Judge Cannot Enjoin Out-of-State Suit Over Non-Compete Clause

Friday, December 20, 2002

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Judge Cannot Enjoin Out-of-State Suit Over Non-Compete Clause—S.C.

By KENNETH OFGANG, Staff Writer/Appellate Courts

A California court cannot enjoin another state’s courts from enforcing an employee’s covenant not to compete with a former employer solely because such covenants violate this state’s public policy, the California Supreme Court ruled yesterday.

The fact that such covenants are illegal in California is not a sufficient basis for ignoring “principles of judicial restraint and comity,” Justice Ming Chin wrote for the court.

The decision “doesn’t tell us very much” about what measures California employers can take if they wish to hire employees who have signed such agreements with employers in other states, Robin Meadow, who argued the case for Sylmar-based Advanced Bionics Corporation, told the MetNews.

“We’re kind of left with an opinion that says that California has this really strong public policy, but it’s not enough to issue an anti-suit injunction,” Meadow, with the Los Angeles firm of Greines, Martin, Stein & Richland, said.

His adversary, David Axelrad of Encino’s Horvitz & Levy, said he had been instructed to refer all calls for comment to his client, Minnesota-based Medtronic, Inc. A corporate spokesperson there could not be reached.

Injunction Overturned

The high court’s decision unanimously reverses an order of this district’s Court of Appeal and overturns an injunction that purported to bar Medtronic, a maker of medical devices, from suing in Minnesota to block one of its managers from accepting a competing position with Advanced Bionics.

The manager, Mark Stultz, was hired by Medtronic in 1995 and signed a contract in which he agreed not to work for a competitor within two years of leaving Medtronic. The agreement also included a clause providing that it would be governed by the laws of the state in which Stultz was last employed by Medtronic.

In June 2000, Stultz quit Medtronic and accepted a position with Advanced Bionics, which hired him to market a spinal cord stimulation device. His last position at Medtronic had been as manager of a product line that included such devices.

Stultz and Advanced Bionics immediately filed suit in Los Angeles Superior Court, seeking a declaration that the choice-of-law clause and the covenant not to compete were unenforceable as contrary to California public policy. They also asked for a temporary restraining order barring Medtronic from suing Advanced Bionics or Stultz in any forum other than the Los Angeles Superior Court.

Medtronic avoided an immediate hearing on the TRO request by removing the action to federal court, then filed suit in Minnesota. The judge there issued a TRO, and later a preliminary injunction, barring Advanced Bionics from employing Stultz in a competitive role, and barring both parties from obtaining any order that would interfere with the Minnesota court’s jurisdiction to resolve the claims made by Medtronic.

The California action was subsequently remanded to Superior Court on the ground that Stultz was still a Minnesota citizen when the suit was filed, precluding the federal court from exercising diversity jurisdiction.

Superior Court Judge Richard P. Kalustian then granted the TRO sought by Stultz and Advanced Bionics. Medtronic sought a writ in this district’s Court of Appeal, which was denied.

Public Policy

Div. One held that the Minnesota law allowing covenants not to compete is contrary to California public policy, that California has a materially greater interest than Minnesota in enforcing its law, and that the suit should be allowed to proceed because it was filed prior to a Minnesota suit involving the same parties and issues.

The Minnesota Court of Appeal, however, affirmed the injunction granted by the trial court there. It held that the trial court was not required to defer to the first-filed California action; that Minnesota law rather than California law should apply; and that “Minnesota also has a strong interest in having contracts executed in this state enforced in accordance with the parties’ expectations.”

Stultz, meanwhile, continued to work for Advanced Bionics, but on products on which the company was not competing with Medtronic, until he resigned earlier this year, Meadow said.

Chin, writing for the California Supreme Court, held that neither the desire to avoid duplicative litigation nor this state’s interest in enforcing its ban on non-compete clauses constitutes the type of “exceptional circumstance” that will overcome the general rule that the courts of one state should not enjoin suits brought in another.

Judicial restraint and respect for the sovereignty of other states, Chin said, is a matter of “fundamental importance.” The rule that the court in which an action is first filed has precedence, the justice explained, has no application to matters filed in different sovereignties.

The justice went on to note, however, that “Advanced Bionics remains free to litigate the California action unless and until Medtronic demonstrates to the Los Angeles County Superior Court that any Minnesota judgment is binding on the parties.”

Chin was joined by Chief Justice Ronald M. George and Justices Marvin Baxter, Joyce L. Kennard, and Kathryn M. Werdegar.

In a concurring opinion, Justice Carlos Moreno argued for a more specific rule—based on federal case law—that would allow anti-suit injunctions if “necessary to protect the jurisdiction of the enjoining court, or to prevent the litigant’s evasion of the important public policies of the forum.”

Justice Janice Rogers Brown also wrote separately, saying she generally agreed with Moreno, but not “with the implication in Justice Moreno’s opinion that a choice-of-law analysis is irrelevant to determining whether to enjoin parties from litigating a dispute in a foreign jurisdiction.”

California, Brown wrote, has a strong interest in promoting competition by allowing the free movement of personnel. But that interest, she said, is no greater “than Minnesota’s countervailing interest in enforcing bargained-for restrictions on that free movement.”

The case is Advanced Bionics Corporation v. Medtronic, Inc., 02 S.O.S. 6173.