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Competitive Business Practices: Employee Poaching in the Medical Device Industry

Companies concerned about their protecting IP and customer base should have noncompete agreements with their employees in place.

It’s a competitive world out there. Medical device companies seek out talented engineers who have demonstrated skills

Jeffrey Boxer

in developing successful products and sales people who have strong relationships with hospitals and clinicians to launch those products into practice. So what happens when a talented employee leaves your company to work for a competitor? Sometimes nothing happens. In other cases, the issue can be serious and the company takes the former employee to court. In a Q&A with Jeffrey Boxer, commercial litigation partner at Carter Ledyard & Milburn (New York City), MD+DI’s Maria Fontanazza finds out what you need to know about employee poaching—whether you’re an executive searching for talent or an employee looking to get out of your company.

MD+DI: How common is the prevalence of poaching employees from competitors in the medical device industry?
 
Jeffrey Boxer: It’s moderately common, but it [hasn’t reached] epidemic levels. It’s an industry where having somebody with experience, whether it’s a sales person who knows doctors and hospitals and understands how devices work, or a scientist, doctor, or technologist who is involved in creating and producing products, [is valuable]. It’s not uncommon to see one company try to bring on somebody from another company who has that knowledge.
 
In terms of trends, I can’t say there’s been an increase or decrease over the last couple of years. I don’t think the economic downtown has slowed the pace of hiring from competitors or the pace of litigation resulting from those hirings.
 
MD+DI: Is it illegal to poach from a competitor?
 
Boxer: Illegal is a loaded word. If you’re saying illegal in terms of the criminal side, no. Generally this isn’t criminal conduct. You’re talking about civil relief, and that comes in two forms. One is an injunction from a court saying that the employee who is moving can’t go to work for the new company. The other [form] is a ruling by a court that the employee’s move to the competitor has resulted in money damages to the former employer and that the employee or the new company is liable for those damages. In that sense, if the noncompete is well written and enforceable and if the employee has violated it, then yes, you can get those kinds of orders from the court—an order saying you can’t go compete, and down the road, saying that your competing caused a level of damages to the former employer, and you and possibly your new employer are liable for that.
 
As a practical matter, most companies looking to enforce these noncompetes are far more interested in step one—getting the injunction that says, I have a valid contract with my former employee that says he or she can’t do what he or she is doing, and [asking the court to stop him or her]. That’s where the big battles are.
 
MD+DI: When can a company go after a former employee? Can you provide a background on noncompete agreements?
 
Boxer: In virtually every state in the United States, and most non-U.S. locations where you might find this kind of work, employees are free to leave and go to a competitor unless they’ve agreed not to do so. If you have an employment contract with your employee that just says, you’ll work for me and give me 30 days’ notice when you leave, and it doesn’t say anything about not going to a competitor or about protecting confidential information, then that employee can leave whenever he or she wants and go work for a competitor with no problem and no claims by the former employee.
 
Generally speaking, in almost every U.S. state, noncompete agreements are disfavored and only enforceable in very limited circumstances. Generally, they’re only enforceable to protect a legitimate interest of the company. Most states have defined a legitimate interest of the company as being confidential information or trade secrets, and relationships with customers. Even if you can show a legitimate interest, the noncompete is only enforceable if it is reasonable in scope. Generally speaking, you can’t preclude someone from competing for 10 years, because that’s not reasonable. In this industry, noncompetes of one or two years have been held up as reasonable.
 
[The noncompete agreement] has to be reasonable in geographic scope as well. [For example, if] I’m a sales rep who covers the Northeast for a particular product for a company and I go work for a competitor. [I’m] selling the same product but I’m now working in the Southwest and I don’t have any contacts down there from my prior employment. [If] the restrictive covenant says [I] can’t work anywhere in the U.S., that’s probably not reasonable, because I’m not really threatening a legitimate interest of the company down there.
 
The key is for companies in this or any industry, [is] to look at their employees and how they are situated and make a decision about whether they want to have noncompete [agreements] with those employees. If they do, then they need to make sure that they’re reasonable –that they can justify them if it comes to court. You don’t want to be in a position of overreaching and having a noncompete that when you go to enforce it just isn’t going to get enforced. Then you’ve really wasted the benefit that you could get from having a well-written noncompete agreement.
 
MD+DI: Are there any sectors of the medical device industry in which your seeing employee poaching occurring more often?
 
Boxer: There have been a lot of reported cases recently in connection with cardiac products. It’s odd; I don’t know if there’s a reason; I haven’t seen anything going on in that segment of the market. There’s been no consolidation; there’s been no new products offered that would lead to people from one place to another.
 
Sometimes companies go the other way and try to keep it quiet that they’ve lost key people. [They] don’t look to enforce the noncompete, because they don’t want to make a big deal of it or they don’t want the risk of having the noncompete found to be unenforceable, or [face] the cost (which can be significant) to go to court to enforce it. We can only talk about what’s been published in terms of court cases about these incidents.
 
MD+DI: When employees are moving to a competitor, what are the main concerns faced by the previous employer?
 
Boxer: The main concern when you’re losing an employee is outward-facing employees—sales people, the people who go into hospitals, and [those] meeting with doctors, etc. The company is concerned about the relationships that employees have with the company’s customers. Once you’ve lost the person with the relationship, how do you replace that? One way is by having a well-written valid noncompete and a realistic understanding of its likely enforceability, the cost of enforcing it, and other ramifications of going to court. Another way to handle this [issue] is to structure your team so that you don’t have just one person who has a unique relationship with each client—that you have teams or backups or that you’re structured in a way that losing one person doesn’t lose an entire relationship with a hospital, doctor, or wherever your selling.
 
MD+DI: Is poaching employees becoming a larger issue given the globally connected environment in which we live?
 
Boxer: Absolutely . Employees are more mobile, not only within the United States but around the world. The United States has a very well developed set of laws and rules on enforceability of noncompetes, and on protection of intellectual property and trade secrets. That law is different or isn’t as developed in some of the locations where these companies are doing business. It’s important for companies to understand when they’re doing business in countries outside the United States what those countries laws are, what the likelihood of getting a court to enforce those laws is, and what the process is for doing that. The globalization of this, and other industries, makes those very important issues.
 
MD+DI: What are your thoughts on recruiting new talent at medical device companies?
 
Boxer: Recruiting new talent into the industry is, from a legal standpoint, a safer way to bring someone into your fold rather than going out and recruiting someone from a competitor who is going to bring along potential legal action. But getting the right person is difficult. By recruiting laterally from a competitor, you generally know what you’re getting—you have an experienced person with relationships and skills that have been demonstrated over time. Bringing in new talent is key and it’s great, but in some ways, it’s harder to do, because it’s harder to identify, and it takes more time and money to train [new employees].
 
MD+DI: Where do you think poaching in the device industry is headed?
 
Boxer: I don’t see it happening less often. I think the competition for talent out there in a very competitive industry with a lot of significant players is always going to be high. That leads to experienced employees moving from one company to another and that leads to the type of litigation we are talking about. I don’t see it decreasing.
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