Medtech Must Heed Choice-of-Law and Choice-of-Forum Clauses

Many companies within the medical device industry operate across state lines. The company may be headquartered in one state, but its employees live, work, or sell medical devices in another. This can create legal challenges for employers when bringing a lawsuit against a departing employee or new employer, or defending a lawsuit brought against the employer based on a new hire. The enforcement of the non-compete agreement often times depends on what law applies or where a lawsuit is filed. This implicates choice-of-law and choice-of-forum issues.
 
Employment contracts typically have provisions called choice-of-law and choice-of-forum clauses. Under these clauses, employers and employees agree to have the laws of a specific state or jurisdiction apply and to litigate in a particular forum or court should a dispute arise. It is not uncommon to see the enforcement of these clauses determining which side will win a lawsuit.
 
A recent example involving a choice-of-law clause is a case out of the Sixth Circuit (which governs employers that operate in Kentucky, Michigan, Ohio, and Tennessee), Stone Surgical, LLC v. Stryker Corporation. The case involved a departing sales representative from Stryker. Stryker is headquartered in Michigan, but the sales rep lived and worked in Louisiana. The sales rep was a long-time employee, but left Stryker to work for a regional competitor. Stryker sued the sales rep for violating his non-compete agreement, and filed in Michigan invoking the Michigan choice-of-law and choice-of-forum clauses in the non-compete agreement. After the employee lost at the trial level when a jury verdict was rendered against him, he appealed to the Sixth Circuit challenging the enforcement of the Michigan choice-of-law and choice-of-forum clauses. If successful, the appeal could have turned the case. Louisiana has a statute severely restricting non-competes that also invalidates choice-of-law and choice-of-forum clauses in employment agreements involving Louisiana employees.
 
Ultimately, the challenge was not successful. The Sixth Circuit enforced both the choice-of-law and choice-of-forum clauses on appeal affirming the trial court. The court rejected the choice-of-forum argument without much analysis simply holding that Michigan law “favors forum-selection clauses.” The choice-of-law argument was a closer question. To decide this issue, the court applied Michigan’s choice-of-law rules. These rules create a framework for the court whereby it determines based on certain tests whether Michigan law or Louisiana law will apply. Here, the court had to determine (1) if Louisiana had the “most significant relationship” to the employment contract, and if so (2) whether Louisiana had a “materially greater interest” than Michigan. If the court answered yes to both questions then Louisiana law would apply.
 
Louisiana was the answer to the first test, but not the second. It had the most significant relationship of the two states because the sales rep lived and worked in Louisiana and his non-compete agreement restricted his ability to work there. However, Louisiana did not have a “materially greater interest” than Michigan in determining the validity of the non-compete. Although Louisiana has a statute severely restricting non-competes, Michigan also has a strong interest in enforcing non-competes. Thus, Louisiana’s interest was not materially greater than Michigan’s so Michigan law applied.
 
In addition to choice-of-law, choice-of-forum clauses also are critically important to medical device disputes. Medtronic, Inc. v. Ernst is a recent example. In that case, Medtronic sued one of its global competitors in the neuro-stimulation device market, Nevro Corp. Nevro is an industry leader in the market in Australia. Medtronic is an industry leader in the United States and is working to expand globally. At the time of the case, Medtronic was fourth out of four companies in Australia in this market. Nevro hired Ernst to market neuro-stimulation devices to physicians in Australia. She had formerly worked for Medtronic in a similar position marketing to U.S. physicians. She worked directly with these physicians and formed strong relationships. As a result, Medtronic had her enter a non-compete to protect itself from her potential departure to prevent her from leveraging these relationships for a new employer in a new position for a competitor. The position she accepted with Nevro appeared to be such a position.
 
Accordingly, Medtronic sued Nevro in Minnesota state court, obtaining a temporary restraining order (TRO). A TRO is an emergency injunction, or court order, that compels or restrains the defendant from acting in a certain manner demanding immediate compliance with the court order. In this case, the TRO prevented Nevro from employing Ernst.
 
Importantly, Medtronic did not sue Ernst and merely obtained a TRO against Nevro. Thus, when Nevro subsequently moved to remove the action from state to federal court, Ernst was not a party to the case. Only after Nevro moved to remove the case did Medtronic seek to add Ernst as a defendant. The timing of this decision proved to be crucial to the outcome of the case.
 
Medtronic opposed the removal and sought to remand the case back to state court. Medtronic relied on a forum-selection clause in Ernst’s employment contract whereby she agreed to litigate all disputes in Minnesota state court. The forum-selection clause essentially blocked Ernst from removing the case to federal court because, under the agreement, she agreed to litigate in state court and waived her right to remove to federal court. Interesting, if Ernst had been a party at the time of removal, her forum-selection clause would have bound Nevro too. Federal rules require unanimous consent of all defendants prior to removal, and in light of Ernst’s forum-selection agreement, she could not consent to removal because she had waived that right.
 
Fortunately for Nevro, Ernst was not a party at the time of removal and her consent was not needed. Instead, when deciding the issue of removal, the court solely focused on Nevro and whether the forum selection clause could be applied to it. Nevro was not a party to the employment contract so it could only be bound by the forum-selection clause if it was a “closely related party.” The court held that it was not. It was not “foreseeable,” or predictable to Nevro, that it would be bound by the contract and forum-selection clause. In fact, Nevro did not even add Ernst to the litigation, Medtronic did. Nor did Nevro have a sufficiently common interest with Ernst. Indeed, they were both represented by separate counsel in federal court.
 
Having found itself to be the proper forum, the federal court was free to take up the merits of the case. It decided, contrary to the state court, that Medtronic had not met the requirements for a TRO because it could not establish irreparable harm (i.e., harm that cannot be undone or reversed or compensated by damages). Even though the undisputed evidence proved that Ernst had misappropriated confidential information (usually a key piece of evidence for the plaintiff-employer), the court found that this did not establish irreparable harm because Ernst had returned the information, had not accessed it after she left, and could not access it in the future. The court further found no evidence of irreparable harm because Ernst had only worked with U.S. physicians while with Medtronic and took no part in Medtronic’s global marketing efforts. Therefore, in Ernst’s new marketing position, working exclusively in Australia with Australian physicians, she would not harm Medtronic because she would not use the information she had learned while working at Medtronic in her new position.
 
These cases are significant to the medical device industry. Many employers operate across state lines, and as a result, these issues that will come up time and again in legal disputes. The law governing restrictive covenants varies widely from state to state and sometimes within the state. Accordingly, medical device employers with a multi-state presence or workforce should ensure their employment agreements comply with the laws of the particular jurisdictions in which they operate. Indeed, some states, such as Louisiana, have laws that declare choice-of-law and choice-of-forum provisions in employment agreements unenforceable. As a result, employers would be wise to have the choice of whom to sue, where, and when, top-of-mind because these factors could decide the outcome of a case.