Pause Before Sending: Using Unenforceable Non-Competes can be Very Costly
Had STAAR Surgical Company (Nasdaq: STAA) (“STAAR”) obtained sound legal advice before it sent three letters to its competitors, STAAR might have saved itself $11.4 million. In separate, two-month long jury trials, our trial team including myself, Eudeen Chang and Monica Vu of Jeffer Mangels, and Isaac Zfaty of Davis Zfaty APC, prevailed in Orange County Superior Court against STAAR on behalf of clients Parallax Medical Systems and Scott C. Moody, Inc. for tortiously interfering with their prospective economic relationships.
STAAR manufactures and sells specialized lenses for surgical vision correction, such as replacement lenses for the eye’s natural crystalline lenses in cataract surgery, called Intraocular Lenses, or IOLs.
Parallax Medical Systems (“Parallax”) was a former authorized independent sales company for STAAR and supplied the sales force for STAAR in the Southeast United States Region. Scott C. Moody, Inc. (“SMI”) was also a former authorized independent sales company for STAAR and supplied the sales force for STAAR in the Southwest United States Region. Using their own marketing strategies, their own independent sales subcontractors and their own customer lists, Parallax in the Southeast, and SMI in the Southwest, generated sales of over $160 million for STAAR. Parallax and SMI were paid on a commission basis. Parallax and SMI had contracted with STAAR for over 15 years. When the two companies and STAAR were unsuccessful in negotiating a new contract, STAAR launched a campaign designed to prevent Parallax and SMI from working with any of STAAR’s competitors.
STAAR tortiously interfered with Parallax and SMI’s opportunity to sell Bausch & Lomb lenses by sending letters to competitors stating that Parallax and SMI had a contract with STAAR that included a restrictive covenant prohibiting both companies from selling any competing products for a year. Additionally, STAAR sent an email to Parallax’s and SMI’s sales force at 12:02 a.m.—two minutes after STAAR’s contract with Parallax and SMI expired—seeking to lure their sales force away to work directly for STAAR. STAAR’s letters torpedoed Parallax’s and SMI’s pending deal to sell Bausch & Lomb lenses. As a result, Parallax and SMI separately sued STAAR for intentional and negligent interference with prospective economic advantage.
The Parallax case was tried to a jury over the course of two months, the Honorable Andrew Banks presiding, and concluded in March of 2009. The jury took less than a day in deliberations to find in favor of Parallax and against STAAR for $4.9 million in damages, including $2.7 million in punitive damages. The SMI case was also presented to a jury, the Honorable Glenda Sanders presiding, in a two-month trial, resulting in a verdict on December 1, 2009 in favor of SMI. Again, the jury took less than a day in deliberations, and awarded SMI $6.5 million in damages, including $2.5 million in punitive damages. STAAR’s defense team for the Parallax case was led by Mark Borenstein (now a Los Angeles Superior Court Judge), and STAAR’s defense team for the SMI case was led by Daniel Callahan. The jury in the SMI case was not informed about the verdict in the prior Parallax case.
To prove a tortious interference with prospective economic advantage claim, the plaintiff must show that: there was a prospective economic relationship with a third party; the defendant knew about the prospective relationship; the defendant (negligently or intentionally) interfered with it; the defendant engaged in wrongful conduct, separate and apart from the interference itself; and, the relationship was disrupted causing the plaintiff damages. (Youst v. Longo (1987) 43 Cal.3d 64; North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764.)
In its letters to its competitors, STAAR wrote that Parallax and SMI had agreements with STAAR, which contained “restrictive covenants that broadly prohibit them and persons/entities affiliated with them from selling any products that compete with STAAR’s products or competing with STAAR in any way, both during the terms of those agreements (which expire July 31, 2007) and for the period of one year thereafter (through July 31, 2008),” and that these covenants would encompass the competitors’ products that Parallax and SMI intended to sell. Although technically STAAR’s letters were partially true (Parallax and SMI did have noncompetes in their contracts with STAAR), the letters implied that the non-competes were enforceable.
The jury viewed STAAR’s conduct as an attempt to indirectly enforce a noncompete that was unenforceable pursuant to, and violative of, California Business and Professions Code section 16600, which in turn constitutes an “unlawful, unfair fraudulent business practice” under California’s unfair competition law, Business and Professions Code section 17200. While a company would understandably want to limit the number of its competitors in the marketplace, these jury verdicts show that doing so by the use of an unlawful noncompete can be very costly. Consulting with seasoned counsel before hitting the “send” button or dropping letters in the mail slot could save a lot of money.
Mark S. Adams, a partner in the Litigation Department of JMBM’s Orange County office, focuses his practice on domestic and international business litigation including, contracts, products liability, corporate and partnership disputes, and employment litigation. He has tried numerous cases in state courts, federal courts, and in domestic and international arbitrations under the auspices of the International Chamber of Commerce. Contact him at MarkAdams@JMBM.com or 714.429.3064.