Recruiting Employees: Court Refuses To Enforce Out-Of-State Non-Compete Agreement; Practical Strategies

In California, most agreements that restrict employees from competing with former employers are illegal and California courts won’t enforce them. But what if you want to hire someone who signed a non-compete provision with an employer in another state that does recognize these agreements? A California Court of Appeal has confirmed that California employers aren’t bound by non-compete clauses workers signed in other states. This ruling also suggests a new strategy for fending off non-compete disputes, but as we’ll explain, doesn’t eliminate all the risk in hiring a worker who’s signed a non-compete agreement.

California Competitor Hires Ex-Employee Of Minnesota Firm

When Mark Stultz was hired as a sales representative at Medtronic Inc., a Minnesota medical device manufacturer, he signed an agreement not to work for Medtronic’s competitors for two years after his employment ended. The agreement stated it was governed by the laws of the state where Stultz worked, Minnesota.

Stultz eventually resigned and on the same day began working in Sylmar, Calif., for Advanced Bionics Corp., a Medtronic competitor.

Race To Court

Later that afternoon, Stultz and Advanced Bionics asked a Los Angeles court to rule that the non-compete clause Stultz had signed was unenforceable. Medtronic sued in Minnesota the next day to prevent Stultz from violating its non-compete clause. Eventually, the Los Angeles court issued an order prohibiting Medtronic from pursuing the Minnesota lawsuit. Medtronic appealed.

400+ pages of state-specific, easy-read reference materials at your fingertips—fully updated! Check out the Guide to Employment Law for California Employers and get up to speed on everything you need to know.

First-Filed Action Prevails

A California Court of Appeal upheld the Los Angeles court’s restraining order against Medtronic and ruled that Stultz could continue to work for Advanced Bionics. The court explained that when two courts in different states are asked to rule on substantially identical lawsuits, the court with the first-filed lawsuit typically can assume control over the action. This is true if: 1) the first lawsuit wasn’t designed to harass the adverse party; 2) the stay is necessary to avoid a conflict between the two courts; and 3) the first court can best determine the parties’ rights.

The court rejected Medtronic’s contention that Stultz and Advanced Bionics’ “rush to court” on a few hours’ notice to Medtronic was harassment. The court found this tactic was necessary to prevent Medtronic from first racing to court in Minnesota, where non-compete agreements are permitted.

Non-Compete Agreement Not Enforceable

What’s more, the court said, California has a strong interest in allowing employers to recruit the most talented and skilled workers. Employers need the freedom to choose from a nationwide applicant pool without being restricted by non-compete clauses signed in other states. The court did note that Medtronic was free to assert claims against Stultz and Advanced Bionics in a California court to prevent trade secret disclosures.

Practical Strategies

This case makes clear that California courts won’t enforce non-compete clauses from other states. But you still risk protracted and expensive litigation if you spirit away out-of-state competitors’ employees who have signed these agreements. Here are some practical strategies for avoiding problems:

 

1. Check applicant agreements. Tim Emert, a partner in the Oakland office of Crosby, Heafy, Roach & May, advises that before hiring a competitor’s employee, you ask the applicant for signed verification that they don’t have contracts with their current or former employers that could affect you, such as non-compete agreements, trade secret pro-visions or no-solicitation clauses. If agreements exist, get copies and review them carefully so you know the potential problems you could face.

    

2. Caution employees about trade secrets. Although a new hire’s non-compete agreement with a former employer may be unenforceable, you could still be sued if the new employee brings along a competitor’s trade secrets. Put yourself on record as warning new employees not to use confidential information from a previous job. To protect yourself, it may be necessary to assign the person to projects unrelated to their former work for a period of time.

    

3. Get to court first. If an out-of-state employer is likely to enforce a non-compete clause aggressively, this ruling shows the importance of getting to the courthouse first. If you don’t, the out-of-state court could hold the employee to their agreement or you could face a bigger legal hassle than you bargained for.