[This article was originally published in the Minnesota Lawyer on August 1, 2016]
News that St. Jude Medical, Inc. will soon be acquired by Chicago-based Abbott Laboratories for $25 billion (subject to antitrust review), following Medtronic’s $42.9 billion acquisition of Dublin-based Covidien PLC and overseas headquarters move in 2014, gives one the sense the heydays of Minnesota-headquartered medical device companies may be in the past.
Regardless of the coming industry changes, medical device companies have made a noticeable mark on the state’s law regarding noncompetes, as “[c]ourts have repeatedly recognized that noncompete agreements in the medical device industry serve employers’ important and legitimate interests in long-term customer relationships and preserving goodwill.” Boston Scientific Corp. v. Duberg, 754 F. Supp.2d 1033, 1039 (D. Minn. 2010), (citing Guidant Sales Corp. v. Niebur, No. 01–1772, 2001 WL 1636502, at *7 (D. Minn. Oct. 18, 2001)). In 2009, U.S. District Court Judge Joan Ericksen noted, “Enforcement of noncompete agreements related to the CRM [Cardiac Rhythm Management] device industry has been a frequent subject of litigation.” St. Jude Med. S.C., Inc. v. Ord, Civ. No. 09–738, 2009 WL 973275, at *4 (D. Minn. Apr. 10, 2009).
Before acquisitions, tax inversions, and other strategic moves shifted local med-tech headquarters across state borders and overseas, Minnesota was known as “medical alley.” Medtronic launched the Minnesota medical device industry in 1949 and dozens of spinoff med-tech companies followed suit. By the 2000s, Minnesota was home to hundreds of med-tech companies, including Guidant’s Cardiac Rhythm Management division in Arden Hills, and Boston Scientific, which acquired the now Indianapolis-based Guidant in 2006.
During the industry’s zenith, cutting edge technology, new scientific research and offers of increased pay often lured professionals from one local med-tech competitor to another, thrusting Minnesota med-tech companies into an increased number of lawsuits, especially in the areas of noncompete and nonsolicitation agreements, trade secrets, and unfair competition. For some professionals, the offer to switch companies was irresistible, as Minnesota recruiters promoted the dense cluster of med-tech businesses in the metropolitan area, allowing Minnesotans to change their job without changing their residence. Likewise, the gain of a competitive advantage in the med-tech industry could be extremely profitable for individuals and companies vying to control sales territories and steer purchasing decisions worth millions of dollars.
While numerous high-profile med-tech disputes were litigated, the resulting decisions often became the leading authority interpreting noncompete law in Minnesota. One of the most famous noncompete cases, Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998), established an immediate precedent, after Kallok, a research scientist and senior manager at Medtronic, left to work for a competitor, who had actively recruited him in knowing violation of Medtronic’s noncompete agreement. The Minnesota Supreme Court called that tortious interference, for which attorney’s fees are recoverable. Medtronic was granted injunctive relief enforcing the noncompete agreement and third-party damages in the form of attorney’s fees, as the court determined recruiting companies were required to investigate and exercise due diligence regarding the effect and scope of any potential employee’s noncompete agreement. See also, Medtronic, Inc. v. Hughes, No. A10–998, 2011 WL 134973 (Minn. Ct. App.2011) (reinforcing damages available under Kallok when a third-party employer interfered with employee’s noncompete agreement by employing him in a department directly prohibited by the noncompete agreement).
Four years later, Medtronic was also responsible for a pair of decisions that addressed the question of choice of law provisions, and whether an employee who moved to California, which does not enforce noncompete agreements, can escape from the restrictions of a Minnesota contract. In Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal.4th 697 (Cal. 2002), the California Supreme Court reversed the California Appellate Court’s temporary restraining order against Medtronic’s parallel proceeding in Minnesota, subsequently giving deference to the contractual Minnesota choice of law provision. The ruling represented a significant departure from California’s steadfast stance against noncompete agreements, but was determined appropriate based on principles of judicial restraint and comity. Id. at 708. Meanwhile, the Minnesota Court of Appeals affirmed the use of Minnesota law, enforcing Medtronic’s noncompete agreement and providing Medtronic with injunctive relief. Advanced Bionics Corp. v. Medtronic, Inc. 630 N.W.2d 438 (Minn. Ct. App. 2001); see also, Medtronic, Inc. v. Gibbons, 684 F.2d 565, 568 (8th Cir. 1982) (affirming enforcement of choice of law provisions if they are made “in good faith and without an intent to evade the law”).
The enforceability of a noncompete agreement with a broad scope and lengthy duration was also called into question in a recent Minnesota Court of Appeals case involving St. Jude and Medtronic. In Medtronic, Inc. v. Hughes, the court ruled that a “worldwide” geographic scope was permissible when the employee held confidential information applicable in international markets, but only to the extent the noncompete applied to certain industry products. Medtronic, Inc. v. Hughes, No. A10–998, 2011 WL 134973, at *5, 6 (Minn. Ct. App. 2011). The court blue penciled the noncompete duration of two-years to one-year after Medtronic failed to prove its confidential information warranted two years of protection.
Moreover, employers have recently been successful in enforcing noncompete agreements that restricted or prevented employees from soliciting business from any prior client or customer, as the courts have found that “[i]rreparable harm may be inferred from breach of a valid noncompete agreement if the former employee obtained a personal hold on the good will of the former employer.” Boston Scientific Corp. v. Duberg, 754 F.Supp. 2D at 1039, citing St. Jude Med. S.C., Inc. v. Ord, 2009 WL 973275, at *5); see Guidant Sales Corp. v. George, Civ. No. 01–1638, 2001 WL 1491317, at *7 (D. Minn. Nov. 19, 2001).
As Minnesota courts continue to define and interpret the enforceability of noncompete agreements, some states like Massachusetts have discussed legislative limitations on the enforceability and scope of noncompete agreements, modeling the strict stance taken by California in an effort to spur innovation. It is unclear if this approach will prove successful, but considering Minnesota’s relatively firm enforcement of med-tech noncompete agreements, it is almost surprising that so many employees from Medtronic and other companies were able to depart and start second- and third-generation med-tech businesses.
Today, Minnesota med-tech companies remain a source of innovation and profits, employing thousands of individuals in the state. It remains to be seen if the med-tech industry will continue to generate litigation and new legal interpretations surrounding unfair competition in the future.
V. John Ella is a shareholder at Trepanier MacGillis Battina P.A. and practices in the area of noncompete litigation.
Anna Koch is a student at the University of Minnesota Law School, J.D. expected 2018.