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St. Jude’s Non-compete Upheld against Medtronic

 

signing agreement

Big news this week in the world of non-compete agreements and medical technology.  Judge M. Michael Monahan in Ramsey County has enjoined Joe McCullough, a former high-ranking executive of St. Jude Medical, from moving across town to rival Medtronic.   The judge’s analysis of the issues is very thorough, and the opinion provides a good template for how to think about these cases.

As the judge himself noted in his 15-page Opinion, this is not a “run-of-the-mill” employment dispute.  McCullough was employed by St. Jude for 16 years, and reached the highest levels of the company’s management, reporting directly to the company’s President-CEO.  In that role, he had access to “a significant quantity of high quality St. Jude confidential information.”   As the judge aptly summarized, McCullough’s “professional life was spent at the heart of St. Jude’s worldwide activities, second in importance and access only to [the CEO].” 

While it was unclear to the judge whether McCullough resigned or was fired from St. Jude (“Evidently in modern corporate parlance, “terminate”, “resign” and “retire” are synonyms, leaving the casual onlooker at a loss to know what actually occurred”), it was undisputed that McCullough formally terminated his relationship with St. Jude in May 2010, and accepted a written offer from Medtronic 52 days later.  Among the agreements he signed with Medtronic was a document called “Ethical Wall: Detailed Restrictions”.  While Medtronic and McCullough undoubtedly viewed this as an effort to protect St. Jude’s confidential information, the judge was not convinced:  “These documents evidence an attention to linguistic detail more commonly encountered in tax legislation or SEC filings rather than in employment contracts.  They are at the apex of the drafters’ art.  More to the point, the documents are evidence that both [McCullough] and Medtronic recognized that they were embarking upon a relationship that was laden with serious legal and ethical problems.”  Once St. Jude was informed by Medtronic of its decision to hire McCullough as its International General Manager”, this lawsuit quickly followed. 

St. Jude’s arguments in favor of enjoining McCullough from working at Medtronic were standard ones:  Medtronic is its direct competitor, McCullough had access to most if not all of its sensitive confidential information, and the only sensible way to protect such information was through a one-year prohibition on employment with Medtronic.  McCullough (who was represented as an individual in this matter by lawyers who frequently represent Medtronic in this type of case) also raised familiar arguments in defense:  the agreement was unenforceable for lack of consideration, and because it lacked any geographic, product or customer limitation; McCullough’s Ethical Wall with Medtronic was sufficient to protect St. Jude’s legitimate interests; and the Agreement was obtained by fraud. 

The Court properly analyzed St. Jude’s request for a temporary restraining order under the five factors established by the Minnesota Supreme Court in its decision in Dahlberg Brothers, Inc. v. Ford Motor Co.    In particular: 

  1. The nature of the relationship between the parties supports entry of an injunction given McCullough’s high-level position at St. Jude.
  2. The relative harm to St. Jude was greater than that to McCullough because McCullough will continued to be paid by Medtronic even if he is enjoined from working there, whereas St. Jude’s confidential information could be compromised forever.
  3. St. Jude was likely to succeed on the merits of its claims against McCullough.
  4. Public policy – the right of employers to safeguard their confidential information – weighs in St. Jude’s favor.
  5. There is no particular judicial burden in granting St. Jude’s request.  

The most important of the Dahlberg factors is, of course, the third: the likelihood of success on the merits.  It was here that the Court was able to consider each of McCullough’s arguments in detail.  On the consideration issue, McCullough had argued that there was no consideration for the agreement because he signed it after beginning in his position as Group Vice President, and under Minnesota law such a “mid-stream” agreement must be supported by additional consideration because continued employment alone is not enough.  The Court, however, rejected this argument, finding that there was no evidence that the agreement was backdated as McCullough had claimed, and that he had received additional benefits for signing the agreement.  

In regard to irreparable harm, McCullough argued that St. Jude would not be harmed because of the extensive protective provisions (i.e. Ethical Wall) in his Employment Agreement with Medtronic.   The Court was not convinced that the “product-by-product or country-by-country” approach incorporated in the agreement would product St. Jude’s confidential information when McCullough had worldwide responsibilities for all St. Jude products, present and future.    The judge also suggested that Medtronic’s “third-party beneficiary approach” to protecting St. Jude’s confidential information would not work “in the real world”; presumably an allusion to his earlier observation that the two companies are “well known to the global legal community for their energetic mutual litigation.” 

Finally, the Court considered the reasonableness of St. Jude’s proposed restriction.  He was not troubled by the fact that the agreement contained no geographic or product limitation given the nature of St. Jude’s business and McCullough’s place in that business.   He also found that a one-year restriction was “conservative” and “more than reasonable” (and pointed out that Medtronic imposes a two-year limitation on some of its employees.)    The judge did not give St. Jude everything that it wanted however; finding that McCullough’s active participation in St. Jude’s business (and therefore his access to St. Jude confidential information) had ended in October 2009, he started the one-year clock ticking from that date, rather than from the May 2010 resignation date that St. Jude had sought. 

In the end, Judge Monahan did a very fine job of analyzing the facts of this particular case under Minnesota law.  He broke no new legal ground, and reached a decision which appears to be correct under the facts as related in his opinion.

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