The Iowa Supreme Court declined to enjoin a
    12
    salesman whom the employer had terminated due to a recession. Ma & Pa, Inc. v. Kelly, 
    342 N.W.2d 500
    , 503 (Iowa 1984). The equities balanced heavily in the salesman’s favor as not
    allowing him to practice his trade would have a profound economic hardship on the
    employee and his family. Ma & Pa, Inc., 342 N.W.2d at 503. The New York Court of
    Appeals similarly declined to enforce a covenant when the employer terminated the
    employee without cause. Post v. Merrill Lynch, Pierce, Feener, & Smith, 
    397 N.E.2d 358
    ,
    360-61 (N.Y. 1979). Enforcement would allow an employer “to economically cripple a
    former employee and simultaneously deny other potential employers his services” when the
    employer, without reason, creates the employee’s need to compete. Post, 397 N.E.2d at 360-
    61.
    ¶33    Courts accordingly have determined that the circumstances surrounding the
    employee’s departure should be considered before enforcing the covenant. The Tennessee
    Supreme Court stated that an employer terminating an employee without cause “clearly has a
    bearing on whether a court…should enforce a non-competition covenant.” C. Adjustment
    Bureau, Inc. v. Ingram, 
    678 S.W.2d 28
    , 35 (Tenn. 1984). The South Dakota Supreme Court
    similarly determined that a stricter standard to enforce covenants applied when the employee
    had been terminated without cause. C. Monitoring Serv., Inc., 553 N.W.2d at 520. The
    court cited the consensus among various jurisdictions that courts should scrutinize highly a
    covenant’s enforcement given the involuntary nature of the departure. C. Monitoring Serv.,
    Inc., 553 N.W.2d at 520-21.
    13
    ¶34    Courts have provided—in accordance with this heightened disfavor—various
    rationales for why an employer may lack a legitimate business interest when it terminates the
    employment relationship. For example, the Seventh Circuit determined that a covenant’s
    enforcement proved unnecessary to protect the employer. Rao, 718 F.2d at 224. A doctor
    and a medical practice had entered into a two year employment agreement. Rao, 718 F.2d at
    221. The agreement included a covenant. The practice informed the doctor that it would not
    renew the contract after the two year term expired. The practice provided no reason for the
    non-renewal. Rao, 718 F.2d at 221.
    ¶35    The Seventh Circuit analyzed the covenant’s enforceability, under Illinois law, by
    addressing whether the employer had a legitimate business interest in the covenant. Rao,
    718 F.2d at 223. The court acknowledged that a covenant serves a legitimate business
    interest when it prevents an employee from appropriating trade secrets and customer
    relationships to compete against the employer. Rao, 718 F.2d at 224. The court determined
    that this legitimate interest did not warrant protection, however, when the employer
    terminates the employment relationship. The practice could have prevented the doctor’s
    competition simply by maintaining the employment relationship. Rao, 718 F.2d at 224.
    ¶36    A Pennsylvania court similarly determined that an employer could not claim a
    legitimate business interest when it terminated an employee without cause. Insulation Corp.
    of Amer. v. Brobston, 
    667 A.2d 729
    , 735 (Pa. Super. 1994). An employer’s decision to end
    the employment relationship reveals the employer’s belief that the employee is incapable of
    generating profits for the employer. Insulation Corp., 667 A.2d at 735. It would be
    14
    disingenuous for an employer to claim an employee was worthless to the business and
    simultaneously claim that the employee constituted an existential competitive threat.
    Insulation Corp., 667 A.2d at 736. The employer could not claim that it was in need of
    protection, and, therefore, could not demonstrate a legitimate business interest in the
    covenant.
    ¶37    We agree that an employer normally lacks a legitimate business interest in a covenant
    when it chooses to end the employment relationship. Maintenance of the employment
    relationship represents an employer's best method to prevent competition from an employee.
    Rao, 718 F.2d at 224. An employer needs no covenant to protect its business in these
    circumstances as the employer sits in the best position to protect itself simply by maintaining
    the employment relationship. Rao, 718 F.2d at 224. An employer also cannot claim that it
    needs protection from employee competition when the employer has stated implicitly that the
    employee is incapable of generating profits. Insulation Corp., 667 A.2d at 736. A covenant
    serves only to prevent competition when an employer chooses to end the employment
    relationship. Rao, 718 F.2d at 224. We do not consider this interest legitimate. An
    employer assumes the risk of competition from a former employee when it chooses to end
    the employment relationship.
    ¶38    We recognize that circumstances may exist in which the employer chooses to end the
    employment relationship due to conduct of the employee that has proven detrimental to the
    employer or the employer’s clients. This employee conduct, or misconduct, could provide
    the employer with a legitimate business reason to seek to enforce the covenant. The
    15
    employer under those circumstances would have to establish the legitimacy of the business
    interest and the nature of the risk posed by the former employee’s competition. See, e.g.,
    Whitmyer Bros., Inc. v. Doyle, 
    274 A.2d 577
    , 583 (N.J. 1971) (refusing to enforce a covenant
    where the employer had failed to make an adequate evidentiary showing that it needed to
    enforce the covenant to protect against the employee using trade secrets to compete with the
    company).
    ¶39    JCCS argues that the reason for the employee’s departure should be immaterial to a
    covenant’s enforceability. JCCS correctly notes that many of our decisions regarding
    covenants have not specified the circumstances under which the employee departed. See,
    e.g., Mont. Mt. Prods., ¶ 6. JCCS interprets this lack of specificity as an implicit holding that
    which party terminates the employment relationship as being irrelevant to the enforceability
    of covenants. We cannot agree.
    ¶40    The Court’s cases address the issues presented by the parties. Employers primarily
    raised the issue of a district court’s failure to analyze a covenant’s reasonableness. Mungas,
    ¶¶ 16, 40; Mont. Mt. Prods., ¶¶ 11-17; Dobbins, 218 Mont. at 397, 708 P.2d at 580. Other
    cases have focused on whether adequate consideration accompanied the covenant. Access
    Organics, Inc., ¶ 18. The remaining cases involved overly broad covenants under the
    Dobbins test. Daniels v. Thomas, Dean & Hoskins, Inc., 
    246 Mont. 125
    , 144-45, 
    804 P.2d 359
    , 370-71; St. Med. Oxygen & Supply v. Amer. Med. Oxygen Co., 
    240 Mont. 70
    , 74-75,
    
    782 P.2d 359
    , 370-71 (1989). The Court’s lack of specificity regarding the manner by which
    these previous parties had ended the employment relationship simply means that the parties
    16
    have not placed before the Court the issue of a covenant’s enforcement when the employer
    chooses to end the employment relationship.
    ¶41    JCCS finally argues that it never terminated Wrigg. The Agreement with Wrigg had
    expired. JCCS paid Wrigg through the date that the Agreement expired on June 30, 2009.
    JCCS contends that it fully performed its contractual obligations under the Agreement and
    waived performance of Wrigg’s obligations. JCCS suggests that a distinction exists between
    ending employment without cause and deciding not to renew an agreement. JCCS concedes
    that it must have cause to terminate a contractual relationship, but argues that it faces no
    legal obligation to renew an expired contract.
    ¶42    Whether JCCS terminated the Agreement, or it expired under its own terms, proves
    immaterial to our analysis. JCCS undoubtedly had the right not to renew its Agreement with
    Wrigg. We face the issue, however, of whether JCCS can assert a legitimate business
    interest to justify enforcement of its covenant when JCCS chose to end the employment
    relationship. Our analysis concerning an employer’s legitimate interest in the enforceability
    of covenants applies to both a terminated contract and an expired contract. See Rao, 718
    F.2d at 221-24.
    ¶43    A covenant may serve a legitimate business interest when an employee voluntarily
    leaves his employment to compete against, and take business from, his former employer.
    Rao, 718 F.2d at 224. A court should analyze whether the former employee used trade
    secrets, customer relationships, or proprietary information that would provide an employee
    with an unfair advantage. Boisen, 383 N.W.2d at 34. An employer would have difficulty
    17
    asserting this same legitimate business interest, however, when the employer initiates the
    termination. Rao, 718 F.2d at 224.
    ¶44   JCCS clearly ended the employment relationship here as evidenced by its May 2009
    letter to Wrigg. The letter informs Wrigg that JCCS would not renew the Agreement that
    was set to expire on June 30, 2009. The letter describes no refusal or failure by Wrigg to
    comply with JCCS policies or standards. The letter also describes no facts that would give
    rise to misconduct or allege that Wrigg had failed to perform diligently her employment
    duties. JCCS elected to terminate its employment relationship with Wrigg, and, accordingly,
    cannot enforce its covenant under these circumstances. Rao, 718 F.2d at 224. We reverse
    and remand with instructions to the District Court to vacate its declaration that JCCS can
    enforce its covenant and enter judgment in Wrigg’s favor.
    /S/ BRIAN MORRIS
    We Concur:
    /S/ MIKE McGRATH
    /S/ PATRICIA COTTER
    /S/ MICHAEL E WHEAT
    /S/ BETH BAKER
    18
    

Document Info

Docket Number: DA 11-0147

Citation Numbers: 2011 MT 290, 362 Mont. 496, 265 P.3d 646, 33 I.E.R. Cas. (BNA) 773, 2011 Mont. LEXIS 399

Judges: Morris, McGrath, Cotter, Wheat, Baker

Filed Date: 11/22/2011

Precedential Status: Precedential

Modified Date: 10/18/2024

Authorities (18)

cr-mohan-rao-md-sc-counterdefendant-cross-v-m-hari-kishan-rao , 718 F.2d 219 ( 1983 )

Dobbins, DeGuire & Tucker, P.C. v. Rutherford, MacDonald & ... , 218 Mont. 392 ( 1985 )

Daniels v. Thomas, Dean & Hoskins, Inc. , 246 Mont. 125 ( 1990 )

Access Organics, Inc. v. Hernandez , 341 Mont. 73 ( 2008 )

Mungas v. Great Falls Clinic, LLP , 354 Mont. 50 ( 2009 )

In Re the Estate of Marchwick , 356 Mont. 385 ( 2010 )

Boisen v. Petersen Flying Service, Inc. , 222 Neb. 239 ( 1986 )

Syncom Industries, Inc. v. Wood , 155 N.H. 73 ( 2007 )

Guardian Fiberglass, Inc. v. Whit Davis Lumber Co. , 509 F.3d 512 ( 2007 )

Montana Mountain Products v. Curl , 327 Mont. 7 ( 2005 )

Ma & Pa, Inc. v. Kelly , 1984 Iowa Sup. LEXIS 1011 ( 1984 )

American Institute of Chemical Engineers v. Reber-Friel ... , 682 F.2d 382 ( 1982 )

Dumont v. Tucker , 250 Mont. 417 ( 1991 )

Whitmyer Bros., Inc. v. DOYLE , 58 N.J. 25 ( 1971 )

United Laboratories, Inc. v. Kuykendall , 322 N.C. 643 ( 1988 )

Freiburger v. J-U-B Engineers, Inc. , 141 Idaho 415 ( 2005 )

A.E.P. Industries, Inc. v. McClure , 308 N.C. 393 ( 1983 )

Hess v. Gebhard & Co. Inc. , 570 Pa. 148 ( 2002 )

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