Medtronic, Inc. v. Walland, Jr.

Background

Medtronic, Inc. and three affiliated companies sued Joseph F. Walland, Jr., their former CEO of Medicrea USA, Corp. The companies asked for a preliminary injunction, an emergency court order issued before a final judgment, that would require Walland to participate in mediation and, if necessary, arbitration under his employment and separation agreements. They also sought to stop him from performing activities allegedly prohibited by those agreements.

Walland became Medicrea’s vice president of sales in 2017 and its CEO in July 2018. He voluntarily left the company in December 2020. He signed an employment agreement containing confidentiality and non-compete provisions. The non-compete provision barred him for twelve months after employment from engaging in certain competing activities involving spinal implants and the company’s patient-specific implant project. The employment agreement selected New York law and allowed Medicrea to seek an injunction for violations.

After Medtronic purchased Medicrea, Walland exercised a contractual right to terminate his employment and received $81,250 in severance. He later signed a separation agreement with Medtronic and received an additional $50,000. That agreement stated that he waived claims challenging the reasonableness or enforceability of the restrictive covenants and that the restrictions would remain effective. Walland then began working as vice president for sales at Alphatec Spine, Inc.

The companies alleged that emails and spreadsheets sent to Walland’s former Medicrea email account showed that he was participating in strategic discussions involving Alphatec and EOS Imaging, Inc. They claimed this activity violated the agreements and involved Medicrea’s confidential information. Walland disputed the extent of competition between the companies and argued that the alleged information use and potential harm were unsupported.

Choice of Law

The court found an actual conflict between New York and California law. California law generally voids contracts that restrain a person from engaging in a lawful profession, trade, or business. New York law, by contrast, can enforce restrictive covenants when they are reasonable in time and geographic scope, protect legitimate employer interests, do not harm the public, and are not unduly burdensome to the employee.

Although the employment agreement selected New York law, the court held that New York choice-of-law rules recognize exceptions when the selected law conflicts with a fundamental policy of another state that has a materially greater interest in the dispute. The court found that New York had connections to the dispute because Walland worked there and Medicrea was headquartered there. But it found that California had the materially greater interest because Walland lived there when he negotiated and signed the employment agreement, negotiated and signed the separation agreement there, and currently lived there.

The court also held that applying New York law would violate California’s fundamental policy favoring open competition and employee mobility. The court therefore applied California law despite the agreement’s New York choice-of-law provision.

Restrictive Covenants

The court found that the separation agreement expressly showed Walland intended to give up his right to challenge the restrictive covenants in exchange for $50,000. But the court concluded that California law did not allow Walland to waive the protections of California Business and Professions Code section 16600. In the court’s view, an agreement preventing an employee from challenging a restrictive covenant effectively restrains the employee from engaging in a lawful profession, trade, or business.

The court therefore concluded that the non-compete, non-solicitation, and confidentiality provisions were void under section 16600. The court separately stated that, even if the confidentiality provision survived section 16600, the companies had shown no more than conclusory allegations that Walland used or relied on protected confidential information. The companies consequently had not shown a likelihood of success on the merits, one requirement for a preliminary injunction.

Other Preliminary-Injunction Factors

The court found that the irreparable-harm factor favored the companies only slightly. The companies showed some overlap between the markets served by Medicrea and Alphatec, particularly in connection with EOS and patient-specific implants. But the alleged acquisition of EOS by Alphatec had not been finalized, and the companies provided little support for their claims that Walland was acting or planning to act as a sales leader for Alphatec and EOS or that he had used confidential information. The companies also identified no customer reports or other evidence showing lost customers or business.

The balance of hardships favored Walland. An injunction would have barred him from his current employment and potentially from other work in the United States overlapping with his specialty. Without an injunction, the companies might lose business or customers, but the court found no evidence that such losses had occurred and noted that the companies’ markets did not completely overlap.

The court also held that the public interest favored Walland. Although enforcing agreements can serve the public interest, the court stated that contract terms must comply with controlling law. It concluded that California’s policy protecting employee mobility outweighed the interest in enforcing the restrictive covenants.

Disposition

The court held that the companies failed to establish that a preliminary injunction should issue based on the four required factors. Judge Edgardo Ramos denied the plaintiffs’ motion for a preliminary injunction. The court directed the parties to appear for a telephonic initial conference and directed the Clerk of Court to terminate the motion.