In a case summary published in April 2016, the U.S. Court of Appeals affirmed the judgment of a district court, awarding damages for lost profits in an employment contract dispute. The case brought by St. Jude Medical S.C., Inc. against Biosense Webster, Inc. hinged on the contractual agreement between an employee and St. Jude. According to court records, damages in this case totaled $1.6 million.

Details of the Original Case

The case alleged that Biosense Webster, a subsidiary of Johnson and Johnson, had recruited and hired Jose B. de Castro from St. Jude while has was employed there. As a condition of employment, de Castro had signed a three-year employment contract with St. Jude that limited St. Jude’s ability to terminate de Castro, but also prevented him from leaving the company during the term of the contract.

St. Jude had promoted de Castro from a field engineer role to a sales representative position. After two years in the sales position, St. Jude and de Castro signed the employment agreement. After about a year in the new position, Biosense started trying to recruit de Castro to work for them. He accepted a position, even though his contract with St. Jude still had two years remaining. Biosense promptly filed a declaratory judgment action in California to have the remainder of the contract invalidated. St. Jude, based in Minneapolis, filed to have the case moved to a Minnesota court, where it was tried. The Minnesota court ruled in favor of St. Jude on all issues except for the damages claimed by St. Jude.

Appeals Court Ruled on Damages

St. Jude appealed the decision regarding damages, based on the “tortious interference” by Biosense in hiring St. Jude’s contracted employee away from the firm. The appeals court agreed with St. Jude by citing decided cases in which Minnesota law provides for compensatory damages that result from the interference with the employment contract. The court found that St. Jude lost profits while Biosense increased profits as a result of de Castro’s move to the second company.

St. Jude and Biosense sell competing equipment systems that the market considered equivalent. When de Castro offered Biosense equipment free of charge to a hospital, it gave Biosense a competitive advantage that contributed to St. Jude’s loss of profit. While both companies took opposing views of the source of the lost profit, the court found in favor of St. Jude and agreed that St. Jude’s loss of profit resulted from de Castro’s move to the competing company.

How Does this Affect Other Situations?

“The courts ebb and flow over the years about whether or not contracts like this one are enforceable,” said Denny Taylor, MBA CPA ABV CFF, a forensic and valuation principal with TD&T CPAs and Advisors, P.C. “What’s important about this case is that it did confirm that these kinds of contracts are enforceable in the 8th Circuit court.” The U.S. Court of Appeals for the Eighth Circuit includes the state of Iowa, Arkansas, Minnesota, Missouri, Nebraska, South Dakota and North Dakota. This appeals court decision means that similar situations could result in damages paid for recruiting an employee who is covered by an employment contract.

TD&T CPAs and Advisors has forensic and valuation professionals who can assist you or your company if you are involved in this kind of litigation.