Should Minnesota company suing former employees pay legal fees? High court to decide

It is unusual for companies to sue their own employees in Minnesota without related criminal charges waiting in the wings. Now a bitterly fought court case between a Twin Cities medical device distributor and its former sales staff illustrates why.

The Minnesota Supreme Court has agreed to examine whether Maple Plain-based CorVascular Diagnostics must pay the defense costs for a former sales executive whom it is suing in a dispute over sales of precision machines used in hospitals and clinics to diagnose blocked blood vessels.

In its underlying lawsuit, CorVascular alleges that former Vice President of Sales Michael Talcott and a group of other people actively worked to undermine the company and later "convert" company funds for their own use.

Talcott and the other defendants dispute that. And they are asking for the court to force CorVascular to advance them the money to pay for their legal defense under the state law that says companies pay for legal expenses of employees who are acting in good faith in the course of their official duties.

CorVascular argues that such protections don't apply when employees act in bad faith, such as with Talcott's alleged breaches of fiduciary duties, interference and conversion. Talcott in court filings insists he always acted in good faith, and notes he has not been charged criminally.

On Nov. 14, the Minnesota Supreme Court agreed to review lower court decisions on legal fees for Talcott and a limited-liabilty company he formed called CorVascularMI, along with William Beymer, a contractor who sold CorVascular Diagnostics' devices.

In pretrial motions, CorVascular won the initial battle over legal fees with a district court ruling that it shouldn't have to pay the expenses in light of the serious allegations involved.

Minneapolis business attorney Phillip Cole of Lommen Abdo, who has represented employers in similar disputes, said it is uncommon for employers to sue their own employees because of the legal protections like those that the state Supreme Court will examine in the CorVascular case.

"There are some exceptions: They [the employees] have to have acted in good faith and the like. But very rarely does a corporate plaintiff want to see it through, and end up not only paying for its own costs, but also the costs to defend its claim," Cole said. "So as a rule, corporations don't sue their own employees."

Talcott has been selling medical equipment since 1985, according to his LinkedIn page. In 2013 he joined forces with Spencer Lien, who has been an executive with half a dozen medical-technology companies since 1987. The two men formed CorVascular Diagnostics in December 2013 initially to be the exclusive U.S. distributor of a vascular diagnostic system called Falcon, made by Israel-based Viasonix, Ltd., according to court filings.

Talcott, as vice president of sales, built a national sales force for Falcon that came to include clients like Johns Hopkins Hospital, the University of Rochester and West Penn Allegheny Health System. Yet sales were sluggish, and CorVascular was at risk of losing its exclusive right to distribute Viasonix's Falcon device, according to court filings.

Accounts of what happened next diverge sharply.

"You have threatened [the] economic ruin of CorVascular by stripping its prospective sales and diverting to a direct competitor," Lien's attorney wrote to Talcott, Beymer and others in an August 2015 letter. The letter, filed with the court, included an offer to drop a potential lawsuit if Talcott and the others agreed to buy Lien out of his share of the business for $2.07 million. (The business was worth $3.7 million at the time, the letter said.)

No deal was made. Talcott subsequently left the company in February 2016.

But Talcott's affidavit denies that he threatened to go to work for a competitor and take the CorVascular sales representatives with him, and he denies spreading false or misleading statements about the company.

Rather, Talcott said he acted in good faith on CorVascular's behalf. That includes supporting the company after the litigation threat in the fall of 2015, and helping CorVascular customers even after he said his employment was terminated.