A great article over at Computerworld.com regarding the treatment of non-competes given today’s economy. It is very interesting reading. According to the article, courts have been reluctant to enforce non-compete agreements (in those states where enforcement is typical) because of the bad economy and the difficulty that people are
The article then provides several alternative tools to protect your company’s trade secrets which do not revolve around non-compete agreements. having just finding a job, in general.
The article first suggests that all companies perform a “trade secrets audit”–a suggestion I wholeheartedly endorse. A trade secret audit can provide the following: “Once all such assets are identified and valued and the risk of their loss has been assessed, the company designs and implements a comprehensive protection program, typically involving some combination of written agreements (called “restrictive covenants”), written policies concerning the appropriate use of company information, defined security measures and a detailed enforcement scheme, including not only enforcement of each of the applicable agreements, but also reliance on both established and novel legal claims and theories.”
The article then identifies some of the alternative forms of protection that may help in an economy where non-competes are not being enforced:
* “Garden leave” clauses: A type of noncompete agreement that compensates an employee during the period that the employee’s competitive activities are restricted. In a traditional garden leave clause, the employment relationship technically continues during the restricted period. However, the legality of such an obligation remains dubious.
* Forfeiture-for-competition agreements and compensation-for-competition agreements: Agreements by which an employee either forfeits certain benefits or pays some amount of money if he engages in activities that are competitive with his former employer.
* Forfeiture agreements: Agreements by which an employee forfeits benefits when his employment terminates, regardless of whether he engages in competitive activities.
* Nondisclosure/confidentiality agreements: Agreements by which an employee agrees not to use or disclose an employer’s confidential information.
* Nonsolicitation agreements: Agreements by which an employee agrees not to solicit — and, if well drafted, not to accept — business from the employer’s customers.
* Antipiracy agreements: Agreements by which an employee agrees not to solicit — and, if well drafted, not to hire — the employer’s employees.
* Invention assignment agreements: Agreements by which an employee assigns to the employer any potential inventions conceived of during employment.
Any or all of these can be important for your business. While the requirements for enforcement are similar to non-competes, “courts are nevertheless more likely to enforce these agreements than noncompete agreements. For example, garden leave clauses are more likely to be enforced because of the palliative effects of the compensation paid during the restrictive period. Similarly, forfeiture-for-competition and compensation-for-competition agreements are more likely to be enforced because they impose only financial disincentives — not a bar — to an employee’s employment by a competitor.”
Read the whole thing. If you have any questions about your own trade secrets protection plan, please contact me and I would be more than happy to discuss.
According to Gamespot.com, A Judge has ordered Activision to hand over the source code for the DJ game, Scratch: The Ultimate DJ. This case has gotten interesting fairly quickly. Let’s recap.
Activision was sued on April 14 by Genius Productions and Numark Industries for “intentional interference with contract, breach of contract…and misappropriation of trade secrets” after Activision purchased Scratch developer 7 Studios. 7 Studios is under contract to develop Scratch: The Ultimate DJ, for Genius and Numark.
Gamespot.com reported on April 16, 2009, the following: “Genius and Numark’s [April 14] filing claimed that Activision contacted them via the cash-strapped 7 Studios expressing interest in buying Scratch: The Ultimate DJ. However, after announcing its own DJ Hero game and seeing a demo of Stratch, Activision allegedly broke off negotiations and promptly bought 7 Studios. The suit then contends that 7 Studios slowed work on the game and refused to turn over software and a Numark turntable-inspired controller when Genius terminated its contract.
In addition to “substantial damages” and a return of its assets, Genius and Numark sought a restraining order against Activision’s release of DJ Hero so Scratch could retain its “‘first to market’ status.”
Then, Activision released statement announcing that a Los Angeles judge had rejected the request for a restraining order, citing a lack of evidence:
“Activision Publishing strongly denies the allegations made by Genius Products and Numark Industries and believes that the claims are disingenuous and lack any merit. Yesterday, the L.A. Superior Court found that there was no evidence of any wrongdoing by Activision and refused to grant any restraining order against Activision.
“These allegations are nothing more than an attempt by Genius to place blame for the game’s delay, as well as to divert attention from the cash flow, liquidity, and revenue challenges Genius detailed in its March 30, 2009, SEC filing. By their own admission in October 2008, the game had fallen behind in production, which was well before Activision had any involvement with Genius, Numark or California 7 Studios regarding the game.”
So, that’s the background.
On April 20, 2009, gamespot.com reported that “Genius and Numark are claiming that it was they, not Activision, who prevailed in court last week. Through an external publicity agency, the companies made public the transcript of the April 15 hearing, which was presided over by Judge James C. Chalfant.”
The hearing began with the judge saying that, “There isn’t any evidence against Activision. …There is no reason to restrain Activision from doing anything.” However, the judge quickly added that “There is evidence that…7 Studios has a duty to return the work product, source code, and software of the plaintiff [Genius].”
“It is actually very straightforward. They hired you. They have terminated the deal. Their agreement requires return of materials,” said the judge. “No matter how you slice this banana, they are entitled to the work product back. I don’t know why your client would want to continue working on a project for which they have been terminated.”
Chalfant then ordered Activision to make its 7 Studios subsidiary turn over the Scratch source code by today, April 20, in preparations for a subsequent hearing next month. “You [Activision] turn over the source code, and then if you want it back, you can argue on May 6th as to why you should get it back. I can’t under any circumstance think why you would be entitled to keep the source code.”
Next step is the May 6 hearing on damages. We’ll keep you posted.
Great article over at PharmExec.com about Post-Employment Restrictive Covenants in the pharmaceutical and biotech industries–but, a lot of the information is generally applicable to all industries. It’s the first part of a four part series that I will keep you updated on. Check it out here.
I took some time off for Christmas and the New Year, and then was slammed at work when I got back, but now that things have settled down a little I’ll be updating more frequently.
Thanks to all of you who check this blog frequently and I hope that you continue to do so. There’s a lot to catch up on and I will try and get to it, but time is limited because, you know, I have a day job. If you have anything that you are interested in hearing about that occurred over the last few months, please email me and I will respond. Otherwise, I will probably just move forward from today.
In a follow-up to a previous post which can be found here, “PETA has filed a request for a rehearing with the Mississippi Supreme Court after the justices ruled that the information PETA was seeking about animal experiments at Mississippi State University (MSU) for cat- and dog-food company Iams is exempt from public disclosure.” You can read about it here.
Key graph: “The Supreme Court ruled that details of the experiments’ protocols–such as the number of animals used, what surgeries were performed, and if any of the animals were killed–would reveal confidential business information and were, therefore, exempt from disclosure under the Mississippi Public Records Act. PETA asserts that the court failed to acknowledge that state law requires government entities to separate exempt material and release non-exempt material. And even though Iams presented no specific evidence that the requested material contained proprietary information, the court has denied PETA all the requested documents.”
This is an interesting case which pits trade secrets against the public’s right to know. Right now, the trade secrets are winning–which I think is a good thing. But who knows, maybe PETA is right and the documents should be made public. I can see arguments on both sides. We’ll continue to follow this intriguing matter.
Good article over at eweek.com explaining the steps to take when considering protection for your trade secrets. While the article relates to high-stakes information and advises costly protection plans (i.e., encryption, data leak prevention tools, etc.), it is instructive of the way that trade secret protection is done at the largest corporate level.
However, there are still some common-sense approaches that can work for anyone–such as the advice to use digital signatures and to segregate the data that absolutely must be protected at higher levels from lower level information. I find the following advice to be very instructive of how a trade secrets protection plan should be implemented: “Be reasonable and employees will participate.”
Read the whole thing.
According to this article in USAToday, Xiaodong Sheldon Mang has been sentenced to two years in federal prison for stealing fighter-pilot training software and trying to sell it to the Chinese, Malaysian and Thai militaries.
Meng “misappropriated two defense articles … , at least six source code products which were also trade secrets, and more than one hundred materials and utilities” from Quantum. One product is “used to provide night vision simulation and is exclusively used in military applications for precision training and simulation applications,” the Justice Department said.
This is not only noteworthy for the fact that we caught a spy trying to sell U.S. intelligence to other countries, but as far as this blog is concerned, this is the first sentence handed down for a violation of the Economic Espionage Act of 1996.
According to Forbes.com, a federal court has upheld the conviction and eight year prison sentence of Joya Williams, the former secretary at Coca-Cola company who was found guilty of conspiring to sell the trade secrets of Coca-Cola to its competitor. The convictions of Williams’ co-defendants, Edmund Duhaney and Ibrahim Dimson, were also upheld.
This trade secrets case related to the formulas for new drinks being designed by the Coca-Cola company. This type of theft would have very little chance of happening with the actual formula for Coca-Cola, the so-called “Merchandise 7X”, because of the precautions the Coca-Cola company takes to protect that recipe. A secretary like Williams would never be allowed access to Merchandise 7X.
You could learn a lot about protection of trade secrets from the Coca-Cola company. When they want to protect something, they make sure it’s protected. The protection of Merchandise 7X, the “secret ingredient” in Coca-Cola, gives you an idea of the levels to which companies can go in protecting trade secrets. Merchandise 7X has remained a secret since its invention in 1886. It’s been said that only a few employees know the full recipe at any one time, and those employees are not allowed to fly on the same plane and cannot be left alone with strangers while they are together.
I certainly am not suggesting that your company has to go to such extremes, but I think this example gives you an idea of the breadth of strategies available for trade secrets protection beyond minimums such as non-disclosure agreements, confidentiality agreements and employee exit interviews.
Many of you will recall the earlier posts here and here on Spygate II – the allegations that the New England Patriots taped a walk-through practice of the St. Louis Rams prior to SuperBowl XXXVI. We discussed the potential trade secret implications of the allegations and the stonewalling that the NFL was doing to Arlen Specter. It appeared that Matt Walsh, an ex-employee of the Patriots, may have been the individual who taped the walk-through but he wasn’t talking and it seemed the NFL didn’t want him to–until now. According to ESPN, the NFL has reached an agreement with Walsh. The article is here. You can read the full text of the agreement here in .pdf.
Key Graph: “Commissioner Goodell will meet with Mr. Walsh … on May 13, the earliest date that Mr. Walsh, who lives in Hawaii, will be available on the East Coast,” the NFL said in a statement released Wednesday. “The agreement also requires Mr. Walsh to return any tapes and other items in his possession that belong to the Patriots. In return, the NFL and the Patriots have promised not to sue Mr. Walsh. They also will indemnify him for any expenses, including legal fees that he incurs in connection with the interview.”
Looks like Mr. Walsh got what he was asking for–total indemnity. We’ll see how this one continues to develop–either Walsh knows something and this could get real interesting real fast, or what he knows is not terribly consequential and all this will have been much ado about nothing. Of course, there is still the hurdle of finding out what he tells the NFL, or what is on the tapes he turns over to the NFL. If the NFL continues to stonewall, it will be pretty evident that Walsh’s information was pretty damaging.
Arlen Specter, the Senator pursuing this issue, says he will not be backing down.
When asked if he wanted to see the materials, Specter said, “I sure do,” adding that he would ask the league to allow him access to whatever videotapes and notes Walsh turns over.
“To whatever extent the league’s approval is necessary, I will ask them for it in a formal way,” Specter said.
Specter will not be part of the NFL’s interview of Walsh but confirmed he expected to be meeting with Walsh in Washington also on May 13.
As for what he wants to learn from Walsh in their conversation, Specter said: “I want to know everything. I would begin chronologically. When did the first taping occur? Who directed it? And who knew about it? Who participated in it, and what use was made of it? And what effect did it have on the game, as best he could tell? Was there ever any disagreement about using it?”
What he learns from Walsh, as well as the materials the former video assistant turns over, will determine whether Specter will ask the judiciary committee to look into the matter.
As I said, this could get messy for the NFL if Walsh has the goods on the Patriots. As for the trade secrets implications of all this, I will post on that should it appear that Walsh really has what he says he has.
Back in January I posted on Allstate Insurance’s refusal to turn over documents regarding its claims process, the so-called McKinsey documents. That post is here. Allstate claimed that the documents were trade secrets.
Now, as reported by the Kansas City Business Journal here, Allstate has decided not only to turn the documents over to the court, but has posted the documents online. And insurance industry watchdogs are having a heyday with the documents. Go here.
“The company said in a release that it still thinks the documents are trade secrets but that it decided to release the 150,000 pages online because it wanted to dispel the “inaccurate picture” that had been painted of its claims process.”
So, you get to decide, are you in Good Hands, or are they still giving you the middle finger?