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: January 17, 1980
Decided: MAR 2 7
'J!?2 2 7 jq-po
L -
Filed:
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 perma-
nent injunction against the sale of chemicals by the defen-
dants 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. Contracts,
8246, a t 1122 and c a s e s c i t e d t h e r e i n . 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 geo-
g 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. s e c t i o n 28-2-
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 :
"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 . See J . T. M i l l e r Co. v . Made1 ( 1 9 7 8 ) ,
Mont. , 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
-48,
379, 30 P . 2d 997; Du B o i s v . Padgham ( 1 9 1 2 ) , 18 C a l ~ ~ a d
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,
t h e r e t i r i n g partner, w i l l not, .. compete
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 bound-
a 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. S e c t i o n s 28-
2-703, 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