Restrictive covenants are all the rage these days. These agreements put into place restrictions on when and where an employee can work after the employment relationship ends. The most common types of restrictive covenants are better known as non-compete and non-solicitation agreements. They are perhaps the most practiced way for a company to protect against post-employment competition by a former employee.
The difficulty for any employer attempting to enforce a restrictive covenant agreement is the extensive limits that states typically impose on these agreements. In Wisconsin, as is the case with most states, such agreements are disfavored. To be enforceable, a restrictive covenant agreement must (1) be necessary for the protection of the employer; (2) provide a reasonable time period; (3) cover a reasonable territory; (4) not be unreasonable to the employee; and (5) not be unreasonable to the general public. Unless drafted by a lawyer who knows this area of law, these contractual agreements can be difficult to enforce. Even then, it can be tough for such terms to survive judicial scrutiny.
A recent opinion by the Eighth Circuit Court of Appeals may put significant persuasive weight behind an alternative means of protecting against post-employment competition that avoids the scrutiny of restrictive covenant law. In St. Jude Medical S.C., Inc. v. Biosense Webster, Inc., 14-3886 (8th Cir. April 12, 2016), the Eighth Circuit awarded an employer damages for sales made by its former employee at a new employer when the employee left employment before his contractual term expired.
St. Jude signed Jose de Castro to a three-year employment agreement as a sales representative in 2011. However, in February 2012 (before his three years were up), de Castro resigned at St. Jude to begin employment at its competitor, Biosense. After some legal procedure, a jury awarded St. Jude damages from Biosense and de Castro for the cost of replacing him, lost profits, and attorney’s fees.
Significant to this blog post, the Eighth Circuit agreed with the district court that the employment agreement between St. Jude and de Castro “was a valid term-of-years employment contract, not a restrictive covenant, because it is enforceable by damages only.” In other words, the employment agreement escaped the scrutiny of restrictive covenant requirements because St. Jude was not attempting to limit de Castro’s post-employment activity but instead was only seeking to recover damages related to de Castro’s departure. Important to the reality of costs related to embarking on this type of strategy, the Eighth Circuit also agreed with the district court that, under Minnesota law, St. Jude could recover lost profits from Biosense under its tortious interference with contract claim.
Time will tell whether this becomes a popular alternative strategy of protecting against post-employment competition compared to undertaking the rigors of enforcing a non-compete agreement. This strategy may prove to be a more difficult means of protecting against post-employment competition for smaller employers because of the cost comparison to enforcing a non-compete agreement. Whereas the St. Jude strategy seemingly requires the plaintiff to undertake full litigation and the corresponding risks of recovery, parties are typically able to get a relatively quick answer on the enforceability of a restrictive covenant through declaratory or injunctive relief. The St. Jude approach also has the drawback of allowing someone like a sales employee to maintain his or her relationship and take the goodwill of his or her relationship with customers to a new employer, which is often the former employer’s greatest interest in enforcing a restrictive covenant. Regardless, this is a notable alternative strategy for employers to consider.