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: J a n u a r y 23, 1978
Decided: MAR - 1 1978
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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. I n 1973, defendant
was t r a n s f e r r e d t o North Dakota. 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 de-
l 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 . Vulcan Powder Ea. u.
Hercules Powder Co., (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. 1947. Bauer v. Chaussee,
(1977) , Mont . , 567 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 I
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. We
f i n d no merit i n t h a t speculation. 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 ex-
employee'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 com-
petitors.
"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 termina-
t 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 corpora-
t 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., (1957),
148 C.A,2d 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. King v. P a c i f i c Vitamin
Corporation, (1967), 64 Cal.Rptr. 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 that is
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 i s affirmed.
/~ustice.
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 indebted-
ness, the debtor shall, upon request - - creditor,
to the
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. They could,
of course, take any form. 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 insur-
ance 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. 12 u.S.C.
Section 92.
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.