In Medtronic, Inc. v. Hughes, Civ. No. A10-998, 2011 WL 134973, 2011 Minn. App. Unpub. LEXIS 52 (Minn. Ct. App. Jan. 18, 2011), the Minnesota Court of Appeals calls attention to the risks that employers face when hiring an employee who has previously entered into an enforceable non-compete agreement.
The Defendant, James Michael Hughes (“Hughes”), had worked for Medtronic, Inc. (“Medtronic”) as a high-level employee. In 2006, he entered into a non-compete agreement with Medtronic prohibiting him from selling cardiac rhythm disease management (“CRDM”) devices worldwide for a two-year period after his employment with Medtronic ceased. Hughes received independent consideration of over $50,000 worth of Medtronic stock in exchange for entering into the non-compete.
In 2008, Hughes was recruited and accepted a job at St. Jude Medical S.C., Inc. (“St. Jude”) as a CRDM regional sales director in Orlando, Florida. St. Jude was aware of Hughes’ non-compete agreement with Medtronic, and assured Medtronic that Hughes’ employment at St. Jude would not breach the terms of Hughes’ non-compete. Medtronic disagreed and filed a lawsuit against Hughes, alleging anticipatory breach of contract. Hughes answered and counterclaimed for declaratory relief, arguing the non-compete was unenforceable in its entirety or overbroad and required modification. Specifically, Hughes asked the district court to reform the covenant to a “reasonable geographic boundary” that would not include Hughes’s employment in Florida with St. Jude and a time limitation no longer than one (1) year in length.
District Court Holding
The district court denied injunctive relief to Hughes and refused to reform the non-compete early in the proceedings. Ten months after Hughes left Medtronic, while the litigation was still pending, St. Jude directed Hughes to begin working in a division of the company that directly competed with Medtronic – the CRDM division. At this time, Medtronic amended its complaint to add a claim for tortious interference with contract against St. Jude, and sought a temporary injunction against Hughes. The district court enjoined Hughes from competing until the merits of the case were resolved, held that Medtronic’s non-compete agreement with Hughes was enforceable, blue-penciled the duration of the covenant from two years to one year, and found that St. Jude had intentionally procured Hughes’ breach of contract and was liable for tortious interference. The district court awarded Medtronic over $600,000 in damages and attorneys’ fees. Hughes and St. Jude appealed.
Court of Appeals Holding
The Court of Appeals first examined whether the terms of the non-compete agreement were reasonable.
First the Court examined whether a non-compete must have a geographic limitation that is more narrow than “worldwide”. The Court concluded that Medtronic’s worldwide scope in the non-compete agreement was enforceable for several reasons:
- Medtronic operated on a global scale with respect the CRDM products
- Medtronic competed with St. Jude in the worldwide markets for CRDM products
- The confidential information that Hughes had access to at Medtronic was not limited to one geographic location, but could be applied to international markets
- Because Medtronic’s noncompete covenant is restricted to certain cardiology products, Hughes could work for a competitor in a sales capacity in a different division
Therefore, the Court of Appeals held that the product-specific limitation, even without a narrow geographic scope, struck a reasonable balance between Medtronic’s need to protect its confidential information and Hughes’ need to earn a living. The Court of Appeals also noted Hughes’ decision to work for St. Jude in a territory that was geographically close to his former territory for Medtronic, and viewed this fact as a contributing factor in finding that the worldwide scope was reasonable in this case.
Hughes also argued that the district court erred in “blue-penciling” the non-compete duration from two years to one year, instead of a shorter period of six months. Under the blue-pencil doctrine as it has developed in Minnesota, a court can take an overly broad restriction and enforce it only to the extent that it is reasonable. Although the district court found that it was questionable whether Medtronic’s confidential information was truly confidential warranting protection longer than six months, the Court of Appeals upheld the district court’s reduction of only one year because the district court’s findings were not inconsistent as to duration.
Tortious Interference with Contract
Finally, the Court of Appeals affirmed the trial court’s award of over $600,000 in damages, including attorney’s fees, to Medtronic for tortious interference with contract. The Court of Appeals reasoned that because Medtronic’s noncompete covenant prohibited Hughes from working for a competitor in the CRDM sales industry, and Hughes accepted a position in the CRDM industry with St. Jude before he had resigned from Medtronic, Hughes breached his noncompete. The Court further held that St. Jude’s conduct demonstrated intentional procurement of Hughes’ breach (1) individuals from St. Jude met with Hughes to discuss a position in the same field and concerning the CRDM products; (2) a St. Jude regional vice-president called and e-mailed Hughes urging him to accept the position and outlining compensation and benefits terms; and (3) St. Jude offered Hughes a job that was prohibited under the non-compete agreement with Medtronic. The Court of Appeals further found that St. Jude offered no evidence that it was justified in procuring Hughes’ breach.
Takeaways From the Hughes Decision
There are several lessons to be taken away from the Hughes decision. First, employers who are seeking to enforce non-compete restrictions should consider whether a geographic scope is necessary, or whether a product-specific definition is more appropriate. Second, Employers that are seeking to hire an employee who is subject to restrictive covenant obligations with their former employer should carefully assess the risks of hiring such an employee and what job duties are assigned. Here, although St. Jude took precautions to notify Medtronic of their hiring of Hughes, and apparently believed that Hughes first position would not violate the non-compete, St. Jude later reassigned Hughes to a role that the Court determined directly competed with Medtronic and paid the price. The Hughes decision reaffirms that future employers cannot be too cautious in evaluating the enforceability of a potential employee’s non-compete with their former employer and weigh the pros and cons of hiring such an employee.
If you have questions about the enforceability of your non-compete agreement or are involved in a lawsuit surrounding unfair competition or misappropriation of trade secrets, contact one of the Minnesota non-compete attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota non-compete attorney Kelly M. Dougherty represents both employees and employers in a variety of employment law matters, including drafting, negotiating, and litigating disputes over Minnesota non-compete agreements. Kelly may be reached at 612.455.0504 or email@example.com. Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm.