JNJ and BSX Settle Non-Compete Dispute over Michael Mahoney — Part of a New Hurd Mentality?

Spend Matters welcomes this Healthcare Matters cross-post from Tom Finn.

Non-competes are executed to store leverage for your employer so when it's time for you to move on, regardless of who makes that decision, you're still not quite done. Just ask Michael Mahoney, Boston Scientific's (BSX) new "CEO-in-waiting." In a rare move, Johnson & Johnson (JNJ) has successfully interfered with the career path of one of its favorite sons. Why rare? Because at his executive level, the exit perks are so strong that disputes of this type rarely seem to make any sense -- for anyone, of course, except the lawyers.

Believe it or not, BSX has agreed to allow Mahoney to fulfill some "lingering JNJ commitments" and have him spend the next year (until November 2012) observed by a JNJ attorney whose job is to ensure that he doesn't engage in any activity that could be construed as competitive to JNJ's interests. Mahoney will oversee CRM and Endoscopy. That means, BSX's new CEO is going to stay out of about 60% of its business -- a business that hasn't been doing so well of late.

Are J&J's actions part of a new Hurd mentality?

Mark Hurd, Hewlett Packard's (HP) former CEO never even signed a non-compete, but he did sign several confidentiality agreements (protecting HP trade secrets and IP) as consideration for a severance valued at about $36 million. He moved on to Oracle (owner now of Sun Microsystems), where Ellison appointed him "co-president." And shortly after the announcement, all hell broke loose.

"Despite being paid millions of dollars in cash, stock and stock options in exchange for Hurd's agreements to protect HP's trade secrets and confidential information during his employment and following his departure from his positions at HP as Chairman of the Board, Chief Executive Officer, and President, HP is informed and believes and thereon alleges that Hurd has put HP's most valuable trade secrets and confidential information in peril. Hurd accepted positions with Oracle Corporation ("Oracle"), a competitor of HP, yesterday as its President and as a member of its Board of Directors. In his new positions, Hurd will be in a situation in which he cannot perform his duties for Oracle without necessarily using and disclosing HP's trade secrets and confidential information to others."

As prejudicial as this legal position (above) is obviously intended to be for HP, it still made no specific accusations. And to cap it off, the legal action was filed in California, a state that holds as void, illegal and unenforceable any agreement that restrains trade or competition. HP milked the situation for the better part of a year, making various off the wall, media-driven legal complaints. And what happened? HP was actually able to strengthen several pre-existing partnership arrangements between itself and Oracle -- and then it settled the suit and released Hurd (about three days ago). Apparently, HP's trade secrets are worth about half of Hurd's severance, because that was the deal. It's common knowledge that Ellison wants to take on IBM and Hurd is the man to lead the charge. After acquiring Sun Microsystems (beating IBM in what was known as the "Java Wars"), Ellison only needs HP to complete his package. Oracle will be perfectly positioned to take on IBM via an integrated hardware/software model that looks a lot like Apple's -- an engineering strategy that no one except perhaps Steve Jobs could execute better than Hurd.

Back East, JNJ has managed to make a friendly deal with its sworn enemy; a deal that allows a former JNJ all pro executives to live in the BSX huddle for the next year, but not run any plays. JNJ is the most commonly named candidate to acquire a faltering BSX and it could now do it for less than BSX paid for Guidant. The Drug Eluting Stent (DES) and Cardio Rhythm Management (CRM) markets are supposed to stay soft for the next year. If they do, the BSX acquisition price will fall further. And finally, JNJ's CFO is talking about the company's desire to make a strong move into the CRM market. Analysts who argue against this acquisition rumor point to JNJ's recent decision to jettison its DES business unit. But everyone knows that JNJ gets out of markets it can't lead; that it's sitting on some valuable DES intellectual property; and that BSX is the DES market leader.

If you happen to believe that non-competes are rarely if ever enforced, you're wrong. California may represent an exception, but the point is, if you think these agreements generally don't have any teeth, that's because you've never been bitten. State governments compete with each other to attract new and relocating businesses. They lay out all kinds of perks and tax incentives. Some of the concessions you never read about include stiffer enforcement/support for non-competes.

I don't like non-competes. Most of the time, clumsy executives use them in shameful ways. And I am not a conspiracy theorist. So I'm not inclined to believe that Mahoney's or Hurd's respective departures were part of any grand strategy hatched before they decided to leave. But I'm genuinely beginning to wonder.

-- Tom Finn

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