Medtech Litigation in 2009

It was a busy year for litigation in the medtech industry. Product liability litigation dominated the dockets in 2009, while a stream of non-compete and trade-secret litigation underscored employers' increasing concern about protecting their confidential information and trade secrets. In-house counsel, meanwhile, continued to struggle with new attacks on the attorney-client privilege and a host of new and amended employment laws.

Non-Compete and Trade-Secret Actions

Non-compete and trade secret litigation were active in 2009 as the economy grew worse and companies focused on protecting their goodwill and trade secrets. While the law governing non-compete agreements can vary greatly between states, some significant state-level developments in 2009 could influence courts and policymakers elsewhere in the country.

California Trade Secret Exception Called Into Question

California is well known for its hostility to non-compete covenants — embodied in a state law prohibiting enforcement of such covenants in nearly all circumstances. And recently, the California Court of Appeals suggested that the state's attitude toward non-compete covenants may be getting even stricter.

Despite California's non-compete statute, over the years California courts have held that such covenants can be enforced to the extent they are necessary to protect a company's trade secrets. In a November 2009 decision, Dowell v. Biosense Webster, Inc., the California Court of Appeals indicated that it doubted this judicially created "trade secret exception" remained valid. The Dowell court did not expressly eliminate the exception, because the question of whether to do so was not presented in that case. However, this decision — coupled with a 2008 California Supreme Court decision that invalidated a different judicially created exception to the state's non-compete law (Edwards v. Arthur Anderson) — could indicate the direction California courts are headed regarding judicially created exceptions to the statute generally and the trade secret exception in particular.

Employers operating in California should keep this in mind when deciding whether to include non-compete or customer non-solicit covenants in their employee agreements, even if such covenants are aimed at protecting trade secrets.

Massachusetts Legislature Considering Proposals to Restrict Non-Compete Covenants

Over the past year, Massachusetts legislators have considered proposals to change significantly the way that Massachusetts law enforces non-compete covenants, including proposals for a California-style ban on such covenants.

By mid-summer 2009, a proposal to prohibit non-compete agreements was viewed as dead, but committees of the Massachusetts Legislature are now considering a modified bill. Although this legislation would not go so far as California law, it would still place significant restrictions on these covenants. These restrictions would include requiring that a non-compete be provided to an employee two weeks in advance of employment, prohibiting enforcement of non-compete agreements for employees earning $75,000 per year or less, restricting non-compete covenants to one year, and requiring payment of the employee's legal fees under certain circumstances. The proposed legislation would also reject the "inevitable disclosure doctrine," under which it can be presumed that employees will disclose certain information by virtue of their working for a company.

This bill is working its way through the Massachusetts legislative process. Companies that operate in Massachusetts should review their restrictive covenants in light of these legislative developments.

Wisconsin Moderates Its Approach to Partially Invalid Covenants

A state with particularly harsh policies regarding non-compete covenants — including a statute that restricts what types of non-compete agreements are reasonable, and therefore, enforceable — appears to be easing up.

Wisconsin courts do not "blue-pencil" non-compete agreements to modify unreasonable portions so remaining elements of the contract would be enforceable. Instead, Wisconsin courts have held that if any part of a non-compete agreement was unreasonable, the entire contract was void — even unrelated confidentiality provisions.

In July 2009, the Wisconsin Supreme Court in Star Direct v. Dal Pra rejected this approach. Instead, the court held that different portions of agreements may relate to separate protectable interests. Therefore, these separate portions can be read and enforced independently. This is good news for employers seeking to enforce non-compete agreements in Wisconsin. The decision also provides guidance for employers who may wish to revise their restrictive covenants to ensure they will be enforced under this regime and in states that may find Wisconsin's approach influential.

Attorney-Client Privilege

Developments in the area of attorney-client privilege in 2009 may affect how companies and their employees treat confidential information exchanged during investigations and the degree to which advice of in-house counsel is protected from disclosure.

Decisions Finding Waiver of Attorney-Client Privilege Are No Longer Immediately Appealable

In December, the U.S. Supreme Court decided Mohawk Industries v. Carpenter, a case that could influence how companies and their lawyers conduct internal investigations. Mohawk involved a company's attempt to immediately appeal a court order finding that its attorney-client privilege had been waived, and forcing the company to give the plaintiff communications between its attorneys and a former employee. The Supreme Court held that such decisions may not be appealed before the case is over, but can be addressed after a final judgment in the case. Before Mohawk, some federal appellate courts had held that such rulings could be immediately appealed before the case was over. This decision eliminates that possibility.

Mohawk means that companies investigating allegations brought against them should take extra care to avoid doing things that even arguably waive the attorney-client privilege, because the company might have to live with that decision for the rest of the lawsuit. Although there remain methods to contest such decisions even after Mohawk, challenging a trial court's decision ordering production of communications with lawyers will now be more difficult.

More Assessments Performed by In-House Counsel Could Be Discoverable

Another important case held that a company's tax accrual work papers, which were prepared by in-house counsel, are not protected from disclosure by the work product doctrine. In United States v. Textron, the U.S. Court of Appeals for the First Circuit decided that because such papers — which may be prepared to help a company assess its potential tax liability — were "prepared in the ordinary course of business" instead of in anticipation of specific litigation, the work product doctrine does not apply.

This decision could have consequences for companies that file audited financial statements and disclose materials, including assessments related to potential litigation, to auditors. In particular, there is concern that a broad interpretation of the Textron decision could threaten to make even more assessments performed by in-house counsel discoverable. Federal appellate courts are now split on this question, and Textron is preparing to seek review of the First Circuit's decision by the U.S. Supreme Court.

Increased Frequency of Motions to Dismiss

Throughout 2009, defense counsel more frequently moved to dismiss causes of action right out of the box by applying two Supreme Court rulings that arguably narrowed the liberal notice-pleading standard that had been in place for over 50 years. Those decisions, Twombly and Iqbal, have been used to dismiss claims as wide-ranging as meal break practices, patent claims, investor lawsuits, and employment discrimination.

Courts and commentators have split on whether these decisions really changed things or are much ado about nothing. Nonetheless, many federal district courts have dismissed complaints for failing to plead sufficient facts to provide the grounds for entitlement to relief, which requires "more than labels and conclusions, and [for which] a formulaic recitation of the elements of a cause of action will not do."

Twombly dictates that courts ask whether the plaintiff has alleged enough facts to state a claim of relief that is "plausible" on its face, i.e., will the alleged facts "nudge" the claim across the line from conceivable to plausible? Corporate defendants must carefully weigh whether to move to dismiss and take into account the likelihood of success, the judge deciding the issue, and whether the plaintiff could simply remedy a thin complaint by amending or re-filing elsewhere.

In light of Twombly's and Iqbal's impact, legislators in both houses of Congress have introduced legislation to clarify that the liberal notice-pleading standard governs, although it is unlikely that the proposed legislation will be passed any time soon.

New Employment Laws

It was also a busy year for new employment laws and regulations involving disability, pay and genetic discrimination. Many of these laws have — and will — result in an increase in claims and lawsuits by current and former employees.

Many More Individuals Are "Disabled" Under ADA

The Americans with Disabilities Amendments Act of 2008 imposes a broader definition of "disability." Prior to the amendments, ADA litigation often focused on whether the employee was actually "disabled," but now the existence of a disability will be in doubt less often. ADA litigation will now likely focus on whether the employee is or was qualified to perform the essential functions of the job and whether discrimination or retaliation occurred. In light of the ADA amendments, employers must be especially careful to consider the expanded scope of disability coverage when evaluating employees' requests for reasonable accommodation or when contemplating an adverse employment action against any employee who may have a disability under the new standards.

Courts Grappling With Meaning of New Pay Discrimination Statute

In January 2009, President Obama signed the Lilly Ledbetter Fair Pay Act, extending the time within which employees may bring claims for pay discrimination. In brief, each paycheck that is based on a discriminatory decision activates a new statute of limitations period, thus extending employees' opportunity to sue to the entire duration of their employment. The act is not limited to pay discrimination based on gender alone, but extends to other protected classes and states "a discriminatory compensation decision or other practice that is unlawful under such acts occurs each time compensation is paid pursuant to the discrimination compensation decision or other practice." Since the act's enactment, courts have grappled with the meaning of "other practice" as enterprising plaintiffs' lawyers seek to apply the language not just to paychecks, but harassment claims, denial of tenure, pension payments, job titles, job assignments and other employment decisions.

Employer Collection and Use of Genetic Information Restricted

The Genetic Information Nondiscrimination Act (GINA) "prohibit[s] discrimination on the basis of genetic information with respect to health insurance and employment" and restricts employers' collection and use of such information. "Genetic information" includes not only the results of genetic testing, but also information about the health of employees' relatives. There are several exceptions, the most unclear of which is the so-called "water cooler" exception, whereby an employer will not be held liable if it inadvertently obtains genetic information through casual conversation with employees. That said, an employer still may not use the information to alter the terms, conditions or privileges of employment. For example, an employer may not refuse to promote a sales manager because it knew her father died of a heart attack.

Federal Preemption

Product liability litigation remained on the forefront of in-house counsel's minds, as several high-profile cases went to trial and many others settled. At issue in many lawsuits was Riegel v. Medtronic, in which the Supreme Court held that state-law product liability lawsuits relating to the use of certain FDA-approved medical devices were barred by federal law.

In 2009, several cases against medical-device manufacturers were dismissed applying Riegel. Congress has stepped into the fray with the proposed Medical Device Safety Act of 2009 (MDSA), which is slowly making its way through the House and Senate. The MDSA would effectively overrule Riegel to allow injured plaintiffs to pursue lawsuits against device companies without having to worry about federal preemption.