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Montana Supreme Court Holds That Employer May Not Enforce Non-Compete Agreement Where Employee Was Terminated Without Cause

Posted in Non-Compete Enforceability

By Paul Freehling

As a result of a recent ruling by the Montana Supreme Court in a case of first impression in that state, an employer there — as in several other states — ordinarily will not be permitted to enforce a non-compete provision in an employment agreement where the employer was solely responsible for ending the employment relationship. Significantly, the ruling might be different if the employee misappropriated trade secrets.

Wrigg, a CPA, started working for JCCS in Helena as a staff accountant in 1987 and was promoted to shareholder in 2003. She signed a series of two-year employment agreements each of which contained a provision which had the effect of imposing a monetary penalty if, during the 12 months after termination “for any reason,” she rendered certain professional services to a competitor of JCCS. In May 2009, JCCS informed Wrigg that the agreement which would be expiring June 30, 2009 would not be renewed. After she left JCCS, she was hired by another accounting firm but for significantly less compensation because, allegedly, of that firm’s concerns about the JCCS covenant. She filed a declaratory judgment suit against JCCS, seeking to invalidate the non-compete. JCCS counterclaimed based on the penalty clause and prevailed at trial, but the Montana Supreme Court reversed in all respects. Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C., Case No. DA 11-0147, 2011 MT 290 (Nov. 22, 2011).

In its unsuccessful effort to persuade the Supreme Court to affirm, JCCS cited Dobbins, Deguire & Tucker, P.C. v. Rutherford, MacDonald & Olson, 218 Mont. 392, 394-97, 708 P.2d 577, 578-80 (1985), a decision also involving an accountant. In Dobbins, that court reversed and remanded a lower tribunal’s holding that a non-compete covenant virtually identical to the one in Wrigg was unenforceable. But JCCS’ reliance on Dobbins was misplaced, according to Montana’s highest court in Wrigg, because the trial court in Dobbins did not address the issue of whether the “covenant served a legitimate business interest.” In both cases, the high court stressed that “Montana law strongly disfavors covenants not to compete” but added that it may be enforceable if it does not impose an unreasonable burden on the parties and the public. So, according to Wrigg, all that the Dobbins Court meant was that the trial court needed “to make factual findings as to the covenant’s reasonableness.”     

In Wrigg, by contrast, the Supreme Court said that because JCCS was responsible for Wrigg’s termination, it could not show that its “legitimate business interest” would be furthered by enforcement of the non-compete (according to Wrigg’s appellate brief, the accountants in Dobbins left their employment voluntarily). Therefore, under the circumstances in Wrigg  (involuntary termination) but not necessarily in Dobbins (voluntary), penalizing an accountant for pursuing her livelihood during the 12 months after her employment ended apparently was considered to be an unwarranted punishment. JCCS’ contention that Wrigg repeatedly had consented to the non-compete provision as written — “termination for any reason” — did not carry the day.

The Montana Supreme Court asserted in Wrigg that the applicable legal principle where an employee is terminated without cause is that “courts should scrutinize highly a covenant’s enforcement given the involuntary nature of the departure.” Intense scrutiny is required because the employer could have prevented harmful competition “simply by maintaining the employment relationship.” Further, “An employer’s decision to end the employment relationship 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 that an employee was worthless to the business and simultaneously claim that the employee constituted an existential competitive threat.” The court said that its ruling is supported by decisions from Iowa, New York, Pennsylvania, Tennessee, and the Seventh Circuit Court of Appeals (interpreting Illinois law).

Employers be aware: A non-compete provision in an agreement with an employee who is discharged without cause and who does not misappropriate trade secrets may be unenforceable.