WESTERN MONT CLINIC v JACOBSON

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No. 13024 I N THE SUPREME COURT OF THE STATE OF MONTANA WESTERN M N A A C L I N I C , OTN P l a i n t i f f and A p p e l l a n t , DAVID P. JACOBSON, M.D., Defendant and Respondent. Appeal from: D i s t r i c t Court of t h e F o u r t h J u d i c i a l D i s t r i c t , Honorable J a c k L. Green, Judge p r e s i d i n g . Counsel of Record : For A p p e l l a n t : Boone, Karlberg and Haddon, Missoula, Montana K a r l R. Karlberg argued, Missoula, Montana For Respondent : G a r l i n g t o n , Lohn and Robinson, Missoula , Montana Sherman V. Lohn argued, Missoula, Montana Lawrence F. Daly argued, Missoula , Montana Submitted: Filed : November 5, 1975 Mr. J u s t i c e Wesley C a s t l e s d e l i v e r e d t h e Opinion o f t h e C o u r t . T h i s i s a n a p p e a l from a summary judgment f o r d e f e n d a n t e n t e r e d on t h e ground t h a t a r e s t r i c t i v e c o v e n a n t a g a i n s t compet i t i o n v i o l a t e d t h e l a w s o f Montana and was n o t w i t h i n t h e s t a t u t o r y e x c e p t i o n s c o n t a i n e d i n s e c t i o n s 13-808 and 13-809, R.C.M. 1947. The s o l e i s s u e on t h i s a p p e a l i s whether t h e r e s t r i c t i v e c o v e n a n t c o n t a i n e d i n A r t i c l e XX o f t h e A r t i c l e s o f A s s o c i a t i o n of t h e Western Montana C l i n i c , a n u n i n c o r p o r a t e d a s s o c i a t i o n , i s enforceable. On J u n e 30, 1948, t h e Western Montana C l i n i c , a s a p a r t n e r s h i p of physicians p r a c t i c i n g medicine i n Missoula, w a s d i s s o l v e d and A r t i c l e s o f A s s o c i a t i o n w e r e e x e c u t e d by t h e former p a r t n e r s , forming an " u n i n c o r p o r a t e d A s s o c i a t i o n " f o r t h e p r a c t i c e o f m e d i c i n e , a t t h e same l o c a t i o n and under t h e same name a s t h e former p a r t n e r s h i p . From t h a t day f o r w a r d , t h e new A s s o c i a t i o n has continued without d i s s o l u t i o n . Physicians associated with t h e C l i n i c may be d i v i d e d i n t o two main g r o u p s : members. employees and T r a d i t i o n a l l y a new d o c t o r i s made a n employee f o r a p e r i o d o f o n e o r two y e a r s , and t h e n h e i s r e q u i r e d t o become a member. T h a t s t a t u s o f "member" i s f u r t h e r s u b d i v i d e d i n t o " j u n i o r " and " s e n i o r " members. A t the t i m e s i n question the C l i n i c was composed o f some 2 5 member p h y s i c i a n s and 6 employee physicians p r a c t i c i n g v a r i o u s medical s p e c i a l i t i e s , t o g e t h e r w i t h numerous o t h e r m e d i c a l and a d m i n i s t r a t i v e employees. Defendant, Doctor J a c o b s o n , i s a l i c e n s e d o r t h o p e d i c s u r g e o n who became a n employee of t h e Western Montana C l i n i c on a p p r o x i m a t e l y J a n u a r y 1, 1968. On a p p r o x i m a t e l y J a n u a r y 1, 1970, i n accordance with t h e e s t a b l i s h e d p o l i c y of t h e C l i n i c , defenda n t was r e q u i r e d t o p u r c h a s e $5,200 o f s t o c k i n t h e Western Mont a n a C l i n i c B u i l d i n g C o r p o r a t i o n and t h e r e b y was a c c e p t e d a s a j u n i o r member of t h e C l i n i c . The Western Montana C l i n i c and The Western Montana C l i n i c B u i l d i n g C o r p o r a t i o n a r e s e p a r a t e legal entities. Approximately two y e a r s l a t e r , a g a i n f o l l o w i n g C l i n i c policy, defendant w a s required t o purchase an a d d i t i o n a l $5,200 o f s t o c k i n t h e B u i l d i n g C o r p o r a t i o n and became a s e n i o r member of t h e C l i n i c . On August 1, 1973, d e f e n d a n t withdrew from t h e C l i n i c f o r a l l e g e d p r o f e s s i o n a l r e a s o n s and e s t a b l i s h e d a p r i v a t e p r a c - tice limited t o orthopedic surgery a t Professional Village i n Missoula. Defendant a l s o m a i n t a i n s smaller p r a c t i c e s a t S t . J o s e p h ' s H o s p i t a l i n P o l s o n , Montana, and a t t h e S t u d e n t H e a l t h C e n t e r a t t h e U n i v e r s i t y o f Montana. T h i s c o n t r o v e r s y a r o s e from a demand by t h e C l i n i c t h a t d e f e n d a n t pay i t 30% of t h e g r o s s p r o c e e d s from h i s m e d i c a l p r a c t i c e f o r t h e t h r e e y e a r s f o l l o w i n g August 1, 1973. p r o v i s i o n was c o n t a i n e d i n t h e Articles o f A s s o c i a t i o n . This Defend- a n t r e f u s e d , and t h e C l i n i c f i l e d t h i s a c t i o n . I n h i s motion f o r summary judgment, d e f e n d a n t a s s e r t e d s i m p l y t h a t by v i r t u e o f t h e unique p r o v i s i o n s of A r t i c l e XX and o t h e r c l a u s e s i n t h e C l i n i c ' s A r t i c l e s of Association, t h i s part i c u l a r r e s t r i c t i v e c o v e n a n t f a i l s t o come w i t h i n Montana's narrow s t a t u t o r y e x c e p t i o n s p e r m i t t i n g s u c h a g r e e m e n t s and i s t h e r e f o r e a n i l l e g a l c o n t r a c t i n r e s t r a i n t of t r a d e , u n e n f o r c e a b l e i n t h i s State. The s t a t u t e s i n v o l v e d h e r e a r e : 13-807, R.C.M. 1947. "Contract i n r e s t r a i n t of t r a d e void. Any c o n t r a c t by which anyone i s r e s t r a i n e d from e x e r c i s i n g a l a w f u l p r o f e s s i o n , t r a d e , o r busi n e s s of 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 t h e n e x t two s e c t i o n s , i s t o t h a t e x t e n t v o i d . " 1947. " E x c e p t i o n i n f a v o r of s a l e 13-808, R.C.M. of good w i l l . One who s e l l s t h e good w i l l o f a busi n e s s may a g r e e w i t h t h e buyer 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 w i t h i n a s p e c i f i e d c o u n t y , c i t y , o r p a r t t h e r e o f , s o l o n g as t h e b u y e r , o r any p e r s o n d e r i v i n g t i t l e t o t h e good w i l l from him, c a r r i e s on a l i k e b u s i n e s s t h e r e i n . " 13-809, R.C.M. 1947. "Exception i n f a v o r o f p a r t n e r s h i p agreements. P a r t n e r s may, upon o r i n partners hi^. 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 o f t h e .. . a g r e e 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 b u s i n e s s w i t h i n 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 b u s i n e s s h a s been t r a n s a c t e d , o r within a specified p a r t thereof." A r t i c l e I1 o f t h e A r t i c l e s o f t h e C l i n i c p r o v i d e s : "ARTICLE I1 - AN UNINCORPORATED ASSOCIATION "The p a r t i e s h e r e t o hereby a s s o c i a t e t h e m s e l v e s t o g e t h e r f o r t h e p r a c t i c e of m e d i c i n e and s u r g e r y a s a n u n i n c o r p o r a t e d A s s o c i a t i o n which s h a l l be known and d e s i g n a t e d a s 'The Western Montana C l i n i c ' . This A s s o c i a t i o n s h a l l be endowed t o t h e e x t e n t p e r m i s s i b l e by law w i t h a l l t h e a t t r i b u t e s o f a c o r p o r a t i o n , and s h a l l be t r e a t e d a s a c o r p o r a t i o n f o r p u r p o s e s o f t a x a t i o n , and a l l o t h e r p u r p o s e s , s u b j e c t , however, t o t h e r e q u i r e m e n t o f t h e law t h a t t h e r e l a t i o n s h i p between t h e members o f t h e A s s o c i a t i o n a s p h y s i c i a n s and s u r g e o n s and t h e i r p a t i e n t s s h a l l be d i r e c t , p e r In a l l matters relating t o s o n a l and c o n f i d e n t i a l . t h e f i s c a l and b u s i n e s s management o f t h e A s s o c i a t i o n , I t i s s e e n from t h i s l a n g u a g e , and from t h e u n d i s p u t e d h i s t o r y of o p e r a t i o n , t h a t a s between d e f e n d a n t D r . Jacobson and t h e C l i n i c , t h e C l i n i c s h a l l be t r e a t e d a s a c o r p o r a t i o n and t h e a r t i c l e s exp r e s s l y deny a p a r t n e r s h i p r e l a t i o n s h i p a s c o n t e m p l a t e d by t h e e x c e p t i o n c o n t a i n e d i n s e c t i o n 13-809. Thus, t h e l a n g u a g e of t h e r e s t r i c t i v e c o v e n a n t d o e s n o t f a l l w i t h i n t h e p a r t n e r s h i p except i o n o f 13-809. A r t i c l e s XX and X X I of t h e C l i n i c p r o v i d e : "ARTICLE XX - M M E S RESTRICTED I N R I G H T TO REE BR ENGAGE I N PRACTICE Amended and s u b s c r i b e d t o 2 November 1967 "Each Member o f t h i s A s s o c i a t i o n (whether now a Member o r a f t e r w a r d s becoming a Member; whether a S e n i o r o r J u n i o r Member) d o e s hereby a g r e e t h a t i n t h e e v e n t of h i s s e p a r a t i o n from t h i s A s s o c i a t i o n , i n any manner o r f o r any c a u s e o t h e r t h a n f o r d i s a b i l i t y , h e w i l l t h e r e b y and t h e r e u p o n be s e l l i n g t o t h e A s s o c i a t i o n and t h e r e m a i n i n g Members t h e r e o f h i s i n t e r e s t i n t h e good w i l l o f s a i d A s s o c i a t i o n , and i n view o f t h e f a c t t h a t t h e r e a f t e r such s e p a r a t i n g Member w i l l no l o n g e r be a Member i n t h e A s s o c i a t i o n , and f o r t h e prot e c t i o n o f t h e good w i l l a f o r e s a i d , t h e s a i d Members a f o r e s a i d , i n c l u d i n g Members h e r e a f t e r joining t h e Association, agree t h a t i n t h e event t h a t any o f them withdraws from t h i s A s s o c i a t i o n o r i s e x p e l l e d t h e r e f r o m he w i l l n o t engage i n , o r c a r r y on t h e p r a c t i c e o f m e d i c i n e o r s u r g e r y w i t h i n t h e c o u n t y o f M i s s o u l a , s t a t e o f Montana, f o r t h e p e r i o d o f t h r e e y e a r s from t h e d a t e o f such s e p a r a t i o n , o r f o r t h e p e r i o d d u r i n g which t h e s a i d A s s o c i a t i o n o r i t s o t h e r Members c a r r y on t h e p r a c t i c e o f m e d i c i n e o r s u r g e r y w i t h i n s a i d c o u n t y , whichever p e r i o d be t h e s h o r t e r . * * * " " I n o r d e r t o a s s u r e c o n t i n u i t y of t h e A s s o c i a t i o n w i t h o u t impairment o f i t s c a p i t a l , which m i g h t res u l t i f a Member were e n t i t l e d t o a d i v i s i o n o f a s s e t s upon h i s d e a t h , r e t i r e m e n t , w i t h d r a w a l o r expulsion, t h e Association i s c r e a t i n g t h e R e t i r e ment o r P e n s i o n P l a n t o p r o v i d e r e t i r e m e n t b e n e f i t s and d e a t h b e n e f i t s t o i t s Members, t h e t e r m s o f which plan a r e r e f e r r e d t o h e r e a f t e r . Therefore, each p r e s e n t and f u t u r e Member d o e s h e r e b y renounce any and a l l claims t o any d i v i s i o n o f t h e a s s e t s o f t h e A s s o c i a t i o n upon h i s d e a t h , r e t i r e m e n t , w i t h d r a w a l o r e x p u l s i o n p r i o r t o t h e t e r m i n a t i o n o f t h e Assoc i a t i o n , and a g r e e s t o a c c e p t i n l i e u t h e r e o f t h e b e n e f i t s , i f a n y , p a y a b l e under s u c h p l a n . " W c o n s i d e r now t h e l a n g u a g e o f t h e e x c e p t i o n i n s e c t i o n e 13-808 t o t h e law a g a i n s t c o n t r a c t s i n r e s t r a i n t o f t r a d e when such c o n t r a c t i s i n c o n j u n c t i o n w i t h t h e s a l e o f good w i l l o f a business. I n o t h e r words, d o e s A r t i c l e XX come w i t h i n t h e ex- c e p t i o n t o permit such a c o n t r a c t ? The C l i n i c ' s p o s i t i o n , s i m p l y s t a t e d , i s t h a t A r t i c l e s XX and X X I s t a t e t h a t i n exchange f o r a member j o i n i n g t h e C l i n i c w i t h o u t c o s t , and t h u s be e n t i t l e d t o a n immediate l u c r a t i v e s h a r e i n a n e s t a b l i s h e d p r a c t i c e , he a g r e e s t h a t on t e r m i n a t i o n , h e s e l l s and t r a n s f e r s whatever i n t e r e s t he h a s , i n c l u d i n g g o o d w i l l , w i t h o u t c o s t ; and, must n o t compete w i t h t h e C l i n i c f o r t h r e e years to assure the effective retention of goodwill by the Clinic. On the other hand, defendant's position is that at the moment each member joins the association, he relinquishes "any and all claims to any division of the assets" in exchange for benefits under the association retirement and pension plans; and that included in the items thus relinquished is any claim to goodwill he might have at the time of his withdrawal from the association. In other words, upon admission of a member, he buys nothing, and at the time of his retirement or death, he takes out nothing; thereby, reasons defendant, there has been no sale of goodwill sufficient to bring the exception contained in section 13-808 into play. Put another way, defendant could not sell any goodwill to the association because as a result of Article XXI, all the assets of the Clinic, including goodwill, were already owned by the association. Goodwill, goes this argument, is an incident to and inherent in the business and may not exist separate from the business. Sections 67-1111, 67-1112, R.C.M. 1947; Wylie v. Wylie Permanent Camping Co., 57 Mont. 115, 187 P. 279. Then, defendant defines sale as used in section 13-808, as defined in sections 74-101 through 74-106, R.C.M. 1947. This Court in Jenson v. Olson, 144 Mont. 224, 227, 395 P.2d 465, stated our rule: "A covenant not to compete is a restrictive covenant in restraint of trade and is valid only in certain lines of enterprise and only if it constitutes a reasonable restriction on the freedom to do business. Sections 13-807, 13-808, 13-809, R.C.M. 1947." Defendant in his brief states: " * * * a profes- sional man who sells his practice and his goodwill may agree not to compete, if there is a consideration and a legitimate sale of goodwill involved." Then he goes on to reassert that there was no "legitimate" sale of goodwill by virtue of Article XXI of the Articles of Association because technically Dr. Jacobson had no goodwill to sell, and was paid nothing for it. Defendant cites Haas v. Hodge, 171 Cal.App.2d 478, 340 P.2d 632, 635. California had identical statutes to Montana's. In Haas two physicians entered into an agreement whereby one Dr. Hodge disclaimed any right or claim to any "professional practice herein mentioned and referred to and to the goodwill thereof." Dr. Haas was attempting to enforce an anticompetitive covenant by claiming it came under the exception for agreements ancillary to the sale of goodwill. The California District Court of Appeals, Division 2, refused to enforce the covenant saying: "Whatever may be the technical status flowing from the contract, it remains true that the last paragraph operates as a present renouncement of any interest in the 'professional practice' of Dr. Haas or the goodwill thereof. This left Dr. Hodge with no inchoate right to future accruing goodwill, for the practice belonged to Dr. Haas and the goodwill belonged to him as an incident to ownership of the practice, present and future. * * * "Defendant could not sell the present or future goodwill of the business in this instance, for the business and its goodwill belonged to plaintiff Haas." In this case, because of Article XXI, defendant had no goodwill from the business to sell to the Association. Definitions for "sale" and related terms are given in sections 74-101 through 74-106, R.C.M. 1947. These statutes provide that in order for there to be a sale, or an agreement to sell, there must be payment, or agreement to pay pecuniary consideration--a price--in exchange for the transfer to another of an interest in property. In Interrogatory No. 9, dated Aug- ust 26, 1974, defendant asked the Clinic to specifically describe the terms of the alleged sale of goodwill; when did it take place; what was the consideration; how was it paid? wer merely pointed to Article XX. The Clinic's ans- When t h e Montana l e g i s l a t u r e c a r v e d o u t two e x c e p t i o n s t o t h e p r o h i b i t i o n a g a i n s t c o n t r a c t s i n r e s t r a i n t o f t r a d e , it d i d s o c a r e f u l l y , w i t h f u l l a w a r e n e s s t h a t t h e r e was l e g i t i m a t e public i n t e r e s t i n favor of allowing r e s t r i c t i v e covenants a n c i l l a r y t o t h e s a l e of a business. But t h a t p u b l i c i n t e r e s t e x i s t s o n l y when t h e r e i s a g e n u i n e s a l e o f g o o d w i l l . Obviously, t h e l a n g u a g e o f A r t i c l e XX was d r a f t e d i n a n e f f o r t t o a c h i e v e p r o t e c t i o n u n d e r s e c t i o n 13-808, R.C.M. 1947. However, no " s a l e " o f a n y t h i n g t o o k p l a c e a t t h e t i m e o f d e f e n d a n t ' s d e p a r t u r e ; and t h e s e l f - s e r v i n g l a n g u a g e t o t h e c o n t r a r y i n A r t i c l e XX i s cont r a d i c t e d by e v e r y s i n g l e f a c t and c i r c u m s t a n c e s u r r o u n d i n g t h e o r g a n i z a t i o n and o p e r a t i o n o f t h e Western Montana C l i n i c and t h e withdrawal of defendant Doctor Jacobson. While numerous c a s e s a r e c i t e d i n b o t h b r i e f s , t h e y do n o t a p p l y t o o u r s i t u a t i o n where t h e e x c e p t i o n u n d e r t h e s t a t u t e i s sought. F o r a c o l l e c t i o n o f c a s e s on V a l i d i t y and C o n s t r u c t i o n o f C o n t r a c t u a l R e s t r i c t i o n s on R i g h t o f M e d i c a l P r a c t i t i o n e r t o Practice, I n c i d e n t t o S a l e o f P r a c t i c e , see Anno. 6 2 ALR3d 918. W e h o l d t h a t t h e r e was no s a l e o f g o o d w i l l u n d e r t h e s t a t u t e and t h u s t h e r e s t r i c t i v e c o v e n a n t i s u n e n f o r c e a b l e . Having examined t h e i s s u e s , and f i n d i n g no e r r o r , w e affirm. ----- . ' ,/ C h i e f J u s t i c e

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