TREASURE CHEMICAL v TEAM LABORATOR
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No. 14806 IN THE SUPREME COURT OF THE STATE OF MONTANA 1980 TREASURE CHEMICAL, INC. , a Montana Corporation, and ART FREDRIKSEN, Plaintiff and Appellant, vs. TEAM LABORATORY CHEMICAL CORPORATION I GARY SULLIVAN and DAVID LEINWAND, Defendants and Respondents. Appeal from: District Court of the Thirteenth Judicial District, Honorable C. B. Sande, Judge presiding. Counsel of Record: For Appellant: Terry L. Seiffert argued, Billings, Montana For Respondents: Pedersen, Herndon, Harper & Munro, Billings, Montana Donald Herndon argued, Billings, Montana - ~ - - Submitted: Decided: Filed: 'J!? 2 2 7 jq-po L January 17, 1980 MAR 2 7 Mr. J u s t i c e D a n i e l J . Shea d e l i v e r e d t h e Opinion of t h e C o u r t . P l a i n t i f f s a p p e a l from t h e o r d e r of t h e Yellowstone County D i s t r i c t C o u r t which g r a n t e d judgment a g a i n s t t h e p l a i n t i f f s i n t h e i r a c t i o n t o e n f o r c e t h e t e r m s of a c o v e n a n t n o t t o compete a g a i n s t t h e d e f e n d a n t s . The main i s s u e i n t h i s a p p e a l i s whether t h e c o v e n a n t a g a i n s t c o m p e t i t i o n f a l l s within a s t a t u t o r y exception t o t h e code's prohibition a g a i n s t r e s t r a i n t s on t r a d e . The p l a i n t i f f s f i l e d a c o m p l a i n t s e e k i n g e n f o r c e m e n t o f a c o v e n a n t n o t t o compete c o n t a i n e d i n a d i s s o l u t i o n of p a r t n e r s h i p agreement made w i t h d e f e n d a n t , Gary S u l l i v a n . The d e f e n d a n t s f i l e d s e p a r a t e answers and a j o i n t motion f o r p a r t i a l summary judgment. The c o u r t g r a n t e d t h e d e f e n d a n t s ' motion and on March 23, 1979, t h e p a r t i e s f i l e d a s t i p u l a t i o n t h a t t h e p a r t i a l summary judgment s h o u l d a c t a s a f i n a l judgment a g a i n s t t h e p l a i n t i f f s . On A p r i l 6, 1979, t h e c o u r t found t h a t t h e s t i p u l a t i o n w a s made w i t h good c a u s e and g r a n t e d judgment t o t h e d e f e n d a n t s a g a i n s t t h e p l a i n tiffs. The p l a i n t i f f s a p p e a l t h i s judgment. S i n c e t h i s a c t i o n n e v e r proceeded t o t r i a l , t h e f o l l o w i n g s t a t e m e n t o f f a c t s i s t a k e n from u n d i s p u t e d f a c t s s t a t e d i n t h e a p p e l l a t e b r i e f s and p a p e r s f i l e d by t h e p a r t i e s i n D i s t r i c t Court, P l a i n t i f f , A r t F r e d r i k s e n , and d e f e n d a n t , Gary S u l l i v a n , engaged i n t h e s a l e of i n d u s t r i a l c h e m i c a l s i n t h e S t a t e of Montana i n 1975. On A p r i l 1 3 , 1976, t h e y f o r m a l i z e d t h e i r r e l a t i o n s h i p i n a p a r t n e r s h i p agreement. S u l l i v a n made s a l e s f o r t h e p a r t n e r s h i p , which w a s c a l l e d T r e a s u r e he mi- c a l l u n t i l J u n e 30, 1976 when a d i s s o l u t i o n o f p a r t n e r s h i p agreement was signed. The agreement provided that the business should belong to Fredriksen and that he should acquire all of Sullivan's interest in the profits, assets, and goodwill of the partnership. Sullivan was to receive $27,500 for his entire interest in Treasure Chemical and he further agreed not to compete with Fredriksen in the sale of chemicals where the partnership business had been transacted. On the same date, Fredriksen incorporated Treasure Chemical and entered into a sales agreement with Sullivan whereby Sullivan would receive a commission for sales made for the newly formed corporation. Sullivan made sales for Treasure Chemical, Inc., until the fall of 1977 when he terminated his sales representative agreement and acquired an interest in a North Dakota business called Team Laboratory Chemical Corporation. David Leinwand, who also has been named as a defendant in this action, signed a sales representative agreement with Treasure Chemical, Inc., on August 18, 1976. The agreement made Leinwand the exclusive salesman for Treasure Chemical in a large territory of Montana. Leinwand terminated this agreement on September 1, 1978, and thereafter began working with Team Lab. Plaintiffs, Treasure Chemical, Inc., and Art Fredriksen, filed a complaint seeking to enforce the covenant against competition contained in the dissolution of partnership agreement. The complaint named Gary Sullivan, David ~einwand, and Team Laboratory Chemical Corporation as defendants, and sought damages, a temporary restraining order, and a permanent injunction against the sale of chemicals by the defendants in some thirty-two Montana counties named in the complaint. The defendants filed separate answers and a motion for partial summary judgment. The c o u r t s e t a d a t e f o r a h e a r i n g and t h e p a r t i e s f i l e d b r i e f s on t h e motion. The c o u r t o r d e r f i l e d F e b r u a r y 1, 1979 d i s m i s s e d T r e a s u r e Chemical, David Leinwand, and T e a m Lab from t h e a c t i o n , d e n i e d t h e r e q u e s t f o r a temporary r e s t r a i n i n g o r d e r , and found t h e c o v e n a n t n o t t o compete void outside the B i l l i n g s c i t y l i m i t s . The c o u r t o r d e r e d f u r t h e r p r o c e e d i n g s t o d e t e r m i n e whether F r e d r i k s e n w a s e n t i t l e d t o damages f o r b r e a c h of t h e c o v e n a n t . On March 23, 1979 t h e p a r t i e s f i l e d a s t i p u l a t i o n s t a t i n g t h a t no s i g n i f i c a n t s a l e s were made i n B i l l i n g s and t h a t t h e p a r t i a l summary judgment s h o u l d a c t a s a f i n a l judgment a g a i n s t t h e p l a i n t i f f s . The c o u r t ' s judgment of A p r i l 6 , 1979 s t a t e d t h a t t h e s t i p u l a t i o n was made w i t h good c a u s e and g r a n t e d judgment f o r t h e d e f e n d a n t s a g a i n s t t h e plaintiffs. The p l a i n t i f f s a p p e a l t h i s judgment. The p l a i n t i f f s c o n t e n d t h e D i s t r i c t C o u r t ' s d e t e r m i n a t i o n t h a t t h e code l i m i t s t h e o p e r a t i o n o f a c o v e n a n t n o t t o compete t o t h e b o u n d a r i e s of a s i n g l e c i t y o r town w a s a n unduly narrow c o n s t r u c t i o n o f s e c t i o n s 28-2-704 and 28-2- 705, MCA and t h a t t h e s e s e c t i o n s a u t h o r i z e t h e e n f o r c e m e n t o f any c o v e n a n t which h a s r e a s o n a b l e g e o g r a p h i c l i m i t a t i o n s . W e do n o t a c c e p t t h e p l a i n t i f f s ' c o n t e n t i o n . The t e s t o f r e a s o n a b l e n e s s p r o v i d e s a g e n e r a l g u i d e t o c o u r t s which do n o t have t h e b e n e f i t of a s t a t u t e g o v e r n i n g t h e s c o p e of r e s t r i c t i v e covenants. See Henderson v . J a c o b s ( 1 9 5 2 ) , 73 A r i z . 1 9 5 , 239 P.2d 1082, 1086. See a l s o 17 C.J.S. 8246, a t 1122 and c a s e s c i t e d t h e r e i n . Contracts, Here, however, w e a r e p r e s e n t e d w i t h a q u e s t i o n of s t a t u t o r y i n t e r p r e t a t i o n . Montana code c o n t a i n s p r o v i s i o n s d e t e r m i n i n g t h e geog r a p h i c a l r a n g e of c o v e n a n t s n o t t o compete. 703, MCA, p r o h i b i t s r e s t r a i n t s on t r a d e : s e c t i o n 28-2- "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 exercising a lawful profession, trade, o r business 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, i s t o t h a t e x t e n t v o i d . " Exceptions t o t h i s general p r o h i b i t i o n a r e s t a t e d i n t h e following sections: "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 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 a s t h e buyer 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 g o o d 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 . " Section 28-2-704, MCA. " P a r t n e r s may, upon o r i n a n t i c i p a t i o n o f a d i s s o l u t i o n of t h e p a r t n e r s h i p , 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 w i t h i n a s p e c i f i e d p a r t thereof." S e c t i o n 28-2-705, MCA. S e c t i o n s 28-2-703, e t s e q . , MCA, have been modeled a f t e r s e c t i o n s 1673, e t s e q . , C a l i f o r n i a C i v . Code. W have e a l r e a d y determined t h a t our i n t e r p r e t a t i o n of t h e s e s e c t i o n s w i l l be g u i d e d by t h e c o n s t r u c t i o n g i v e n them by t h e Supreme C o u r t of C a l i f o r n i a . Mont. , See J . T. M i l l e r Co. v . Made1 ( 1 9 7 8 ) , 575 P.2d 1321, 35 St.Rep. 263. California d e c i s i o n s i n t e r p r e t i n g i t s c i v i l code have concluded t h a t i t s s t a t u t e s s h o u l d be c o n s t r u e d l i t e r a l l y t o deny e n f o r c e ment of c o v e n a n t s t h a t exceed t h e b o u n d a r i e s of a s i n g l e c i t y o r county. Edwards v . M u l l i n ( 1 9 3 4 ) , 220 C a l . R p t r . 7 379, 30 P . 2d 997; Du B o i s v . Padgham ( 1 9 1 2 ) , 18 C a l ~ ~ a d -48, 123 P. 207; F r a n z v . B i e l e r ( 1 8 9 9 ) , 126 C a l . R p t r . 176, 56 P. 249; C i t y C a r p e t B e a t i n g , E t c . , Works v. J o n e s ( 1 8 9 4 ) , 102 Cal.Rptr. 506, 36 P . 841. The d e c i s i o n i n C i t y C a r p e t , supra, provides t h e reasoning f o r t h i s i n t e r p r e t a t i o n : ... "The Code e l i m i n a t e s from t h e c o n t r o v e r s y a r i s i n g upon s u c h r e s t r i c t i o n t h e q u e s t i o n a s t o what i s a r e a s o n a b l e t e r r i t o r i a l l i m i t , by s p e c i f i c a l l y d e f i n i n g i t , and t h u s p r e v e n t i n g l i t i g a t i o n ; and i n t h i s t h e s t a t u t e i s w i s e and s a l u t a r y , even though, i n c e r t a i n c a s e s - - p o s s i b l y i n t h i s o n e , - - i t g i v e s t h e purchaser less than h e bought, and less t h a n he m i g h t e n j o y w i t h o u t v i o l a t i n g t h e i n t e r e s t s of t h e p u b l i c . " The c o v e n a n t n o t t o compete c o n t a i n e d i n t h e p a r t i e s ' d i s s o l u t i o n o f p a r t n e r s h i p agreement was n o t l i m i t e d t o a single city. It stated: ". . . ... .. S u l l i v a n , hereby a g r e e s t h a t he, compete t h e r e t i r i n g partner, w i l l not, with t h e continuing partner e i t h e r d i r e c t l y o r i n d i r e c t l y i n t h e s a l e of c h e m i c a l s w i t h i n t h e same c i t i e s o r towns w i t h i n t h e S t a t e o f Montana where t h e p a r t n e r s h i p b u s i n e s s had been t r a n s a c t e d f o r a p e r i o d of t h r e e ( 3 ) y e a r s . . ." The p l a i n t i f f s ' c o m p l a i n t named 3 2 Montana c o u n t i e s i n which t h e partnership allegedly transacted business. S e c t i o n 28-2-705 g o v e r n s t h e r e s t r i c t i v e c o v e n a n t con- t a i n e d i n t h e p a r t i e s ' d i s s o l u t i o n of p a r t n e r s h i p agreement. T h i s s e c t i o n e x p l i c i t l y l i m i t s s u c h c o v e n a n t s t o t h e bounda r i e s o f a s i n g l e c i t y o r town. The p a r t i e s do n o t s e r i o u s l y dispute t h e t r i a l c o u r t ' s determination t h a t Billings i s the l o c a t i o n where t h e p l a i n t i f f s t r a n s a c t b u s i n e s s . Therefore, t h e c o u r t ' s o r d e r d e c l a r i n g t h e covenant "void t o t h e e x t e n t t h a t i t p u r p o r t s t o o p e r a t e o u t s i d e of t h e c i t y l i m i t s of B i l l i n g s " i s affirmed. The p l a i n t i f f s a l s o a s s e r t t h a t material q u e s t i o n s of f a c t e x i s t e d when t h e c o u r t g r a n t e d t h e d e f e n d a n t s ' motion f o r a summary judgment. They a r g u e t h a t t h e t r i a l c o u r t s h o u l d have d e t e r m i n e d whether t h e p l a i n t i f f s - c o n d u c t e d b u s i n e s s i n a l l 3 2 c o u n t i e s a l l e g e d i n t h e i r c o m p l a i n t and whether Gary S u l l i v a n c o n t r o l l e d T e a m Lab o r merely had an i n t e r e s t i n Team Lab. N e i t h e r of t h e s e q u e s t i o n s a r e m a t e r i a l h e r e i n l i g h t of t h e f a c t t h a t t h e c o v e n a n t i s r e s t r i c t e d t o t h e c i t y l i m i t s of B i l l i r L g s , and t h a t t h e p l a i n t i f f s ' s a l e of c h e m i c a l s i n B i l l i n g s i s i n s i g n i f i c a n t . W e n o t e i n p a s s i n g t h a t t h e d e c i s i o n h e r e m i g h t have been e n t i r e l y d i f f e r e n t w e r e t h e r e n o t a s t a t u t e which s o c l e a r l y l i m i t e d t h e s c o p e o f c o v e n a n t s n o t t o compete t o a s i n g l e c i t y . I n t e r c i t y a n d i n t e r s t a t e b u s i n e s s e s are common t o d a y a n d u n d e r some c i r c u m s t a n c e s , i t i s r e a s o n a b l e t o enforce covenants t h a t cover t h e boundaries of an e n t i r e state. S e e Monogram I n d u s t r i e s , I n c . v. S a r I n d u s t r i e s ( 1 9 7 6 ) , 134 C a l . R p t r . 714, 64 Cal.App.3d 692; Esmark I n c . v. M c K e e ( 1 9 7 8 ) , 1 1 8 A r i z . 511, 578 P.2d 190. 2-703, S e c t i o n s 28- e t s e q . , MCA, w e r e e n a c t e d i n 1895, and t o t h e p r e s e n t d a y have n o t been amended. W e recommend t o t h e l e g i s l a t u r e t h a t i t c o n s i d e r w h e t h e r c h a n g e s a r e now a p p r o p r i a t e . Judgment i s a f f i r m e d . T Justice W e concur: Chief J u s t i c e
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