Recent Decision Signals Trend in Montana Case Law That Could be Disadvantageous
On February 23, 2006, a Montana District Court Judge handed down
a decision that could have serious implications for the way contracts
are drafted in Montana, particularly those contracts that are designed
to protect intellectual property. In Maxim Technologies v. Grotbo,
2006 Mont. Dist. LEXIS 76 (Feb. 23, 2006), Judge Dorothy McCarter
struck down a non-competition clause, a non-disclosure clause, and
a non-recruitment (or non-solicitation) clause—all on the basis
that the clauses as drafted were an “unreasonable restraint
on trade” under Montana law.
Judge McCarter’s opinion follows the rationale set forth in
the Montana Supreme Court’s recent decision in Montana Mountain
Prods. v. Curl
, 112 P.3d 979 (Mont. 2005), reh’g denied
Mont. LEXIS 231 (June 7, 2005), in which the Court held that a covenant
not to compete was unenforceable as an unreasonable restraint on
trade. The Curl
decision, however, did not address either
confidentiality or non-solicitation clauses. (For a thorough discussion
of the Curl
case, please click
.) Judge McCarter’s
opinion arguably expands the scope of the reasonableness test set
forth in Curl
by applying it not only to covenants not to
compete but also to confidentiality and non-solicitation clauses.
The three-part test applied in Curl was first set forth
in O’Neill v. Ferraro, 596 P.2d 197 (Mont. 1979) and
reaffirmed in Dobbins, DeGuire & Tucker v. Rutherford, MacDonald & Olson,
708 P.2d 577 (Mont. 1985). The O’Neill court in turn
borrowed the test from a 1952 Oregon case called Eldrige v. Johnston,
245 P.2d 239 (Or. 1952). According to that test, in order for a non-competition
clause to be valid, it must be: (1) limited with respect to time
or place; (2) based on sufficient consideration; and (3) reasonable.
With respect to the third prong of the test, the covenant must “afford
only a fair protection to the interests of the party in whose favor
it is made, and must not be so large in its operation as to interfere
with the interests of the public.” O’Neill,
596 P.2d at 199. It is this last prong that affords courts the greatest
amount of leeway in deciding whether covenants not to compete should
In O’Neill, the Court upheld the enforceability of
a covenant not to compete that was included in a lease and that prohibited
one lessee from operating a restaurant in direct competition with
another lessee. In Dobbins, the Court similarly upheld the
enforceability of a clause in an employment agreement that required
a departing employee to pay back to the former employer 100% of fees
earned through work performed for a client of the former employer
within one year after the employee’s departure. The fees were
payable over a three-year period of time at an interest rate of 8%
per annum. The court found all of these restrictions, including the
one-year time period, to be reasonable.
Four years after Dobbins
, the Montana Supreme Court handed
down its decision in State Medical Oxygen
and Supply, Inc. v. American Medical Oxygen Co.
, 782 P.2d 1272
(Mont. 1989). In that case, the court invalidated a confidentiality
clause on the ground that it was not limited as to time or place.
Thus, in State Medical Oxygen
, the Court for the first time
applied to confidentiality clauses the test that had been previously
articulated by courts addressing the enforceability of non-competition
clauses under Mont. Code Ann. § 28-2-703. That statute states
that “[a]ny contract by which anyone is restrained from exercising
a lawful profession, trade or business of any kind…is to that
extent void.” According to the statute, the only exceptions
to § 28-2-703 are covenants applying to the sale of goodwill
of a business and the dissolution of a partnership.
In reaching her opinion in Maxim, Judge McCarter cited
the State Medical Oxygen case in support of her position.
The confidentiality clause in Maxim simply required an employee
to maintain the confidentiality of the employer’s confidential
information. The opinion does not make it clear whether the agreement
included a definition of “confidential information,” but
the agreement did list specific examples of confidential information,
including, but not limited to, operating procedures, marketing and
business plans, sales information, and client identities. According
to Judge McCarter, the confidentiality clause was unenforceable because
it was not limited in either time or place.
The contract at issue in Maxim also included a non-solicitation
clause, which prohibited a departed employee from soliciting employees
of his former employer for a period of twelve months.
||after the employee’s
departure. Judge McCarter held that the non-solicitation clause was unenforceable
because it could limit the rights of the employees who still worked
for the employer in going to work for the departed employee. Judge
opinion ignores the distinction between a non-solicitation clause,
which prohibits active solicitation of employees, and a clause that
would prevent the departed employee from hiring his former colleagues.
It also ignores the fact that the agreement is only enforceable
against the departing employee who had signed it. In this
case, the non-solicitation clause sought only to prevent active solicitation.
Judge McCarter could have enforced it to that degree, but instead
she struck down the entire clause as unenforceable.
Relative to the non-solicitation clause, Judge McCarter also cited
Mont. Code Ann. § 39-2-803, which prevents the blacklisting
of any discharged employee. According to Judge McCarter, this statute
prohibits non-solicitation clauses because they seek to prevent employees
from going to work for a different employer. Judge McCarter’s
conclusion misses the point: non-solicitation clauses are intended
only to prevent the active solicitation of employees by a departed
employee, but they do not seek to prevent employees from voluntarily
contacting the departed employee, expressing an interest in going
to work for him or her, or accepting a position with the departed
employee. With all due respect to Judge McCarter, this author believes that
the Maxim decision is flawed in that it does not accurately
reflect the proper interpretation of a non-solicitation clause.
With respect to confidentiality clauses, Montana practitioners should
be warned that under current Montana law, such clauses must be limited
in time or place in order to be enforceable. Because geographic limitations
have less relevance in today’s economy, where nearly every
business has an Internet presence and most companies conduct business
in more than one state, the most practical limitation will be time-based.
The confidentiality clause that was stricken in State Medical
Supply did not have any time period at all; therefore, it is
difficult to predict what time frame the Montana Supreme Court would
find reasonable. Based on Dobbins, it is probably safe to
say that the Montana Supreme Court would find a one-year time period
reasonable, although based on the author’s practice, most companies
that are engaged in research and development find that a one-year
confidentiality clause is too short.
While it is difficult to argue with a reasonableness standard, Montana
courts need to be careful in their interpretation of that standard
not to go so far overboard in protecting employees that they disregard
the rights of employers. Given the high degree of latitude offered
by a reasonableness standard, it would be possible to establish a
legal climate in Montana that is hostile not only to companies seeking
to locate in Montana but also to companies that are already located
here. By way of example, many of the author’s clients have
entered into agreements that require them to maintain a certain level
of confidentiality with respect to their clients’ confidential
information, and some agreements even go so far as to dictate that
the Montana companies include non-competition and non-solicitation
clauses in their employment agreements. These companies need to be
able to tell their clients with confidence that these types of provisions
are enforceable in Montana. If our jurisprudence does not reflect
a willingness to compromise on these issues, then Montana companies
may be forced to leave the state in order to avoid breaching their
existing customer agreements. Even in the absence of customer agreements
dictating the inclusion of these provisions in employment agreements,
technology companies looking at locating in Montana will be less
inclined to do so if they do not feel that their intellectual property
will be adequately protected.
The companies that have these concerns are precisely the kind of
high-tech companies that Montana is seeking to attract as part of
its new economy. While traditional mining, farming and agricultural
enterprises would have difficulty relocating, most technology companies
are much more mobile and can locate anywhere with relative ease.
Thus, the draw for them needs to be not only the beauty of our state
but also a legal climate that is supportive of these businesses.
Because intellectual property plays a key role in most technology-oriented
businesses, these companies will need to know that Montana courts
are willing to recognize their intellectual property concerns. Hopefully
we as lawyers can do a better job of educating our judges regarding
intellectual property issues.