Noncompete News: Employer Bound By New Employees' Prior Agreement To Litigate Noncompete Claims In State Court

As a basic rule of contract law, an entity normally cannot be bound by a contract to which it is not a party. In a recent Minnesota noncompete case, however, the federal district court invoked a rare exception to that rule to conclude that a company was bound by its new employees’ prior agreement that any lawsuit with their former employer had to be litigated in state court.

In Medtronic, Inc. v. Endologix, Inc., two employees had signed Employment Agreements with their employer, Medtronic, that included non-compete provisions as well as “forum selection” provisions. Those forum selection provisions stated that any disputes arising under the Employment Agreements had to be litigated in, and decided by, a Minnesota state court. The Agreements further provided that the employees could not assist or participate in any third party’s commencement or prosecution of a related lawsuit in any court other than the Minnesota state court.

The two employees left Medtronic to accept jobs with Endologix, and allegedly began to solicit Medtronic clients, in violation of their Employment Agreements. Medtronic filed suit against the employees in Minnesota state court, and also sued Endologix for inducing the employees to breach their non-compete agreements.

Endologix “removed” the case to federal court on the basis of “diversity jurisdiction,” i.e., the right to remove certain cases to federal court when the parties are residents of different states. Because the case involved multiple defendants, Endologix could not remove the case unless all of the defendants gave their consent. Therefore, the two employees filed affidavits in which they agreed to the removal.

Removal to federal court occurs automatically when a defendant follows the proper procedure for removal, but a plaintiff who opposes the removal may bring a motion, after the removal, asking the federal court to “remand” the case to state court. Medtronic did just that, arguing that (1) Endologix was bound by the “forum selection” provision in the underlying Employment Agreements, and (2) by agreeing to that provision, the employees had waived their ability to consent to the removal of a case out of state court. In opposing the motion to remand and urging the federal court to retain jurisdiction, Endologix argued that (1) it could not be bound by Employment Agreements to which it was not a party , and (2) the employees may have waived their right to remove the case to federal court, but they not had waived their right to simply consent to another party’s removal.

The federal district court agreed with Medtronic, and remanded the case to state court. The court first ruled that even though Endologix was not a party to the underlying Employment Agreements, it was nevertheless bound by the forum selection provisions in those Agreements. The court recognized that a third party may be bound by a forum selection clause “where it is closely related to the dispute such that it becomes foreseeable that it will be bound.” The court noted that Endologix was “closely related” to the dispute between Medtronic and the two employees, because the lawsuits arose from those employees’ employment with Endologix and solicitation of Medtronic customers on Endologix’s behalf. The court further noted that Endologix should have foreseen, when it hired the employees with full knowledge of their noncompete agreements, that it would be bound by their agreement to litigate only in Minnesota state court.

The court also determined that even if Endologix were not bound by the forum selection provision, the two employees had waived their right to consent to Endologix’ removal of the case to federal court. The court noted that the clear intent of the forum selection clause was to require any lawsuits under the Employment Agreements to be litigated in Minnesota state court, and that by consenting to the removal, the employees had violated the spirit of that clause. Moreover, the court held that the employees had expressly waived their right to consent to removal because the Employment Agreements stated that any disputes had to be “decided by,” not merely “litigated in,” state court, and a case could not be decided by the state court if it were removed to federal court. Finally, the court cited the language in the Employment Agreements where the employees had agreed they would not participate in a third party’s commencement or prosecution of a lawsuit arising from the Employment Agreements in any court other than Minnesota state court. By consenting to the removal, the court reasoned, the employees had participated in Endologix’s prosecution of the case in federal court.

For all of these reasons, the federal court granted Medtronic’s motion and remanded the case to state court. Ironically, while Medtronic had insisted on litigating the case in state court, its results there after the remand were mixed. The state court granted Medtronic’s motion for a Temporary Restraining Order as to one of the two employees, but not as to the other, finding that the second employee was not competing with Medtronic in his new position at Endologix.

The federal court decision, remanding the case to state court, has several practical implications for businesses that utilize noncompete or nonsolicitation agreements, and even for companies that don’t. Companies that use such agreements and prefer, for reasons of strategy or convenience, to require any resulting litigation to occur in a court of their choice, should ensure that their Employment Agreements include forum selection provisions, and that those provisions also expressly prohibit the employees from assisting, participating in, or consenting to, the transfer, removal, or litigation of such claims in any other court. Companies that don’t use noncompete agreements should be aware that if they hire employees who are parties to such agreements, they may be required to litigate noncompete and/or nonsolicitation cases in the court chosen by their new hire’s former employer, even though the new employer never agreed to such a restriction.

For more information on this decision, please contact the Ford & Harrison attorney with whom you usually work.