Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C.

• Decision Date: 22 November 2011
• Docket Number: No. DA 11–0147.,DA 11–0147.
• Citation: Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C., 2011 MT 290, 33 IER Cases 773, 265 P.3d 646, 362 Mont. 496 (Mont. 2011)
• Parties: Dawn M. WRIGG, CPA, Plaintiff and Appellant, v. JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C., Defendant and Appellee.
• Court: Montana Supreme Court

2011 MT 290

265 P.3d 646

33 IER Cases 773

362 Mont. 496

Dawn M. WRIGG, CPA, Plaintiff and Appellant,

v.JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C., Defendant and Appellee.

No. DA 11–0147.

Supreme Court of Montana.

Submitted on Briefs Sept. 7, 2011.Decided Nov. 22, 2011.

For Appellant: Linda M. Deola, Morrison, Motl & Sherwood, Helena, Montana.

For Appellee: Sara R. Sexe, Marra, Sexe, Evenson & Bell, P.C., Great Falls, Montana.

Justice BRIAN MORRISdelivered the Opinion of the Court.

[362 Mont. 497] ¶ 1Dawn Wrigg(Wrigg) appeals from a declaration of the First Judicial District Court, Lewis and Clark County, that Junkermier, Clark, Campanella, Stevens, P.C.(JCCS) could enforce its covenant not to compete against Wrigg.We reverse.

¶ 2 Wrigg raises a dispositive issue that we rephrase as follows:

¶ 3Can an employer enforce a covenant not to compete when the employer ends the employment relationship?

¶ 4 Wrigg is a certified public accountant.JCCS is an accounting firm.JCCS hired Wrigg as a staff accountant to work in JCCS's Helena office in 1987.JCCS promoted Wrigg to a JCCS shareholder in November 2003.Wrigg signed her first Shareholder Agreement (Agreement) in January 2004.The 2004 Agreement expired by its terms.Wrigg signed a new Agreement in 2005 and again in 2007.The 2007 Agreement expired by its terms on June 30, 2009.

¶ 5 All the Agreements included an identical JCCS covenant.The JCCS covenant's relevant terms stated:

If this Agreement is terminated for any reason and Shareholder provides professional services in a business ... in competition with JCCS the Shareholder agrees as follows:

To pay to JCCS an amount equal to one hundred (100%) of the gross fees billed by JCCS to a particular client over the twelve month period immediately preceding such termination, if the client was a client of JCCS within the twelve month period prior to Shareholder's leaving JCCS' employment ... and the particular client is thereafter within one year of date of termination served by Shareholder's partners, or any professional services organization employing the Shareholder.

¶ 6Jerry Lehman, JCCS's CEO, sent Wrigg a letter in May 2009 in which he informed Wrigg that JCCS would not renew Wrigg's Agreement.The Agreement was set to expire on June 30, 2009.The letter stated that this outcome was best for JCCS and Wrigg “[g]iven the culture in the Helena office....”The letter also informed Wrigg that JCCS would pay Wrigg's salary through June 30, 2009, although Wrigg's employment would end immediately.Lehman concluded the letter by reminding Wrigg of the JCCS covenant.

¶ 7 Wrigg began seeking employment with other accounting firms.These firms expressed concerns about hiring Wrigg, in part, due to the JCCS covenant.Rudd and Company(Rudd) eventually hired Wrigg.Wrigg accepted this employment with a significant pay cut.Wrigg had earned an annual salary of $154,000 while at JCCS.Wrigg would earn $87,000 at Rudd.Wrigg agreed to the significant pay cut due to Rudd's concerns about the JCCS covenant.

¶ 8 Wrigg concedes that she worked for, and solicited business from, JCCS's clients within a year of termination.JCCS sent Wrigg a demand letter that sought compensation under the terms of the JCCS covenant.Wrigg filed an action for declaratory judgment in District Court to determine whether JCCS could enforce the covenant.The District Court applied the Dobbins test to determine that the covenant was reasonable, and therefore, could be enforced.Wrigg appeals.

STANDARD OF REVIEW

¶ 9We review for correctness a district court's interpretation of law pertaining to a declaratory judgment ruling.In re Estate of Marchwick,2010 MT 129, ¶ 8, 356 Mont. 385, 234 P.3d 879.

DISCUSSION

¶ 10Can an employer enforce a covenant not to compete when the employer ends the employment relationship?

¶ 11 Montana law strongly disfavors covenants not to compete.Access Organics, Inc. v. Hernandez,2008 MT 4, ¶ 17, 341 Mont. 73, 175 P.3d 899;see§ 28–2–703, MCA.As a result, we construe strictly covenants not to compete.Access Organics,¶ 17.We also read covenants in a light most favorable to the employee.Dumont v. Tucker,250 Mont. 417, 421, 822 P.2d 96, 98(1991).We void covenants that act as a full restraint on trade and in absence of an express statutory exception.Mungas v. Great Falls Clinic, LLP,2009 MT 426, ¶¶ 39–40, 354 Mont. 50, 221 P.3d 1230(citingDobbins, De Guire & Tucker, P.C. v. Rutherford, MacDonald & Olson,218 Mont. 392, 396, 708 P.2d 577, 579(1985));§ 28–2–703, MCA.

¶ 12 Wrigg agrees that the JCCS covenant imposes a partial restraint on trade.We review for reasonableness covenants that impose a partial restraint on trade.Mont. Mt. Prods. v. Curl,2005 MT 102, ¶¶ 11–15, 327 Mont. 7, 112 P.3d 979(citingDobbins,218 Mont. at 397, 708 P.2d at 580).A covenant that restrains trade only partially must meet the following three elements in order to be considered reasonable:

(1) The covenant should be limited in operation either as to time or place;

(2) the covenant should be based on some good consideration; and

(3) the covenant should afford reasonable protection for and not impose an unreasonable burden upon the employer, the employee, or the public.

Mungas,¶ 39(citingDobbins,218 Mont. at 397, 708 P.2d at 580).

¶ 13The District Court determined that the JCCS covenant satisfied all three elements.JCCS covenant is limited in time—one year—and place—Lewis and Clark County and its contiguous counties.The District Court also found that consideration accompanied the JCCS covenant.Wrigg had accepted the JCCS covenant each time that she signed a new employment contract.The District Court further determined that the JCCS covenant satisfied the third element as it did not entirely prevent Wrigg from practicing her profession.The District Court did not address whether the employer's termination of the employment relationship affected a covenant's enforcement.

¶ 14 Wrigg primarily disputes the District Court's failure to consider whether JCCS can claim a business interest in the JCCS covenant.Wrigg argues that JCCS must assert a legitimate business interest in order to enforce the JCCS covenant.Wrigg suggests that the District Court should have concluded that any employer—including JCCS—lacks a legitimate business interest in a covenant when it terminates the employment relationship without cause.

¶ 15 JCCS provides no case law where a court has enforced a covenant when the employer has ended the employment relationship.JCCS also offers no policy argument to offset Montana's public policy against restrictive covenants, especially when an employer terminates the employment relationship.JCCS primarily contends instead that our case law binds us to rule in its favor.

¶ 16 JCCS relies heavily on Dobbins to argue the reasonableness of the JCCS covenant.Dobbins,218 Mont. at 397, 708 P.2d at 580.JCCS correctly notes that the language in the Dobbins covenant mirrors the language in the JCCS covenant.Dobbins,218 Mont. at 394, 708 P.2d at 578.JCCS asserts that its use of the language deemed reasonable in Dobbins means that the JCCS covenant is per se reasonable.JCCS misinterprets Dobbins.

¶ 17 The accountant in Dobbins left his accounting firm with whom he had signed a covenant not to compete.Dobbins,218 Mont. at 394, 708 P.2d at 578.The firm sought to enforce the covenant upon the accountant's departure.The district court deemed the covenant unenforceable as a matter of law.Dobbins,218 Mont. at 394, 708 P.2d at 578.This Court reversed.The Court characterized the covenant as only a partial restraint on trade that could be enforced if its terms were reasonable.Dobbins,218 Mont. at 396, 708 P.2d at 580.The Court remanded to allow the trial court to make factual findings as to the covenant's reasonableness.Dobbins,218 Mont. at 397, 708 P.2d at 580.

¶ 18The Court relied largely on the formulation developed in 13 A.L.R. Fourth 661 to guide the district court on remand.The Court sought to balance “the competing interests” of the public as well as the employer and the employee.Dobbins,218 Mont. at 397, 708 P.2d at 580.Dobbins accordingly did not determine that enforcement of a covenant that uses the same language as the JCCS covenant would be reasonable as a matter of law.Dobbins simply held that covenants, like the JCCS covenant, should be subject to a reasonableness analysis under appropriate circumstances.These circumstances require that legitimate business reasons exist to justify the covenant.

¶ 19 This requirement acknowledges the long standing principle that a covenant that serves no legitimate business interest necessarily is oppressive and invalid.Richard A. Lord, Williston on ContractsVol. 6, § 30:4, 164–75 (4th ed., West 2009).This commentator recognized that a covenant “must be ancillary to a legitimate business undertaking” to be enforced in most jurisdictions based on deep, historical roots of this requirement in English and American common law.Lord, § 30:4 at 164–75.Section 188(1)(a) of the Restatement (Second) of Contracts,(1981), similarly proposes that a covenant may not be enforced if the “restraint is greater than is needed to protect the [employer's] legitimate interest.”The obvious implication is that a covenant without a legitimate interest is unenforceable as it necessarily imposes a greater restraint than is needed.

¶ 20 Courts in most jurisdictions have agreed.For example, the New Hampshire Supreme Court analyzes a covenant's enforceability by addressing the reasonableness of a given restraint.The court assesses reasonableness, in turn, by trying “to identify the legitimate interest of the employer.”Syncom Indus., Inc. v. Wood,155 N.H. 73, 920 A.2d 1178, 1185(2007).Similarly, the Idaho Supreme Court agrees that “[t]he first issue the Court must consider is whether [the employer] has a legitimate interest worthy of protection” in...