State Medical Oxygen and Supply, Inc. v. American Medical Oxygen Co.

• Decision Date: 28 November 1989
• Docket Number: No. 89-236,89-236
• Citation: State Medical Oxygen and Supply, Inc. v. American Medical Oxygen Co., 782 P.2d 1272, 240 Mont. 70 (Mont. 1989)
• Parties: , 1989-2 Trade Cases 68,885 STATE MEDICAL OXYGEN AND SUPPLY, INC., a Montana corporation, Plaintiff and Appellant, v. AMERICAN MEDICAL OXYGEN CO., a Montana corporation, J.C. Lyndes, Gary Gomez, and Ronald Wright, Defendants and Respondents.
• Court: Montana Supreme Court

Page 1272

782 P.2d 1272

240 Mont. 70, 1989-2 Trade Cases 68,885

STATE MEDICAL OXYGEN AND SUPPLY, INC., a Montana corporation, Plaintiff and Appellant, v.AMERICAN MEDICAL OXYGEN CO., a Montana corporation, J.C Lyndes, Gary Gomez, and Ronald Wright, Defendants and Respondents.

No. 89-236.

Supreme Court of Montana.

Submitted on Briefs Oct. 13, 1989.

Decided Nov. 28, 1989.

P. Mars Scott, Mulroney, Delaney and Scott, Missoula, for plaintiff and appellant.

Michael G. Moses, Moses Law Firm and Philip P. McGimpsey, Billings, for defendants and respondents.

BARZ, Justice.

Plaintiff, State Medical Oxygen and Supply, Inc.(State Med.), appeals the January 19, 1989 decision of the District Court of the Eighth Judicial District, Cascade County, finding that plaintiff's nondisclosure agreement violated Sec. 28-2-703, MCA, and granting summary judgment in favor of defendants--American Medical Oxygen Co.(American Med.), J.C. Lyndes, Gary Gomez and Ronald Wright.We affirm.

The issues raised on appeal are:

1.Whether plaintiff's "Agreement of Employee not to Disclose Trade Secrets or Customer Lists of State Medical Supply, Inc." violates Sec. 28-2-703, MCA, as being a contract that restrains the exercise of a lawful profession, trade or business of any kind; and

2.Whether the District Court erred by granting defendants' motion for summary judgment.

Plaintiff, State Med., is a Montana corporation engaged in the business of supplying oxygen and allied health care to patients in their homes and in hospitals.Upon State Med.'s formation in the early part of 1984, the directors of State Med. had its employees sign an agreement entitled, "Agreement of Employee not to Disclose Trade Secrets or Customer Lists of State Medical Supply, Inc."This Agreement provides that:

The undersigned, an employee of State Medical Supply, Inc., in consideration of his employment, hereby agrees not, at any time or in any manner, either directly or indirectly, to divulge, disclose or communicate to any person, firm, or corporation, in any manner whatsoever, any information concerning any matters affecting or relating to the business of State Medical Supply, Inc.'s trade secrets and/or customer lists.Including without limiting the above, the employee agrees not to divulge any of State Medical Supply, Inc.'s customers, the prices it obtains or has obtained from the sale of, or at which it sells or has sold, its products, or any other information concerning the business of State Medical Supply, Inc., its manner of operation, its plans, processes, or other data without regard to whether all of the foregoing matters will be deemed confidential, material, or important, the parties hereby stipulating that as between them, the same are important, material and confidential and gravely affect the effective and successive conduct of the business of State Medical Supply, Inc., and State Medical Supply, Inc.'s good will, and that any breach of the terms of this agreement shall be termed and considered a material breach.

This agreement shall remain in full force and effect during the undersigned employment and continuing for all time thereafter.

A violation of this agreement will entitle State Medical Supply, Inc., to seek damages and/or injunctive relief or any other remedy at law against the undersigned and the undersigned agrees to pay State Medical Supply, Inc.'s attorney's fees in prosecuting any breach of this agreement.

Several, if not all, of the employees of State Med. signed this Agreement.

Three State Med. employees--Link, Fatz and Tope--became unhappy with their jobs at State Med. and began to seek employment elsewhere.On August 9, 1985, these employees quit their jobs at State Med. and immediately began working for American Med., a Montana corporation also engaged in the business of supplying oxygen and allied health care to patients in their homes and in hospitals.When Link left State Med.'s employ, he memorized his customer route and offered his customers an opportunity to switch from State Med. to American Med.Most of Link's regular customers made the switch.

On March 1, 1988, this Court decided State Medical Oxygen & Supply, Inc. v. American Medical Oxygen Co.(Mont.1988), 750 P.2d 1085, 45 St.Rep. 349, which addressed issues initially raised by State Med.This Court affirmed in part, reversed in part and remanded for further proceedings, but did not address the issue of the nondisclosure agreement because the District Court had not yet ruled on it.State Medical Oxygen Supply, Inc., 750 P.2d at 1089, 45 St.Rep. at 355.On October 18, 1988, the parties stipulated to the dismissal with prejudice of defendant Link from this action.On November 30, 1988, the remaining defendants--American Med., Lyndes, Gomez and Wright--renewed their motion for summary judgment, asserting again that the nondisclosure agreement was void pursuant to Sec. 28-2-703, MCA.

On January 19, 1989, the District Court granted defendants' motion for summary judgment, and stated that the nondisclosure agreement between State Med. and its employees not to divulge trade secrets or customer lists violated Sec. 28-2-703, MCA, and therefore the court found it against public policy and unenforceable as a matter of law.The District Court certified this January 19, 1989 order as a final judgment under Rule 54(b), M.R.Civ.P.State Med. appeals.

The first issue that will be addressed by this Court is whether plaintiff's "Agreement of Employee not to Disclose Trade Secrets or Customer Lists of State Medical Supply, Inc." violates Sec. 28-2-703, MCA.

Section 28-2-703, MCA, codifies Montana's public policy regarding contracts that restrains the exercise of a lawful profession, trade or business of any kind.This statute provides that "[a]ny contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, otherwise than is provided for by 28-2-704 or 28-2-705, is to that extent void."The two exceptions allow parties to agree that upon either the sale of goodwill of a business or the dissolution of a partnership, one or more of the parties will refrain from carrying on a similar business within a narrow designated area.Sections 28-2-704and28-2-705, MCA.

Prior to Dobbins, DeGuire & Tucker v. Rutherford, MacDonald & Olson(1985), 218 Mont. 392, 708 P.2d 577, this Court recognized a difference between covenants incident to an employment contract and those regarding the trade of a business or property.J.T. Miller Co. v. Madel(1978), 176 Mont. 49, 52-53, 575 P.2d 1321, 1323.When presented with a covenant not to compete that involved trade, this Court applied a three part test by which to discern reasonable covenants from unreasonable restraints.Under this test, a covenant not to compete is reasonable if it is (1) limited in operation either as to time or place; (2) based upon some good consideration; and (3) affords reasonable protection for and not impose an unreasonable...