Western Mont. Clinic v. Jacobson, M.D.

No. 13024

I N THE SUPREME COURT OF THE STATE OF MONTANA

WESTERN M N A A C L I N I C ,
OTN

P l a i n t i f f and A p p e l l a n t ,

DAVID P. JACOBSON, M.D.,

Defendant and Respondent.

Appeal from: D i s t r i c t Court of t h e F o u r t h J u d i c i a l D i s t r i c t ,
Honorable J a c k L. Green, Judge p r e s i d i n g .

Counsel of Record :

For A p p e l l a n t :

Boone, Karlberg and Haddon, Missoula, Montana
K a r l R. Karlberg argued, Missoula, Montana

For Respondent :

G a r l i n g t o n , Lohn and Robinson, Missoula , Montana
Sherman V. Lohn argued, Missoula, Montana
Lawrence F. Daly argued, Missoula , Montana

Submitted: November 5, 1975

Filed :
Mr. J u s t i c e Wesley C a s t l e s d e l i v e r e d t h e Opinion o f t h e C o u r t .

T h i s i s a n a p p e a l from a summary judgment f o r d e f e n d a n t

e n t e r e d on t h e ground t h a t a r e s t r i c t i v e c o v e n a n t a g a i n s t compe-

t i t i o n v i o l a t e d t h e l a w s o f Montana and was n o t w i t h i n t h e s t a t -

u t o r y e x c e p t i o n s c o n t a i n e d i n s e c t i o n s 13-808 and 13-809, R.C.M.

1947.

The s o l e i s s u e on t h i s a p p e a l i s whether t h e r e s t r i c t i v e

c o v e n a n t c o n t a i n e d i n A r t i c l e XX o f t h e A r t i c l e s o f A s s o c i a t i o n

of t h e Western Montana C l i n i c , a n u n i n c o r p o r a t e d a s s o c i a t i o n , i s

enforceable.

On J u n e 30, 1948, t h e Western Montana C l i n i c , a s a p a r t -

n e r s h i p of physicians p r a c t i c i n g medicine i n Missoula, w a s d i s -

s o l v e d and A r t i c l e s o f A s s o c i a t i o n w e r e e x e c u t e d by t h e former

p a r t n e r s , forming an " u n i n c o r p o r a t e d A s s o c i a t i o n " f o r t h e p r a c t i c e

o f m e d i c i n e , a t t h e same l o c a t i o n and under t h e same name a s t h e

former p a r t n e r s h i p . From t h a t day f o r w a r d , t h e new A s s o c i a t i o n

has continued without d i s s o l u t i o n . Physicians associated with

t h e C l i n i c may be d i v i d e d i n t o two main g r o u p s : employees and

members. T r a d i t i o n a l l y a new d o c t o r i s made a n employee f o r a

p e r i o d o f o n e o r two y e a r s , and t h e n h e i s r e q u i r e d t o become a

member. T h a t s t a t u s o f "member" i s f u r t h e r s u b d i v i d e d i n t o

" j u n i o r " and " s e n i o r " members. A t the t i m e s i n question the

C l i n i c was composed o f some 2 5 member p h y s i c i a n s and 6 employee

physicians p r a c t i c i n g v a r i o u s medical s p e c i a l i t i e s , t o g e t h e r w i t h

numerous o t h e r m e d i c a l and a d m i n i s t r a t i v e employees.

Defendant, Doctor J a c o b s o n , i s a l i c e n s e d o r t h o p e d i c

s u r g e o n who became a n employee of t h e Western Montana C l i n i c on

a p p r o x i m a t e l y J a n u a r y 1, 1968. On a p p r o x i m a t e l y J a n u a r y 1, 1970,

i n accordance with t h e e s t a b l i s h e d p o l i c y of t h e C l i n i c , defend-

a n t was r e q u i r e d t o p u r c h a s e $5,200 o f s t o c k i n t h e Western Mon-

t a n a C l i n i c B u i l d i n g C o r p o r a t i o n and t h e r e b y was a c c e p t e d a s a
j u n i o r member of t h e C l i n i c . The Western Montana C l i n i c and

The Western Montana C l i n i c B u i l d i n g C o r p o r a t i o n a r e s e p a r a t e

legal entities. Approximately two y e a r s l a t e r , a g a i n f o l l o w i n g

C l i n i c policy, defendant w a s required t o purchase an a d d i t i o n a l

$5,200 o f s t o c k i n t h e B u i l d i n g C o r p o r a t i o n and became a s e n i o r

member of t h e C l i n i c .

On August 1, 1973, d e f e n d a n t withdrew from t h e C l i n i c

f o r a l l e g e d p r o f e s s i o n a l r e a s o n s and e s t a b l i s h e d a p r i v a t e p r a c -

tice limited t o orthopedic surgery a t Professional Village i n

Missoula. Defendant a l s o m a i n t a i n s smaller p r a c t i c e s a t S t .

J o s e p h ' s H o s p i t a l i n P o l s o n , Montana, and a t t h e S t u d e n t H e a l t h

C e n t e r a t t h e U n i v e r s i t y o f Montana.

T h i s c o n t r o v e r s y a r o s e from a demand by t h e C l i n i c t h a t

d e f e n d a n t pay i t 30% of t h e g r o s s p r o c e e d s from h i s m e d i c a l

p r a c t i c e f o r t h e t h r e e y e a r s f o l l o w i n g August 1, 1973. This

p r o v i s i o n was c o n t a i n e d i n t h e Articles o f A s s o c i a t i o n . Defend-

a n t r e f u s e d , and t h e C l i n i c f i l e d t h i s a c t i o n .

I n h i s motion f o r summary judgment, d e f e n d a n t a s s e r t e d

s i m p l y t h a t by v i r t u e o f t h e unique p r o v i s i o n s of A r t i c l e XX and

o t h e r c l a u s e s i n t h e C l i n i c ' s A r t i c l e s of Association, t h i s par-

t i c u l a r r e s t r i c t i v e c o v e n a n t f a i l s t o come w i t h i n Montana's narrow

s t a t u t o r y e x c e p t i o n s p e r m i t t i n g s u c h a g r e e m e n t s and i s t h e r e f o r e

a n i l l e g a l c o n t r a c t i n r e s t r a i n t of t r a d e , u n e n f o r c e a b l e i n t h i s

State.

The s t a t u t e s i n v o l v e d h e r e a r e :

13-807, R.C.M. 1947. "Contract i n r e s t r a i n t of t r a d e
void. 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 l a w f u l p r o f e s s i o n , t r a d e , o r bus-
i n e s s of 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 t h e n e x t two s e c t i o n s , i s t o t h a t e x t e n t v o i d . "

13-808, R.C.M. 1947. " E x c e p t i o n i n f a v o r of s a l e
of good w i l l . One who s e l l s t h e good w i l l o f a bus-
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 as t h e b u y e r ,
 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 good 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 . "

13-809, R.C.M. 1947. "Exception i n f a v o r o f p a r t -
n e r s h i p agreements. 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 of a d i s s o l u t i o n o f t h e - .. .
partners hi^.
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
within a specified p a r t thereof."

A r t i c l e I1 o f t h e A r t i c l e s o f t h e C l i n i c p r o v i d e s :

"ARTICLE I1 - AN UNINCORPORATED ASSOCIATION

"The p a r t i e s h e r e t o hereby a s s o c i a t e t h e m s e l v e s
t o g e t h e r f o r t h e p r a c t i c e of m e d i c i n e and s u r g e r y
a s a n u n i n c o r p o r a t e d A s s o c i a t i o n which s h a l l be known
and d e s i g n a t e d a s 'The Western Montana C l i n i c ' . This
A s s o c i a t i o n s h a l l be endowed t o t h e e x t e n t p e r m i s s i b l e
by law w i t h a l l t h e a t t r i b u t e s o f a c o r p o r a t i o n , and
s h a l l be t r e a t e d a s a c o r p o r a t i o n f o r p u r p o s e s o f
t a x a t i o n , and a l l o t h e r p u r p o s e s , s u b j e c t , however,
t o t h e r e q u i r e m e n t o f t h e law t h a t t h e r e l a t i o n s h i p
between t h e members o f t h e A s s o c i a t i o n a s p h y s i c i a n s
and s u r g e o n s and t h e i r p a t i e n t s s h a l l be d i r e c t , p e r -
s o n a l and c o n f i d e n t i a l . In a l l matters relating t o
t h e f i s c a l and b u s i n e s s management o f t h e A s s o c i a t i o n ,

I t i s s e e n from t h i s l a n g u a g e , and from t h e u n d i s p u t e d h i s t o r y of

o p e r a t i o n , t h a t a s between d e f e n d a n t D r . Jacobson and t h e C l i n i c ,

t h e C l i n i c s h a l l be t r e a t e d a s a c o r p o r a t i o n and t h e a r t i c l e s ex-

p r e s s l y deny a p a r t n e r s h i p r e l a t i o n s h i p a s c o n t e m p l a t e d by t h e

e x c e p t i o n c o n t a i n e d i n s e c t i o n 13-809. Thus, t h e l a n g u a g e of t h e

r e s t r i c t i v e c o v e n a n t d o e s n o t f a l l w i t h i n t h e p a r t n e r s h i p excep-

t i o n o f 13-809.

A r t i c l e s XX and X X I of t h e C l i n i c p r o v i d e :

"ARTICLE XX - M M E S RESTRICTED I N R I G H T TO RE-
E BR
ENGAGE I N PRACTICE Amended and s u b s c r i b e d t o
2 November 1967

"Each Member o f t h i s A s s o c i a t i o n (whether now a
Member o r a f t e r w a r d s becoming a Member; whether
a S e n i o r o r J u n i o r Member) d o e s hereby a g r e e t h a t
 i n t h e e v e n t of h i s s e p a r a t i o n from t h i s A s s o c i a -
t i o n , i n any manner o r f o r any c a u s e o t h e r t h a n
f o r d i s a b i l i t y , h e w i l l t h e r e b y and t h e r e u p o n be
s e l l i n g t o t h e A s s o c i a t i o n and t h e r e m a i n i n g
Members t h e r e o f h i s i n t e r e s t i n t h e good w i l l o f
s a i d A s s o c i a t i o n , and i n view o f t h e f a c t t h a t
t h e r e a f t e r such s e p a r a t i n g Member w i l l no l o n g e r
be a Member i n t h e A s s o c i a t i o n , and f o r t h e pro-
t e c t i o n o f t h e good w i l l a f o r e s a i d , t h e s a i d
Members a f o r e s a i d , i n c l u d i n g Members h e r e a f t e r
joining t h e Association, agree t h a t i n t h e event
t h a t any o f them withdraws from t h i s A s s o c i a t i o n
o r i s e x p e l l e d t h e r e f r o m he w i l l n o t engage i n ,
o r c a r r y on t h e p r a c t i c e o f m e d i c i n e o r s u r g e r y
w i t h i n t h e c o u n t y o f M i s s o u l a , s t a t e o f Montana,
f o r t h e p e r i o d o f t h r e e y e a r s from t h e d a t e o f
such s e p a r a t i o n , o r f o r t h e p e r i o d d u r i n g which
t h e s a i d A s s o c i a t i o n o r i t s o t h e r Members c a r r y
on t h e p r a c t i c e o f m e d i c i n e o r s u r g e r y w i t h i n s a i d
c o u n t y , whichever p e r i o d be t h e s h o r t e r . * * * "

" I n o r d e r t o a s s u r e c o n t i n u i t y of t h e A s s o c i a t i o n
w i t h o u t impairment o f i t s c a p i t a l , which m i g h t re-
s u l t i f a Member were e n t i t l e d t o a d i v i s i o n o f
a s s e t s upon h i s d e a t h , r e t i r e m e n t , w i t h d r a w a l o r
expulsion, t h e Association i s c r e a t i n g t h e R e t i r e -
ment o r P e n s i o n P l a n t o p r o v i d e r e t i r e m e n t b e n e f i t s
and d e a t h b e n e f i t s t o i t s Members, t h e t e r m s o f which
plan a r e r e f e r r e d t o h e r e a f t e r . Therefore, each
p r e s e n t and f u t u r e Member d o e s h e r e b y renounce any
and a l l claims t o any d i v i s i o n o f t h e a s s e t s o f t h e
A s s o c i a t i o n upon h i s d e a t h , r e t i r e m e n t , w i t h d r a w a l
o r e x p u l s i o n p r i o r t o t h e t e r m i n a t i o n o f t h e Asso-
c i a t i o n , and a g r e e s t o a c c e p t i n l i e u t h e r e o f t h e
b e n e f i t s , i f a n y , p a y a b l e under s u c h p l a n . "

W c o n s i d e r now t h e l a n g u a g e o f t h e e x c e p t i o n i n s e c t i o n
e
13-808 t o t h e law a g a i n s t c o n t r a c t s i n r e s t r a i n t o f t r a d e when

such c o n t r a c t i s i n c o n j u n c t i o n w i t h t h e s a l e o f good w i l l o f a

business. I n o t h e r words, d o e s A r t i c l e XX come w i t h i n t h e ex-

c e p t i o n t o permit such a c o n t r a c t ?
The C l i n i c ' s p o s i t i o n , s i m p l y s t a t e d , i s t h a t A r t i c l e s
XX and X X I s t a t e t h a t i n exchange f o r a member j o i n i n g t h e C l i n i c

w i t h o u t c o s t , and t h u s be e n t i t l e d t o a n immediate l u c r a t i v e s h a r e
i n a n e s t a b l i s h e d p r a c t i c e , he a g r e e s t h a t on t e r m i n a t i o n , h e
s e l l s and t r a n s f e r s whatever i n t e r e s t he h a s , i n c l u d i n g g o o d w i l l ,

w i t h o u t c o s t ; and, must n o t compete w i t h t h e C l i n i c f o r t h r e e
years to assure the effective retention of goodwill by the
Clinic.
On the other hand, defendant's position is that at the
moment each member joins the association, he relinquishes "any
and all claims to any division of the assets" in exchange for
benefits under the association retirement and pension plans;
and that included in the items thus relinquished is any claim
to goodwill he might have at the time of his withdrawal from the
association. In other words, upon admission of a member, he
buys nothing, and at the time of his retirement or death, he
takes out nothing; thereby, reasons defendant, there has been no
sale of goodwill sufficient to bring the exception contained in
section 13-808 into play. Put another way, defendant could not
sell any goodwill to the association because as a result of Arti-
cle XXI, all the assets of the Clinic, including goodwill, were
already owned by the association. Goodwill, goes this argument,
is an incident to and inherent in the business and may not exist

separate from the business. Sections 67-1111, 67-1112, R.C.M.
1947; Wylie v. Wylie Permanent Camping Co., 57 Mont. 115, 187
P. 279. Then, defendant defines sale as used in section 13-808,
as defined in sections 74-101 through 74-106, R.C.M. 1947.
This Court in Jenson v. Olson, 144 Mont. 224, 227, 395
P.2d 465, stated our rule:
"A covenant not to compete is a restrictive cov-
enant in restraint of trade and is valid only in
certain lines of enterprise and only if it con-
stitutes a reasonable restriction on the freedom
to do business. Sections 13-807, 13-808, 13-809,
R.C.M. 1947."
Defendant in his brief states: " * * * a profes-
sional man who sells his practice and his goodwill may agree not
to compete, if there is a consideration and a legitimate sale of
goodwill involved." Then he goes on to reassert that there was
no "legitimate" sale of goodwill by virtue of Article XXI of the
Articles of Association because technically Dr. Jacobson had
no goodwill to sell, and was paid nothing for it. Defendant
cites Haas v. Hodge, 171 Cal.App.2d 478, 340 P.2d 632, 635.
California had identical statutes to Montana's. In
Haas two physicians entered into an agreement whereby one Dr.
Hodge disclaimed any right or claim to any "professional practice
herein mentioned and referred to and to the goodwill thereof."
Dr. Haas was attempting to enforce an anticompetitive covenant
by claiming it came under the exception for agreements ancillary
to the sale of goodwill. The California District Court of Appeals,
Division 2, refused to enforce the covenant saying:
"Whatever may be the technical status flowing
from the contract, it remains true that the last
paragraph operates as a present renouncement
of any interest in the 'professional practice'
of Dr. Haas or the goodwill thereof. This left
Dr. Hodge with no inchoate right to future accru-
ing goodwill, for the practice belonged to Dr.
Haas and the goodwill belonged to him as an
incident to ownership of the practice, present
and future. * * *
"Defendant could not sell the present or future
goodwill of the business in this instance, for
the business and its goodwill belonged to plain-
tiff Haas."

In this case, because of Article XXI, defendant had no
goodwill from the business to sell to the Association.
Definitions for "sale" and related terms are given in
sections 74-101 through 74-106, R.C.M. 1947. These statutes
provide that in order for there to be a sale, or an agreement
to sell, there must be payment, or agreement to pay pecuniary
consideration--a price--in exchange for the transfer to another
of an interest in property. In Interrogatory No. 9, dated Aug-
ust 26, 1974, defendant asked the Clinic to specifically describe
the terms of the alleged sale of goodwill; when did it take place;
what was the consideration; how was it paid? The Clinic's ans-
wer merely pointed to Article XX.
 When t h e Montana l e g i s l a t u r e c a r v e d o u t two e x c e p t i o n s

t o t h e p r o h i b i t i o n a g a i n s t c o n t r a c t s i n r e s t r a i n t o f t r a d e , it

d i d s o c a r e f u l l y , w i t h f u l l a w a r e n e s s t h a t t h e r e was l e g i t i m a t e

public i n t e r e s t i n favor of allowing r e s t r i c t i v e covenants

a n c i l l a r y t o t h e s a l e of a business. But t h a t p u b l i c i n t e r e s t

e x i s t s o n l y when t h e r e i s a g e n u i n e s a l e o f g o o d w i l l . Obviously,

t h e l a n g u a g e o f A r t i c l e XX was d r a f t e d i n a n e f f o r t t o a c h i e v e

p r o t e c t i o n u n d e r s e c t i o n 13-808, R.C.M. 1947. However, no " s a l e "

o f a n y t h i n g t o o k p l a c e a t t h e t i m e o f d e f e n d a n t ' s d e p a r t u r e ; and

t h e s e l f - s e r v i n g l a n g u a g e t o t h e c o n t r a r y i n A r t i c l e XX i s con-

t r a d i c t e d by e v e r y s i n g l e f a c t and c i r c u m s t a n c e s u r r o u n d i n g t h e

o r g a n i z a t i o n and o p e r a t i o n o f t h e Western Montana C l i n i c and t h e

withdrawal of defendant Doctor Jacobson.

While numerous c a s e s a r e c i t e d i n b o t h b r i e f s , t h e y do n o t

a p p l y t o o u r s i t u a t i o n where t h e e x c e p t i o n u n d e r t h e s t a t u t e i s

sought. F o r a c o l l e c t i o n o f c a s e s on V a l i d i t y and C o n s t r u c t i o n

o f C o n t r a c t u a l R e s t r i c t i o n s on R i g h t o f M e d i c a l P r a c t i t i o n e r t o

Practice, I n c i d e n t t o S a l e o f P r a c t i c e , see Anno. 6 2 ALR3d 918.

W e h o l d t h a t t h e r e was no s a l e o f g o o d w i l l u n d e r t h e

s t a t u t e and t h u s t h e r e s t r i c t i v e c o v e n a n t i s u n e n f o r c e a b l e .

Having examined t h e i s s u e s , and f i n d i n g no e r r o r , w e

affirm.
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. ' ,/ C h i e f J u s t i c e