Quirky Question #212, Montana Non-Competes

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Quirky Question #212:

We are an accounting firm and recently fired an employee at will.  We have always understood that Montana law disfavors non-competition agreements, therefore, our employment agreement provides that if the accountant provides services to our clients within six months of leaving, he will pay us the profits from such an engagement which are stipulated to be 75% of gross revenues.   Since our former accountant is not completely prohibited from competing, isn’t this agreement enforceable?

Dorsey’s Response:

Probably not.  The non-compete laws of Montana are strikingly similar to those of California and North Dakota and originated with the Field Code which California adopted in 1872 and Montana adopted in 1875.   See MCA 28-2-704 and 705 and California Business and Professions Code §16601-02.  In all these states, non-compete agreements are disfavored as a restraint of trade. California expanded exceptions to its prohibitions against non-compete agreements to allow exception for non-compete agreements in connection with the sale of all of one’s interest in a business.  See California Business and Professions Code §16601. Montana followed but enacted a narrower exception.

For years, Montana courts interpreted non-compete agreements identically to California’s courts, following the rules laid out by California’s Supreme Court.  Then in Dobbins v. Rutherford 218 Mont. 392, 396 (1985).  The court held that Montana would apply a rule of reason test to non-compete agreements executed as part of a business sale and as part of an employment contract.  Under this rule, a non-compete agreement is enforceable if: (1) the covenant is limited to time and place; (2) the covenant is based on a good consideration; and (3) the covenant affords a reasonable protection for and does not impose an unreasonable burden upon the employer, the employee or the public.

However, the Montana courts remain more accepting of non-compete agreements in business agreements than in employment contracts. While the courts have held that such covenants in employment cases can be enforceable, when examining the facts of each case, they have invalidated the agreements or reused to enforce them for other reasons.

In the most recent case, Wrigg v. JCCS, 362 Mont. 496 (2011), Wrigg signed a series of employment agreements for a specific term, each with non-compete agreements. She was terminated at the expiration of her last contract.  Wrigg sued to declare the non-compete agreement unenforceable arguing there is no legitimate business interest in a covenant not to compete when the employer terminates the relationship.  The trial court rejected her claim and held the non-compete agreement enforceable.  The Supreme Court reversed and found the non-compete agreement unenforceable because JCCS terminated Wrigg without cause which it held constituted an admission that no legitimate business interest for the termination and the non-complete agreement.  The court reviewed decisions of the Seventh Circuit under Illinois law and Pennsylvania wherein those courts decided an employer could not claim a legitimate business interest in a non-compete agreement when it terminated the employee without cause, as the decision to terminate “reveals the employer’s belief that the employee is incapable of generating profits for the employer. It would be disingenuous for an employer to claim an employee was worthless to the business and simultaneously claim the employee was an existential competitive threat.  The employer could not claim it was in need of protection, and, therefore, could not demonstrate a legitimate business interest in the covenant.”