A Long Non-Compete Battle

A year-old fight between rival medical device makers over a man who has been called a marketing guru has drawn courts in California and Minnesota into an extraordinary showdown over the enforceability of non-compete agreements.

Although contracts restricting future employment by a competitor are gaining popularity across the country, California courts have consistently held they violate an 1872 state law and the public’s interest in promoting the freedom to choose where to work.

Does that make California an escape hatch for people who have signed non-competes in 47 states where post-employment restrictions are permitted?

That’s the central question in a closely watched corporate feud that Mark Stultz triggered when he quit Minneapolis-based Medtronic Inc., where he promoted a spinal cord stimulator. He went to Advanced Bionics Corp., but the dispute has prevented him from working on the marketing campaign for the Valencia company’s version of the pain-relief device.

Rulings have ping-ponged between Minnesota and California in the case, which pits the interests of out-of-state employers in ensuring that trade secrets stay secret against those of workers seeking jobs in their area of expertise.

“We have two states’ judges who are literally butting heads,” said Todd M. Malynn, a Los Angeles lawyer who is representing Stultz and Advanced Bionics. “The Minnesota judge is following Minnesota laws, and the California judge is doing the same thing with California law.”

Courts in Los Angeles appear to be winning, for now. At the next hearing, set for June 19, a Los Angeles judge will have the opportunity to decide whether the Minnesota job contract is enforceable under California law.

If Stultz succeeds, the precedent could turn California into a “dumping ground” for lawsuits by workers seeking to escape non-compete contracts, said Roman Silberfeld, a Century City-based lawyer representing Medtronic, a world leader in the medical device industry.

“There are some very large fundamental business and legal principles at stake,” Silberfeld said. “The object of this is not to hurt employees. The object is to protect the single most important resource Medtronic has, and that is its ideas.”

Stultz said he was not aware he would be asked to sign a post-employment restriction until his first day on the job in 1995. At that point, having left his previous job, he said, he felt he had little choice.

“It puts an employee in an awkward spot,” he said. “You look at the legal wrangling that’s gone on in this case. There’s no way that as a non-attorney, an employee can really know what these non-compete agreements are about.”

If Stultz is allowed to work on Advanced Bionics’ spinal cord stimulator campaign, Medtronic believes, trade secrets could be divulged--one circumstance under which California law allows companies to prevent employees from working on rival products.

“Mark Stultz has worked for Advanced Bionics since the day he resigned from us,” said Rita McConnell, Medtronic senior legal counsel. “It is only spinal cord stimulation and the knowledge and confidential information and background in that narrow category that the Minnesota court kept him from working in. He is working in his chosen profession. It is just one device affecting pain control that he can’t work on.”

McConnell said that in marketing the device, Stultz interviewed medical leaders and listened to focus groups discuss what changes and new devices were most desired. His job was to bring that information back to Medtronic and help the company decide how to move forward, she said.

“Mark Stultz knows where we’re going with our product and where we’re not going,” McConnell said. “He knows what blind alleys we’ve gone down. If a competitor knows that, it’s a huge advantage because then they don’t have to go down those blind alleys.”

But Advanced Bionics President Jeffrey H. Greiner said the company wanted Stultz for his expertise in marketing spinal cord stimulators and for his relationships with widely known leaders in that pain treatment field--not for any trade secrets.

In fact, Advanced Bionics required Stultz, as it does all employees, to sign a document agreeing to keep former employers’ trade secrets secret, he said.

“There may be occasions when a competitor chooses to hire an employee from another competitor in order to get those trade secrets or get information that it’s not entitled to,” Greiner said. “And in those cases, the courts should protect the rights of the former employer and shut that down. All states protect trade secrets. The no-competition clause is an additional contractual matter, and in many cases protects the monopoly, which is what’s really going on with Medtronic.”

Although most states prohibit disclosure of trade secrets, recourse usually is limited to suits for damages after the beans have been spilled. Employers view non-competes as more efficient because they bar employees from working for rivals or on rival products, typically for two years, long enough for inside information to become stale.

Critics view such agreements as tantamount to indentured servitude, making it all but impossible for someone to move to a new job in the field in which he has the most experience.

High Costs to Fight Non-Compete Contracts

Employers in states that enforce post-employment restrictions are loath to hire someone who has signed such a contract--even one that a court might invalidate as overly restrictive--because of the costs of obtaining such a ruling. Advanced Bionics already has spent nearly $1 million trying to defeat Stultz’s non-compete.

Workers, especially between jobs, usually cannot afford to hire lawyers to fight non-competes, said Carl Khalil, a Virginia Beach, Va., lawyer, who founded BreakYourNonCompete.com a year ago.

For $49, visitors to Khalil’s Web site can read outlines of 16 major legal strategies for breaking non-compete contracts. The site gets an average of 5,000 hits and 50 purchases a month, Khalil said. “It seemed to me there was a real need to get [workers] information that would help them.”

The Web site features a special section on California, which has been most vigorous in striking down non-competes, Khalil said. “I did say, ‘If you are totally desperate, move to California.’ ”

That may sound extreme. But, particularly for workers with high-tech skills and start-up ideas, the path to California is well worn, said Ronald J. Gilson, a Stanford law professor.

“Let’s say you are a really clever engineer in Massachusetts,” Gilson said. “You have an idea, but also a non-compete. You are stuck. If you move to California, you can do it.”

In a published study, Gilson blamed Massachusetts’ vigorous enforcement of non-compete contracts for the failure of its Route 128 high-tech corridor to keep pace with Silicon Valley, where the ban on non-competes promoted its unique job-hopping and start-up-spawning culture.

“That sharing of information, that high-velocity movement of creativity, creates a sum that’s larger than its parts,” he said, adding that Los Angeles’ entertainment industry complex and La Jolla’s biotech hub also may benefit from the free-flow of workers and ideas.

“If you’ve found somebody you really want, you can, in effect, launder the candidate through California,” Gilson said.

Yet out-of-state companies have been able to enforce non-compete contracts by getting to a home-state court first, said Malynn, the lawyer for Advanced Bionics and Stultz. “Even though [workers’] rights are protected by [California] statute, they are not being protected in practice.”

Both sides agree that the Stultz case could set a precedent that out-of-state workers could escape non-competes by beating former employers to the courthouse--and filing suit in California.

Stultz attempted to do just that on June 7, 2000, the day he quit Medtronic and went to a Los Angeles court seeking a temporary order preventing Medtronic from trying to enforce the contract in Minnesota.

The Los Angeles judge sent Stultz away, saying he had to give Medtronic 24 hours’ notice.

That allowed Medtronic to obtain a court order in Minnesota, preventing Stultz from participating in marketing of Advanced Bionics’ stimulator. The Minnesota court also scheduled a trial over the enforceability of the contract.

Back in Los Angeles, a judge responded by setting a separate trial over the contract. And, in a highly unusual move, the Los Angeles judge issued an order preventing the case from going forward in Minnesota.

Medtronic appealed and lost.

“California courts have consistently declared [the state’s ban on non-competes] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice,” the appellate court wrote in March. “California has a materially greater interest than does Minnesota in the application of its law to the parties’ dispute, and . . . California’s interests would be more seriously impaired if its policy were subordinated to the policy of Minnesota.”

Medtronic has asked the California Supreme Court to review that decision, arguing that it violates the sanctity of contracts and damages judicial relations and customary commerce between the states. Unless the Supreme Court intervenes, the case is set to go forward in Los Angeles.

Halfway through the two-year waiting period in Stultz’s contract, neither side appears ready to back down. Advanced Bionics doesn’t just want Stultz on its spinal stimulator team. The company wants an order that would bar Medtronic from trying to stop any other employee from joining Advanced Bionics.

A Battle for Future Employees

“This battle that we are engaged in is not just for Mark Stultz but for all the other potential employees who might want to come to work for Advanced Bionics,” said Greiner, the company president.

Stultz is the first employee Advanced Bionics has lured from Medtronic, which employs 25,000 people.

Advanced Bionics is staffing up in order to expand beyond its cochlear implant, a device that improves hearing. In less than 18 months, the company has added 150 people for a total of 430, and Greiner said he expects to keep up that pace for several years.

So who is in charge of recruiting?

Well, since he can’t market the spinal cord stimulator, Advanced Bionics had to give Mark Stultz something to do.