Applying Minnesota law, the Eighth Circuit Court of Appeals recently affirmed a verdict in favor of St. Jude Medical against a former employee and competitor on breach of contract and tortious interference with contract claims. St. Jude Medical S.C., Inc. v. Biosense Webster, Inc., — F.3d —, No. 14-3886 (8th Cir. Apr. 12, 2016), affirmed a damages award in favor of St. Jude against a former salesman, his current employer, Biosense Webster. St. Jude was awarded the cost of replacing their salesman, lost profits, and attorney’s fees.
The key takeaways from the decision are:
- Lost profits are recoverable in a tortious interference with contract claim.
- A term-of-years employment agreement is not a restrictive covenant if the agreement (a) provides a term of years, (b) gives the employee protection from termination, and (c) limits remedies for its breach to damages actually incurred, and not injunctive relief.
- A written choice-of-law provision in an employment agreement is enforceable if it is made in good faith, even if the provision is not negotiated and the provision is more favorable to the employer than the employee.
The litigation arose from Biosense’s alleged “poaching” of St. Jude’s medical equipment salesman, Jose de Castro. St. Jude and Biosense are competitive manufacturers of medical equipment. De Castro was a sales representative for St. Jude in the Bay Area. In 2011, St. Jude and de Castro entered a three-year employment agreement. The agreement limited St. Jude’s ability to terminate de Castro and prevented him from leaving St. Jude during the term of the agreement.
Soon after entering the agreement, de Castro was approached by Biosense on the basis of his relationship with a key client, Sequoia Hospital. Biosense offered to hire de Castro and promised to defend him from the repercussions of terminating his employment agreement with St. Jude before the term expired.
The district court in Minnesota granted summary judgment to St. Jude on all issues except damages, which were tried to a jury and to the court. The jury awarded St. Jude damages of $95,361.04 for the cost of replacing de Castro and $550,952.00 for lost profits. The court awarded St. Jude $662,018.00 in attorney’s fees.
On appeal, Biosense argued the district court improperly awarded damages for lost profits on the basis of Biosense’s tortious interference with St. Jude’s employment agreement with de Castro. Biosense argued that only contract damages are available for tortious interference. The Eighth Circuit disagreed. The panel clarified lost profit damages are available in tortious-interference claims. St. Jude presented sufficient evidence to establish causation for the lost profit award by showing a decline in its profits at Sequoia Hospital corresponding with Biosense’s increase in profits after de Castro changed employers.
Biosense and de Castro also challenged the district court’s application of Minnesota substantive law, claiming the choice-of-law provision in the employment contract was not “negotiated.” The panel disagreed, holding Minnesota law only requires that the parties “act in good faith” when agreeing to a choice-of-law provision. Indeed, the “very purpose of a choice-of-law provision is to select one body of governing law even though more than one could apply.” The court found it “unsurprising” that the Minnesota law was favorable to St. Jude vis-à-vis de Castro. The provision is “simply part of the exchange of rights and obligations under the agreement.”
The Eighth Circuit also rejected Biosense’s argument that the employment agreement with St. Jude was a restrictive covenant rather than a valid term-of-years employment contract. The court found the agreement was a valid term-of-years contract because “it was enforceable only by damages, not an injunction, and was limited to a fixed term.” As such, St. Jude properly bargained for the limited lock-up period by providing de Castro with valuable compensation and protection from termination through damages actually incurred.
The Eighth Circuit was possibly motivated not to establish a rule which could result in a net benefit by knowingly interfering with an employment contract. The decision will no doubt give pause to employers considering hiring an employee subject to an existing “non-compete” or “term of years” agreement.