Eighth Circuit Decision Suggests Employers May Have An Alternative Option to Using Non-Compete Agreements
A recent Eighth Circuit Court of Appeals decision suggests another avenue for employers to secure damages from an employee who competes against them after employment ends – without the use and many limitations of a non-compete agreement.
In St. Jude Medical S.C., Inc. v. Biosense Webster, Inc. et al, the Eighth Circuit upheld a damage award under a term-of-years employment agreement. Specifically, the court held that an employer could be awarded lost profits when its employee, who had a three-year fixed-term employment agreement, resigned before the end of the term to go to a competitor. The award included the lost profits from an account that the employee succeeded in moving from St. Jude Medical to his new employer.
In the case, Biosense Webster, Inc., a subsidiary of Johnson & Johnson, recruited Jose B. de Castro while de Castro was working for St. Jude Medical S.C., Inc. as a sales person. De Castro had signed a three-year employment agreement with St. Jude, which had almost two years remaining when he was hired at Biosense. The agreement allowed St. Jude to terminate de Castro only "for cause," which included conduct ranging from the commission of a felony to failing to meet sales quotas.
The Eighth Circuit's decision, issued April 12, 2016, pursuant to Minnesota law, upheld the district court's decision that the employment agreement with St. Jude was a valid term-of-years employment contract. The court rejected defendants' argument that de Castro's agreement functioned as a restrictive covenant agreement and thus should be scrutinized to determine if it is overbroad and if enforcement is needed to protect a sufficient business interest. In so doing, the court noted that the agreement was enforceable by damages only, and not by an injunction, and rejected as immaterial evidence that St. Jude intended the three-year agreement to lock up the employee from competing. Instead, it said, "St. Jude bargained for the lock-up period by providing its employees with valuable compensation and protection from termination. And it limited the lock-up period and penalty to the term of the agreement and the damages actually incurred."
The Eighth Circuit also rejected Biosense's argument that it could be held liable only for contractual damages and not lost profit damages under a tort theory.
The Eighth Circuit's opinion suggests another avenue for employers to protect against competition by defecting employees. While the opinion suggests a fixed-term employment contract may not be enforceable through an injunction as would a non-compete agreement, it also suggests that fixed-term agreements are not burdened by case law holding restrictive convents to be disfavored contracts. For example, Minnesota courts will uphold restrictive covenants only to the extent reasonable and to the extent the covenant protects a sufficient business interest. Because the decision is limited to the facts of the St. Jude Medical case, it leaves open the question of how aggressively an employer can use a fixed term contract to lock up an employee.
See the Eighth Circuit's decision in St. Jude Medical S.C., Inc. v. Biosense Webster, Inc. et al., No. 14-3886 (8th Cir.).
If you have any questions about the court's ruling, or other issues related to non-competition law, please contact Daniel Oberdorfer, Steven Katras, or the Stinson Leonard Street attorney with whom you regularly work.