Dobbins Deguire Tucker v. Ruthe

Opinion

NO. 85-86

IN THE SUPREME COURT OF THE STATE OF MONTANA 1985

DOBBINS, DEGUIRE & TUCKER, P.C., Plaintiff and Appellant,

RUTHERFORD, MacDONALD & OLSON, a partnership, et al., 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 & Haines; Ron.ald A. Bender, Missoula, Montana

For Respondent:

Plulroney, Delaney & Scott; P. Mars Scott, Missoula, Montana

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 contract required payment to Dobbins if defendants obtained certain clients of Dobbins within 12 months after employment termination. Upon motion of defendants to dismiss the complaint for failure to state sufficient facts upon which relief could be granted, the Missoula County District Court dismissed the complaint. Dobbins a p p e a l s . 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; t h e o t h e r two u n t i l O c t o b e r 3 1 , 1983. While employed by Dobbins, t h e d e f e n d a n t s became acquainted w i t h Dobbins' clients. I n November 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 accounting o f f i c e i n Missoula where t h e Dobbins-office is located. Finally, t h e complaint a l l e g e s t h a t t h e defendants have been engaged, and are now engaged, directly and indirectly through others, in accepting and soliciting a c c o u n t i n g work from Dobbins ' clients. 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 of whether the District Court erred in dismissing Dobbins' complaint turns on whether the above-quoted provisions of the employment contract are enforceable. S e c t i o n 28-2-703, MCA, provides i n pertinent 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 void. ~ n y c o n t r a c tby-which anyone i :

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 28-2-704 o r 28-2-705, is t o t h a t extent void.

Section 28-2-704, MCA, in substance provides t h a t 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 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. A s p o i n t e d o u t by t h e D i s t r i c t Court, neither 5 5 28-2-704 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 . M i l l e r Co. v . Made1 (1978) , 176 Mont. 49, 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 § 28-2-703, MCA. I n Madel, an i n s u r a n c e salesman 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 of what i s now S 28-2-703, MCA, and that accordingly, the statute prohibited the r e s t r a i n t a s s e r t e d i n t h e covenant. 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 not to compete was, in effect, 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. In fact, 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 profession of public accounting. The contract contains neither area nor time limitations on defendants' p r a c t i c e of accounting. In addition, it d o e s n o t p r o h i b i t 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 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 their employment with Dobbins ceased. On its face, that is n o t an unreasonably long period. In 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 be paid in 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. 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 do not appear unreasonable. In a s i m i l a r manner, t h e requirement for t h e payment o f i n t e r e s t a t t h e r a t e of 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 . The C o u r t concluded that the covenant prevented the operation of a Mexican food restaurant in the same hotel and that 528-2-703, MCA, did not require a voiding of all restrictions on engaging i n a trade. 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 ... [for a reasonable] covenant:

" (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 -n t e r f e r e

i with the interests of the 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.

O'Neill, 182 Mont. 218-19, 596 P.2d 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.

The District Court referred to the annotation in 13 A.L.R. Fourth 661. We note t h e general conclusion o f that annotation is consistent with our holding in the present case. The a n n o t a t i o n p o i n t s o u t t h a t 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 to t h e withdrawal of a partner from a n

accounting firm, depends upon whether the 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 and is 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 consideration; and (3) the covenant 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 that the written contract provisions do not constitute a restraint prohibited by § 28-2-703, MCA. 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: - -9'

ief Justice