In this tenth article in the continuing series “The Restricting Covenant,” I discuss non-competition issues that arise in the orthopedic medical device industry.
I would venture to say that, in the past 20 years, the orthopedic medical device and equipment industry is at the top of the charts for high-stakes litigation and precedent-setting rulings with respect to non-competition and non-solicitation disputes. Many orthopedic medical device and equipment companies have sued each other and their former employees, sales representatives, independent contractors, vendors, consultants or distributors for violating the terms of their restrictive covenants. These companies have sought injunctive relief and money damages.
These lawsuits touch upon the hot-button issues that typically arise in many restrictive covenant cases – confidential and trade secret information, fair vs. unfair competition, protectable vs. non-protectable business interests, tortious interference, short and long-term customer relationships, measure and type of damages, irreparable harm, choice of law and venue, public policy concerns and balancing of harm to the parties, boundaries of lawful solicitation, poaching, causation, and reasonableness of time, geography and scope of activities restrictions.
Is the Juice Worth the Squeeze?
The fact pattern in many of these medical device non-compete cases is very similar: Sales Rep joins Device Company and as a condition of his or her employment signs a non-competition agreement with post-employment restrictions (e.g., no selling or promoting competitive products for a competitor for one year in the same geographic territory to the same customers). Device Company invests time and expense in training Sales Rep on its products, pricing and marketing strategies, physician preferences and operating procedures, sales techniques and other core business matters. Sales Rep establishes business relationships with the Device Company’s customers (i.e., hospitals, surgery centers, doctors and their staff). Sales Rep is terminated or resigns, joins a new Device Company, and sells or promotes similar products to the same customers in the same territory during the non-compete period.
Device Company sends a cease-and-desist notice to Sales Rep (and perhaps his or her new employer Device Company). In response, Sales Rep might argue: (1) the non-compete is not enforceable under the applicable state law because it is overbroad in scope or unreasonable for other legal reasons, or (2) Sales Rep did not violate the non-compete because she promoted different, non-competitive products to the same customers, or (3) Sales Rep did not solicit the customer, but rather the customer contacted her and made an independent business decision to change products and medical device companies thereby causing no harm to her former employer.
While many of these disputes are resolved before a formal complaint is ever filed in court, a striking number of them are fought for years and at great expense in courtrooms around the country. As a practical matter, once the Sales Rep leaves the Device Company and joins a competitor, the odds of the former Device Company keeping the business from its customers diminishes. Nevertheless, there might be other practical reasons why the Device Company would want to pursue claims against the outgoing Sales Rep, including to deter and dissuade competitors from poaching additional employees or customers; to deter and dissuade other employees from departing to competitors; to protect the company’s legitimate business interests, confidential information and trade secrets; and to give the company sufficient time to try to retain the customer relationships without undue interference or influence by the departing employees or the competitor.
A Top Ten List
In the spirit of David Letterman’s return to television (on Netflix), I’ve created a “Top Ten List of Key Observations from Medical Device Non-compete Cases,” with direct quotes from the courts that adjudicated them:
- “How a contract should be interpreted is typically a question of law suitable for resolution by a court on a motion for summary judgment. If the terms of the contract are ambiguous, however, the meaning of the contract becomes a factual question that must be decided by a jury.”
- “[F]orum selection clauses are deemed presumptively valid and should be honored absent some compelling and countervailing reason.”
- “The court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.”
- “In cases involving covenants not to compete, a plaintiff has the burden of demonstrating the loss attributable to defendant’s competition versus the loss attributable to other potential causes of declines in revenue.”
- “Non-solicitation and non-compete clauses are enforceable to the extent they are reasonable.”
- “Customer lists and confidential business information cannot be trade secrets if they are easily or readily obtained, without great difficulty, through some independent source other than the trade secret holder.”
- “A noncompete agreement . . . is enforceable if it has the following characteristics: (1) it protects a legitimate business interest; (2) it is reasonable in light of the hardship to the employee and the public; and (3) it imposes time and territorial limits that are no greater than necessary to protect the employer’s legitimate business interest.”
- “If a noncompete agreement is deemed valid and if the elements of tortious interference are established, interference with the noncompete agreement by a third party is a tort for which damages are recoverable.”
- “To succeed in demonstrating a threat of irreparable harm, a party must show that the harm is certain and great and of such imminence that there is a clear and present need for equitable relief.”
- “Courts 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.”
The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues or special circumstances that might arise in the context of restrictive covenants and a particular occupation or industry. It is not intended to provide and should not be construed as providing legal advice. Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs. Stay tuned for future articles in this Series, which discuss the restrictive covenant landscape for many other occupations and industries, including janitorial services, laundry services, landscapers, lawyers, and more.