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Enforcement of noncompete agreements is a bit easier now in cases where a California employee might be bound by an out-of-state covenant not to compete. A California Supreme Court ruling has limited the use of temporary restraining orders filed by newly hired California employees to pre-empt enforcement of covenants by their former employers in other states. In the wake of the court’s ruling on Advanced Bionics Corporation v. Medtronic, Inc., 29 Cal.4th 697 (Dec. 19, 2002), out-of-state companies should be less reluctant in their home jurisdictions to challenge employees who move to California. There won’t be as much of a race to the courthouse because the “first filed” rule will not bar the employer’s preferred forum from hearing the case. But if different substantive law may be applied in the two courtrooms, there will be a race to judgment. THE FACTS OF ‘MEDTRONIC’ Medtronic is a Minnesota corporation that manufactures implantable devices used to treat pain. In 1995, it hired Mark Stultz in Minnesota as a senior product specialist. At the time of hiring, Stultz signed a “Medtronic Employee Agreement” containing a covenant not to compete. That agreement restricted Stultz from working for a company with a competitive product in any geographic area where Medtronic markets a similar product for two years after the end of Stultz’s employment. The agreement also contained a choice-of-law provision, stating that “the validity, enforceability, construction and interpretation of this agreement shall be governed by the laws of the state in which the employee was last employed by Medtronic.” Stultz worked in Minnesota for the duration of his employment. On June 5, 2000, Stultz accepted an offer of employment with Advanced Bionics Corp., a Delaware corporation with headquarters in California, and a competitor of Medtronic’s. On June 7, 2000, he resigned from Medtronic. Later that same day, Advanced Bionics and Stultz fired the first shot and filed suit against Medtronic in Los Angeles Superior Court, seeking to void the covenant not to compete and choice-of-law provisions of the employment agreement, as against California law and public policy. They also sought a temporary restraining order enjoining Medtronic from taking any action, other than in the California court, to enforce the noncompetition agreement. Medtronic promptly filed suit against Stultz and Advanced Bionics in Minnesota, seeking to enforce the terms of the employment agreement and prevent the other parties from litigating the issues in California. Following an order from the Los Angeles Superior Court enjoining Medtronic from proceeding in the Minnesota action, and Medtronic no longer appearing in Minnesota due to the temporary restraining order, the California case went up on appeal. The appeals court upheld the TRO and held that, notwithstanding the choice-of-law agreement, California law should apply to the dispute. Further, the court held that California courts should decide the matter because the California case was filed first. The court emphasized the significant public policy in ensuring that “California employers will be able to compete effectively for the most talented, skilled employees in their industries, wherever they may reside.” SUPREME COURT SOLUTION: COMITY The California Supreme Court reversed the appellate court, holding that the trial court improperly issued the TRO. Justice Ming Chin held that principles of judicial comity and restraint counseled against using the court’s power to issue a TRO as to a court in a sister state, even when the sister state applies different substantive noncompete law, and even where the California case is filed first. “The first-filed rule ‘was never meant to apply where the two courts involved are not courts of the same sovereignty,’” said the court. Justice Chin also ruled that the filing of the Minnesota case did not divest the California court of jurisdiction, and that the parties were free to pursue litigation in both forums. While this could result in potentially conflicting rulings, and an “embarrassing race to judgment,” this was not a sufficient reason for issuing a TRO. Significantly, the majority did not reach the choice-of-law question of which state’s law the California court should apply. IMPLICATIONS OF THE CASE As a result of Medtronic, parallel litigation will likely be the norm in some cases, with the attendant increase in costs involved in such proceedings. Although the court did not completely rule out anti-suit TROs, the ruling leaves little guidance as to what would provide “sufficient justification” to warrant such injunctive orders. The majority opinion anticipated the legal entanglements that may occur due to this ruling, noting, “The possibility that one action may lead to a judgment first and then be applied as res judicata in another action ‘is a natural consequence of parallel proceedings in courts with concurrent jurisdiction.’” Justice Janice Rogers Brown’s concurring opinion sums up the implications of the case nicely: “Relocating to California may be, for some people, a chance for a fresh start in life, but it is not a chance to walk away from valid contractual obligations, claiming California policy as a protective shield.” Although the decision applies only to California employees, Medtronic has implications across the country. One reason is California’s concentration of companies in technology and other industries where trade secrets are vital company resources. Another is California’s history of establishing legal concepts that are eventually adopted in other states. A third reason is that, relative to other states, California courts are generally not receptive to enforcing noncompete agreements and other restrictive covenants. Now that California has placed limits on anti-suit TROs, there could be a race to judgment in parallel cases where state laws differ. Kurt Kappes is a partner in the Sacramento office of Seyfarth Shaw (www.seyfarth.com). Kappes has pretrial and trial experience in matters pertaining to commercial litigation, trade secrets protection and unfair competition, among other areas. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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