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, 2005 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 here.) 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 be enforced.
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 McCarter’s 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.
