DOBBINS DEGUIRE TUCKER v RUTHE

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NO. 85-86 IN THE SUPREME COURT OF THE STATE OF MONTANA 1985 DOBBINS, DEGUIRE & TUCKER, P.C., Plaintiff and Appellant, RUTHERFORD, MacDONALD partnership, et al., & OLSON, a 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 Montana & Haines; Ron.ald A. Bender, Missoula, For Respondent: Plulroney, Delaney Montana & Scott; P. Mars Scott, Missoula, 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 defendants months obtained after required certain employment defendants to sufficient facts Missoula contract dismiss County Dobbins a p p e a l s . upon clients of complaint which relief Court to Dobbins if within 12 Dobbins termination. the District payment for could dismissed Upon motion failure be to granted, the of state the complaint. 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 payment 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 prec 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; by t h e o t h e r two u n t i l O c t o b e r 3 1 , Dobbins, clients. t h e d e f e n d a n t s became I n November accounting o f f i c e located. have been through a c c o u n t i n g work acquainted w i t h Dobbins' where t h e Dobbins-office is t h e complaint a l l e g e s t h a t t h e defendants engaged, indirectly While employed 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 i n Missoula Finally, 1983. and are others, from Dobbins ' now in engaged, accepting clients. directly and and soliciting 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 dismissing above-quoted of Dobbins' whether the complaint provisions of the District turns Court on employment erred in whether the contract are enforceable. S e c t i o n 28-2-703, provides i n pertinent MCA, 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 ~ n y c o n t r a c tby-which anyone i : void. 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 is t o t h a t extent 28-2-704 o r 28-2-705, void. Section 28-2-704, MCA, who s e l l s t h e g o o d w i l l of in substance provides t h a t one 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. Court, neither 5 5 28-2-704 A s p o i n t e d o u t by t h e D i s t r i c t 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 . (1978) , 176 Mont. 49, M i l l e r Co. v . 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 MCA. I n Madel, Made1 an i n s u r a n c e salesman § 28-2-703, 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 Employe 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 Employer 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 MCA, and that accordingly, of i s now S 28-2-703, what the statute r e s t r a i n t a s s e r t e d i n t h e covenant. prohibited the 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 effect, not to compete was, in 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. fact, In 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 contains profession neither of area public nor p r a c t i c e of accounting. time accounting. limitations In addition, 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 The on contract defendants' it d o e s n o t p r o h i b i t 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 that their employment with Dobbins is n o t an unreasonably ceased. long period. its On In face, 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 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. be paid in 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 s i m i l a r manner, a t t h e r a t e of do not appear t h e requirement unreasonable. In a for t h e payment o f i n t e r e s t 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 . concluded Mexican that food the covenant restaurant 528-2-703, MCA, restrictions on did in not engaging i n a prevented the the same require trade. a The C o u r t operation hotel voiding and of of a that all 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 reasonable] covenant: ... [for a " (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 i with the interests of the -n t e r f e r e 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. 182 Mont. O'Neill, 596 P.2d 218-19, 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. District The Fourth A.L.R. annotation case. is Court 661. to referred the note t h e general We consistent with our annotation conclusion o f holding The a n n o t a t i o n p o i n t s o u t t h a t in in the 13 that present 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 accounting firm, to t h e withdrawal depends upon of whether a the partner from a n 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 is and 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 (3) the covenant consideration; and 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 constitute a that the restraint written contract prohibited by § provisions 28-2-703, do MCA. not 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: ief Justice - -9'

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