J T MILLER CO v MADEL

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No. 13796 I N THE SUPREME COURT O THE STATE O M N A A F F OTN THE J . T . MILLER COMPANY, a p a r t n e r s h i p and UPPER N R H E T P Y E T PLAIJS COMPANY, O T WS A MN a Minnesota c o r p o r a t i o n , P l a i n t i f f s and A p p e l l a n t s , JAMES Defendant and Respondent. Appeal from: D i s t r i c t Court of t h e T h i r t e e n t h J u d i c i a l ~ i s t r i c, t Honorable C h a r l e s Luedke, J u d g e p r e s i d i n g . Counsel o f Record: For A p p e l l a n t s : Crowley, Baughey, Hanson, G a l l a g h e r and T o o l e , B i l l i n g s , Montana H. Elwood E n g l i s h a r g u e d , B i l l i n g s , Montana D a n i e l R. Shulman a r g u e d , Minnesota F o r Respondent: B e r g e r , Anderson, S i n c l a i r , Murphy, Nelson & Edwards, B i l l i n g s , Montana A C l i f f o r d Edwards a r g u e d , B i l l i n g s , P4ontana Submitted: Decided: a ! & / lerk J a n u a r y 23, 1978 MAR - 1 1978 M r . J u s t i c e Gene B . Daly d e l i v e r e d t h e Opinion of t h e Court. This i s an appeal from t h e f i n d i n g s , conclusions and order f o r judgment entered by the D i s t r i c t Court, Yellowstone County. The c o u r t r u l e d t h e r e s t r i c t i v e covenant contained i n t h e employment agreement between t h e p a r t i e s was i n e f f e c t i v e i n t h e s t a t e of Montana because it was v i o l a t i v e of t h e p u b l i c policy of t h i s s t a t e and t h e r e f o r e unenforceable. The m a t e r i a l f a c t s were s t i p u l a t e d t o f o r t h e purpose of appeal. P l a i n t i f f s J . T . M i l l e r Co. and Upper Northwest Payment Plans Co. a r e engaged i n t h e business of operating and managing a g e n e r a l insurance agency i n Minneapolis, Minnesota. Defendant entered i n t o an employment agreement with p l a i n t i f f s on J u l y 6 , 1971. Defendant was employed t o a c t a s M i l l e r Company's f i e l d agent f o r t h e purpose of s e l l i n g " c r e d i t l i f e " insurance. Pursuant t o t h i s agreement, defendant d i d a c t a s a salesman f o r p l a i n t i f f M i l l e r Co. i n t h e Minnesota a r e a u n t i l 1973. was t r a n s f e r r e d t o North Dakota. I n 1973, defendant A f t e r one year i n North Dakota, defendant was moved t o Montana a s of August 1974. During t h e following August (1975), defendant terminated employment with plaintiffs. Defendant immediately commenced employment with a competing insurance company. P l a i n t i f f s f i l e d s u i t on March 10, 1976, praying f o r an order r e s t r a i n i n g defendant from contacting o r s o l i c i t i n g any of p l a i n t i f f s ' customers with whom defendant had a t any time d e a l t with on behalf of p l a i n t i f f s . The D i s t r i c t Court i s s u e d , upon p l a i n t i f f s ' ex p a r t e a p p l i c a t i o n and a f f i d a v i t , a temporary r e s t r a i n i n g order. T r i a l was held on t h i s matter October 5 , 1976. Following t r i a l , the D i s t r i c t Court dissolved t h e temporary r e s t r a i n i n g o r d e r on t h e grounds t h e r e s t r i c t i v e agreement was contrary t o t h e declared public policy of Montana and s e c t i o n 13-807, R.C.M. 1947. From t h i s judgment, p l a i n t i f f s appeal. The d i s p u t e c e n t e r s on t h e l e g a l question: Is t h e r e s t r i c - t i v e covenant contained i n t h e employment agreement between p l a i n t i f f s and defendant enforceable under t h e laws of Montana? The p e r t i n e n t p a r t of t h e r e s t r i c t i v e covenant contained i n the employment agreement reads: "* ** The Employee agrees and covenants t h a t f o r a period of f i v e (5) years a f t e r t h e termination of t h i s Agreement, he w i l l not d i r e c t l y o r i n d i r e c t l y own, manage, o p e r a t e , c o n t r o l , be employed by, p a r t i c i p a t e i n o r be connected i n any manner with t h e ownership, management, operation o r c o n t r o l of any business 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 insurance t o any customer of t h e Employer with whom t h e Employee has a t any t i m e had any dealings on behalf of t h e Employer; c o n t a c t o r s o l i c i t any customers of t h e Employer with whom t h e Employee has a t any time had any d e a l i n g s on behalf of t h e Employer; o r s e l l o r del i v e r t o any customers of t h e Employer any insurance s o l d by t h e Employee while an Employee of t h e EmpLoyer a s s e t o u t i n t h i s c o n t r a c t . 11 P l a i n t i f f s challenge t h e a p p l i c a b i l i t y of s e c t i o n 13-807, R.C.M. 1947, t o t h e r e s t r i c t i v e covenant contained i n t h e employ- ment agreement. Section 13-807 s t a t e s : "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 lawful profession, t r a d e , o r business of any kind, otherwise than i s provided f o r by t h e next two s e c t i o n s , i s t o t h a t e x t e n t void." Section 13-807 was f i r s t enacted i n Montana a s Sec. 2246, 1895 C i v i l Code and was adopted from t h e c a l i f o m - i a C i v i l Code, Business and Professions 516600. P r i o r t h e r e t o , the C a l i f o r n i a Supreme Court construed i t s e f f e c t a s voiding r e s t r a i n t s o t h e r than thoseauthorized by companion s e c t i o n s . Hercules Powder Co., Vulcan Powder Ea. u. (1892), 96 Cal. 510, 31 P. 581. Also see: Monogram Industries, Inc. v. Sar Industries, (1976), 134 Cal. Rptr. 714, 718, 64 C.A.3d 692. Thus we apply the presumption of statutory construction where in borrowing a statute from a sister state the legislature borrows the construction placed upon it by the highest court of the state from which it is borrowed. State ex rel. Mankin v. Wilson, (1977), Mont . 9 569 P.2d 922, 34 St.Rep. 1075, 1078. This Court requires strict compliance with the statutory provisions of section 13-807 and companion sections 13-808 and 13-809, R.C.M. (1977) , Mont . , 567 1947. Bauer v. Chaussee, P.2d 448, 34 St.Rep. 778, 780. In their challenge plaintiffs contend the prohibition of section 13-807 is not absolute, but permits restraints which are reasonable under the circumstances. We find this contention fails for two reasons: First Section 13-807 is clear in its prohibition against restraint of a lawful profession, trade or business, except where the restrictive covenant involves the sale of the goodwill of the business (section 13-808), or a partnership dissolution agreement (section 13-809). Montana follows those jurisdictions making a distinction between covenants incident to an employment contract and those ancillary to a sale or other transfer of a business, practice or property. Where distinctions have been made, courts are less prone to enforce restrictive covenants between employer and employee than where the restriction is part of a contract for sale of a business in which goodwill may be a part of the property sold. H & R-Block, Inc. v. Lovelace, (1972), 208 Kan. 538, 493 P.2d 205, 50 ALR3d 730; Monogram Industries, Inc. v. Sar Industries, supra. P l a i n t i f f s ' r e s t r i c t i v e covenant, i n t h e i r employment agreement, c l e a r l y does n o t q u a l i f y under e i t h e r s t a t u t o r y exception t o s e c t i o n 13-807. Accordingly, t h e d i r e c t n e s s of s e c t i o n 13-807 i n i t s s t r u c t u r e and t h e broadness of i t s terms commands t h e conclusion t h a t i t a p p l i e s t o t h e f a c t s of t h i s case and p r o h i b i t s t h e r e s t r a i n t a s s e r t e d . Second P l a i n t i f f s 1 contention a l s o f a i l s f o r t h e reason once s e c t i o n 13-807 i s found t o be t h e a p p l i c a b l e law i t i s p l a i n t i f f s ' burden t o show t h a t t h e r e s t r i c t i v e covenant d i d not v i o l a t e t h i s section. To meet t h i s burden p l a i n t i f f s . r e l i e d on numerous C a l i f o r n i a cases and one Montana c a s e -- Best Dairy Farms v. Houchen, (1968), 152 Mont. 194, 448 P.2d 158. W focus our a t t e n t i o n on t h e Montana case a s t h e C a l i f o r e n i a c a s e s r e l i e d on by p l a i n t i f f s were previously reviewed by t h i s Court i n Houchen, t h e Montana case. P l a i n t i f f s contend t h i s Court gave no i n d i c a t i o n whatsoever i n Houchen t h a t s e c t i o n 13-807 would b a r an i n j u n c t i o n under the proper circumstancest and / proper case f o r i n j u n c t i v e r e l i e f i s presented by t h e f a c t u a l s e t t i n g of t h e c a s e a t hand. f i n d no merit i n t h a t speculation. We I n Houchen, the i s s u e r a i s e d was whether t h e customer information, contained i n t h e memory of t h e employee, was a property r i g h t o r t r a d e s e c r e t of t h e employer, such a s t o allow i n j u n c t i v e r e l i e f a g a i n s t t h e exemployee's l a t e r s o l i c i t a t i o n of h i s former employer's customers, t h e Court s t a t e d : "However, even i n C a l i f o r n i a where t h e c o u r t has gone a s f a r a s i t d i d i n Gloria I c e Cream, supra, i n Gordon v. Schwartz, 147 Cal.App.2d 213, 305 P.2d 117, 121 (1957), t h e C a l i f o r n i a Court l i s t e d a s one c r i t e r i o n i n I t r a d e r o u t e 1 cases t h a t t h e information w a s c o n f i d e n t i a l and not r e a d i l y a c c e s s i b l e t o competitors. I "Also i n Restatement of Agency 2d, 3396, t h e Comment on Clause (b) i n d i c a k s t h a t t h e r e i s no t r a d e s e c r e t ' i f t h e information was n o t c o n f i d e n t i a l and was r e a d i l y a c c e s s i b l e t o o t h e r s . I ' (Emphasis added.) 152 Mont. 199. ' Houchen was n o t enjoined from s o l i c i t i n g customers of h i s former employer. The information of customer's names and addresses was n o t c o n f i d e n t i a l and was r e a d i l y a c c e s s i b l e t o anyone. I n t h e i n s t a n t c a s e , defendant d i d nothing more than t o c o n t a c t banks which were obviously known and open t o a l l vendors of c r e d i t l i f e insurance. N p r i v i l e g e d information was required o by defendant t o l o c a t e t h e banks which he s o l i c i t e d . The knowledge of t h e banks was c l e a r l y within t h e public domain. I n f a c t , t o l o c a t e banks i n Montana would be a much e a s i e r t a s k than t o produce customer names on a milk r o u t e a s i n Houchen. F i n a l l y , p l a i n t i f f s contend t h e key q u e s t i o n i n t h i s c a s e i s whether t h e former employee a c t e d u n f a i r l y and u t i l i z e d h i s p a s t employer's customer information. I n answer, we n o t e t h e agreed statement of f a c t s found i n Houchen: "* * * t h e corporation employed t h e d r i v e r a s a r o u t e salesman, gave him a l i s t of customers t o s e l l t o , paid him f o r new customers, paid him f o r h i s s e r v i c e s , and t h a t t h e d r i v e r upon terminat i o n of h i s employment with t h e corporation u t i l i z e d t h e knowledge obtained while employed by t h e corporat i o n t o s e l l products of another d a i r y t o c o r p o r a t i o n ' s customers .I1 Under t h i s f a c t u a l s e t t i n g , no i n j u n c t i o n a g a i n s t k o l i c i t a t i o n was granted. Mathews P a i n t Co. v. Seaside P a i n t & Lacquer Co., 148 C.A,2d (1957), 168, 306 P.2d 113,117, adds a d d i t i o n a l c l a r i t y t o t h e question of u n f a i r u t i l i z a t i o n of a p a s t employer's customer information. I n Mathews , p l a i n t i f f sued t o e n j o i n defendants, former employees of p l a i n t i f f , from s e l l i n g lacquer products t o p l a i n t i f f ' s former customers. I t was a l l e g e d t h a t defendants, while i n t h e employ of p l a i n t i f f , learned t h e names and addresses of t h e customers f o r p l a i n t i f f ' s products and t h e i n d i v i d u a l requirements and needs of t h e customers, and defendants were making use of t h i s information t o s e l l o t h e r lacquer products i n competition with p l a i n t i f f . The c o u r t found t h e complaint i n s u f f i c e n t t o s t a t e a cause of a c t i o n f o r t h e reason t h a t i t f a i l e d t o a l l e g e t h e use by defendants of s e c r e t and c o n f i d e n t i a l i n £ormation p e r t a i n i n g t o p l a i n t i f f ' s business. I n t h e i n s t a n t c a s e , defendant, a salesman, l e f t t h e employment of p l a i n t i f f s , possessed of information gained i n t h a t employment. The employee, having l e f t h i s employment, i s f r e e t o make use of h i s experience, a s long a s he does n o t v i o l a t e h i s employer's confidence. Corporation, (1967), 64 Cal.Rptr. King v. P a c i f i c Vitamin 486, 489, 256 C.A.2d 841; Anno. 28 ALR3d 29; 42 Am J u r 2d, I n j u n c t i o n s , $112, pp. 860,861. Here, defendant d i d nothing more than t o c o n t a c t banks which were known and open t o a l l . N p r i v i l e g e d information o was required by defendant t o l o c a t e t h e banks he s o l i c i t e d . Under t h e standards s e t f o r t h i n Houchen and Mathews, t h e information was n o t c o n f i d e n t i a l , Defendant i s accused of nothing, except s e l l i n g t o former customers of p l a i n t i f f s i n a f i e l d known and open t o a l l competitors of p l a i n t i f f s . The judgment of t h e D i /~ustice. i s affirmed. that is W Concur: e Mr. Justice Daniel J. Shea concurring: I concur with the opinion herein, but I feel the general matter of credit life insurance, as it was explained to this Court during oral argument, should be put in perspective from the standpoint of the consumer. It is clear the present statutes and practices of the banks and credit life insurance companies have anything but the interests of the consuming public in mind. It appears that section 40-4214 (1959), R.C.M. 1947, of Montana's insurance codes authorizes credit life insurance "as additional security for any indebtedness." The statute provides in full: "Existing insurance--choice of insurer. When credit life insurance or credit disability insurance is required as additional security for any indebtedto the ness, the debtor shall, upon request - - creditor, have the option of furnishing the required amount of insurance through existing policies of insurance owned or controlled by him or of procuring and furnishing the required coverage through any insurer authorized to transact an insurance business within this state." (Emphasis added.) By this statute the borrower is allowed the option of further securing the bank by naming the bank as a beneficiary on existing life insurance policies on the borrower's life, or of going to an insurance company of the borrower's choice to procure the required insurance. Unfortunately, no duty is placed upon the bank to inform the borrower of these rights. It is highly unlikely that the average borrower would know of the existence of this statute so that he could make his wishes known to the bank. It is equally obvious that the banks are not going to take it upon themselves to inform the borrower of the existence of this statute and of his rights under the statute. Accordingly, the statute is-- from the standpoint of effectively conferring rights upon the consuming public--meaningless. I believe that because of the weakness of this statute, the situation developed in this case. From the life insurance company's standpoint, credit life insurance was a highly lucrative business. It was in its interest to corner the market, more or less to have an exclusive franchise from the banks to provide the credit life insurance required by the bank of its borrowers. Accordingly, the insurance company spent large sums of money wining and dining appropriate bank personnel to become the exclusive agent selling credit life insurance. If the insurance company won the bank's favor, they had in effect a monopoly on the credit life insurance policies of the bank. The essence of the insurance company's claim here is that it is fighting to retain exclusive control of its territory. There is also an inherent danger that the bank choosing the life insurance company will, in exchange for this business, be getting favors from the insurance company. of course, take any form. They could, At the least, the lavishing of large sums of money wining and dining the appropriate bank personnel involved, can only have the effect of increasing the ultimate cost to the consumer. Moreover, there is another angle that the bank, through its board of directors or officers, could form an insurance company or acquire an interest in an insurance company handling credit life insurance for the bank. In this fashion, the insurance company would have a built-in clientele, and the bank officers, etc., would have a built-in source of additional income-that produced from also having an interest in the insurance company. It should be noted that this kind of cozy rela- tionship is specifically prohibited to banks chartered under the National Banking Act. In such situations banks may not engage in the insurance business or act as agents. Section 92. 12 u.S.C. It is unfortunate that the burden is placed on the borrower in a situation where he is obviously in no position to either know the law or to bargain with the banks and insurance companies who have already decided how the spoils are to be divided.

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