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.
I’m a little late on this one but, better late than never. According to marketwatch.com, ClearOne Communications was awarded in excess of $10 million by a jury in a federal trade secret case in Utah. ClearOne sued BiAmp Systems, WideBand Systems, Dr. Jun Yang (a former employee of ClearOne), Andrew Chiang, Lonnie Bowers and Versatile DSP, Inc. for misappropriation of trade secrets, breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty relating to the theft of algorithms and computer code.
On November 5, 2008, the jury returned a verdict in the Intellectual Property Case in favor of ClearOne and against all of the Defendants. Accordingly, the jury awarded ClearOne approximately $3.5 million in compensatory damages and $7.0 million in punitive damages. Among other things, the jury found that all of the Defendants willfully and maliciously misappropriated ClearOne’s trade secrets. Based on that finding, the court may also award ClearOne exemplary damages and reasonable attorneys’ fees. The court left in place the previously-entered preliminary injunction, pending ClearOne’s application for entry of a permanent injunction against the Defendants.
Big win for ClearOne and congratulations to the Magleby & Greenwood law firm who obviously did an exemplary job of presenting ClearOne’s case to the jury. Big wins like this typically mean that a company has paid attention to its trade secrets protection plan and adhered to its implementation, including, confidentiality agreements, exit interviews, password protections, limited access, etc. Your company should be doing the same thing.
A very timely article over at Computerworld that identifies a faltering economy as a circumstance that leads to greater theft of trade secrets and destruction of sensitive information. The article states that companies should be even more vigilant at these times to protect their valuable assets from literally walking out the door. Good advice. In fact, companies should always be vigilant about their trade secrets, but especially now there are no excuses not to believe that your own employees (or future layoffs) will one day be competing against you using your own trade secrets, or destroying those very same trade secrets so that they are of no use to anyone.
As it is, one of the biggest threats to corporate data and systems traditionally has come from insiders, who with their privileged access to data and systems, have the potential ability do more accidental or malicious damage than even the outside attacker.
That threat greatly increases at times when companies are laying off staff, cutting back on raises and bonuses, deferring promotions, consolidating operations and outsourcing work to save money.
Remember, as you take steps to keep your company competitive in this very difficult market (layoffs, deferred promotions, no bonuses) you should also keep in mind the emotional state of your employees and how it will affect their actions vis-a-vis your trade secrets.
The article goes on to say: “Tough economic times create uncertainty in the workplace . . . . Employees for instance, can be worried about losing jobs and promotions, concerned about financial liabilities, mortgages and rising energy costs.” Shelley Kirkpatrick, director of assessment services at Management Concepts, a Vienna, Va.-based management consultancy, states: “When there is uncertainty, it creates stress for employees. It makes the company more vulnerable” to threats.
The threats can manifest themselves in a number of ways. Insiders with access to corporate information, such as customer data or corporate secrets, might want to steal or disclose it for financial gain or simply to get back at their companies. Those with technical-savvy might seek to sabotage corporate data and systems by planting malicious code and so-called logic bombs that are designed to delete data at a future date on critical systems.
The danger is not confined to such actions alone. Stressed, unhappy workers make easy targets for opportunistic rivals as well, Kirkpatrick said. “If I am a competitor looking for a good opportunity to get trade secrets out of my competition, I am going to go after the people who may be stressed emotionally,” she said.
It makes sense at this time to re-double efforts to ensure that your trade secrets are adequately protected. Review your trade secrets protection plans and update as necessary as you make the necessary economic decisions that will inevitably affect your employees in a negative way. And if you don’t have a trade secrets protection plan, get one quick and stick to it.
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 on http://www.zdnet.com, tiny start-up LimitNone has sued Google in an Illinois circuit court for $1 billion over an email switching tool that LimitNone claims it created. The email switching tool was designed to migrate customers of Microsoft who rely on Outlook applications over to Google’s Gmail application. LimitNone’s switching tool, called “gMove,” was designed to move the email, contacts and calendar of Outlook users over to Gmail.
LimitNone said it entered a confidentiality deal with Google to share trade secrets of its e-mail migration tool with Google engineers, sales people and key Google Apps customers.
Last December, the firm of less than five employees learned from Google that it planned to enter the market for LimitNone’s migration product itself because the business opportunity promised to be huge, according to court papers.
LimitNone alleges that Google had trouble building a similar tool–that is apparently the reason that Google entered into a confidentiality agreement with LimitNone. At this point it’s not clear how similar the tools are. According to the article: Google introduced a free, competing e-mail migration tool called “Google Email Uploader” earlier this year, which the lawsuit alleges is “almost identical” to gMove and that “both operate under a similar conceptual design.”
If true that Google had difficulty building a similar tool, and then after confidential meetings with LimitNone entered the market with a similar tool to LimitNone’s tool, it will be strong evidence of misappropriation. By virtue of the information exchanged pursuant to the confidentiality agreement, Google had access to information that would allow it to build its own version of LimitNone’s tool. However, Google could have independently created the tool, as well. The proof, as they say, will be in the pudding. If the tools are similar, then this lawsuit tilts decisively in favor of LimitNone.
Be that as it may, LimitNone will have to prove that they have reasonably protected the secrecy of their tool prior to disclosing it to Google. Much will depend on the existence and drafting of the confidentiality agreement.
The damages are staggering for what appears to be a small tool. However, LimitNone claims that the tool could help over 50 million subscribers migrate their information over to Gmail. It becomes pretty clear why Google wouldn’t want to give away licensing fees of that magnitude if it felt it could do it on its own. But, if Google could have done it on its own, why sign a confidentiality agreement with LimitNone?
LimitNone’s claim that there is a confidentiality deal in place will be the lynch pin of any successful lawsuit for LimitNone. A properly drafted confidentiality agreement tailored to the specific purpose for which the disclosure is needed will be your strongest protection against misappropriation of the type alleged by LimitNone. Ensure that your confidentiality agreements adequately protect you before disclosing any competitive information.
According to this article in the Chicago Tribune, Clear Channel filed suit against Tribune Co. and former employee and VP Andrew Friedman on May 19, 2008, based on allegations that Mr. Friedman had taken documents, data and files belonging to Clear Channel with him and that Mr. Friedman would use knowledge of Clear Channel’s strategies for the benefit of Tribune Co. Tribune Co. was taken private last year by Sam Zell and has been restructuring its operations since. This is only the latest hire by Tribune Co. of former Clear Channel high-level executives and apparently Clear Channel is fed up.
The article states: “Friedman was deeply involved in the formulation and implementation of the confidential plans and strategies that Clear Channel uses to develop, market, implement, and distribute its online offerings,” the suit said. The information “is of particular competitive significance and value.”
“Before leaving Clear Channel, Friedman allegedly shared information with Tribune employees about business strategies and vendors, said court papers, which included alleged transcripts of e-mails. Friedman also deleted thousands of files from his computer, Clear Channel claims.”
Clear Channel also sought a Temporary Restraining Order (TRO) which would restrain Mr. Friedman from beginning work for Tribune Co.
ChicagoBusiness.com is now reporting that U.S. District Court Judge Joan Gottshall in Chicago granted the TRO and made findings that Clear Channel would “undoubtedly suffer irreparable harm if the (temporary restraining order) is denied and (Mr.) Friedman uses the knowledge of interactive content strategies for the benefit of Tribune.” Mr. Friedman, she wrote, “will suffer little to no harm, other than being unable to work in his chosen profession for a few weeks.”
ChicagoBusiness.com further reports: “Mr. Friedman is also temporarily barred from using confidential information he gleaned during his employment at Clear Channel Communications Inc. and from hiring away other Clear Channel employees. He is also to “immediately return” to Clear Channel any documents, data and files as well as portable storage devices used to transfer proprietary information.”
The Chicago Tribune reports, “Tribune spokesman Gary Weitman described the suit as worthless. “We’re finding that there are a lot of people who want to come work for the new Tribune, and we’re going to hire the best of them, we’re going to do it lawfully and we’re not going to be intimidated by frivolous lawsuits,” he said.”
The question lies in the last statement–was it done lawfully. Of course the Tribune Co. can hire employees of Clear Channel and Clear Channel can ordinarily not prevent its employees from moving on, but if the employee is sharing confidential information, then the question of lawfulness becomes a little more murky. I don’t find that the suit is frivolous if there is evidence that Friedman shared information with Tribune that he acquired only as a result of his employment with Clear Channel.
I’m sure we will hear more facts about this case in the future–was there a confidentiality agreement, a non-compete agreement (the article appears to state that there was a one-year non-compete). I’m not saying that there is no way to recover in the absence of these trade secret strategies, but it makes it more difficult.
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.
The Pacific Coast Business Times is reporting that two medical device makers who focus on aesthetic or cosmetic procedures (however, they are not competitors) are locked in a battle over some files that an employee of one company emailed to an employee of another company. The complaint, filed in Santa Barbara County Superior Court, alleges that Mark Kelly, a consultant for Mentor Corporation emailed files to Jamie Diggs, a Den-Mat Holdings employee, after Diggs had requested certain files. The article is here.
Mentor alleges that the emailed files contained Mentor’s trade secrets and that many were stamped “confidential” or “trade secret” at the top.
“Before Kelly sent the contested message, Mentor had installed a software program to monitor e-mail for potentially sensitive file attachments making their way outside the company, Mentor said in court filings.
“The program flagged as suspicious Kelly’s e-mail to Diggs. The message was then forwarded all the way up to the executive suite, Mentor said in court declarations.”
I haven’t spoken much about this type of software, but with the increasing amount of trade secrets litigation stemming from employee actions and misappropriation, it could make sense to add it as part of your trade secrets protection plan on at least two levels: (1) it is further evidence in court that you were actively seeking to protect your trade secrets and to keep them from becoming generally known to the public, or to a competitor; and (2) more practically, a company might be able to detect a trade secrets leak early on and prevent altogether the need for litigation (and its attendant costs) by taking decisive action early on.
There are some good companies that make such software. I will post later on some of them.
An interesting issue that I am sure will come up in this litigation is the degree of competitive advantage the documents provided to Den-Mat since the companies are not necessarily competitive with each other. The article states that the documents at issue contained “quality management policies, various accounting forms and policies, corporate procedures for expenditures and dispositions, human resources policies, corporate policies regarding inventory, computer system policies, and codes of conduct and ethics.” While much of this could be considered trade secret because it would allow a competitive advantage between competitors, it is not so clear when the companies are not competitors. It could raise interesting issues. We will follow this litigation as it develops.
The Sacramento Business Journal reported last week that Allen Cotten, a former employee of Genesis Microwave, Inc., “admitted to stealing trade secrets from Genesis Microwave and offering them for sale to foreign governments.” Notice the emphasis on employee. Regular readers of this website will understand the significance of that fact.
According to the article, “Cotten worked for Genesis Microwave, Inc., in El Dorado Hills, and admitted that beginning in February 2004 he began to steal plans, designs, parts and specifications for components known as logarithmic video amplifiers. The technology has military applications for radar jamming, guidance, countermeasures and locating enemy signals during combat.”
This happens far too frequently–get your trade secrets protection plans in order and make sure they are followed. Your employees are not your friends.
Kudos to the FBI for doing the legwork that resulted in the confession.
In yet another employee misappropriation case, the FBI got involved in the alleged theft of trade secret information for intumescent fire-proofing coating (I don’t know what it is either) from a worldwide paint company with a subsidiary in Houston, Texas. Jensen Zeng was arrested on January 29, 2008, and detained pending further criminal proceedings after being indicted on two counts of trade secrets theft and one count of computer fraud. Although the press release from the FBI doesn’t say it, the charges likely stem from violations of the Economic Espionage Act. Furthermore, there is no indication of a civil suit by the company, I am sure we can expect one.
Based on the brief allegations detailed in the FBI press release, we can begin to pciture the strong case the paint company has made for itself because, if the allegations are proven true, they implemented and sustained an effective trade secrets protection plan (something this blog highly recommends doing if you have any trade secret information which provides value to your company). In the following paragraph from the press release I will highlight the items which are directly related to a trade secrets protection plan.
According to the indictment, Zeng allegedly signed a confidentiality agreement with his employer and was aware of his responsibility to keep and maintain the confidentiality of his employer’s proprietary interest in trade secrets. Between Nov. 1, 2005 and Jan. 29, 2008, Zeng is accused of accessing without authorization his employer’s protected computer system and obtaining the trade secret formula for the intumescent fire-proofing product with the intent to defraud his employer. Zeng is accused of downloading the trade secret formula from the company’s database with the intent to convert the trade secret to the benefit of a person other than his employer on or about Nov. 1, 2005, and again on Jan. 29, 2008, and concealing the formula in a box under the insulation in the attic of his residence. The indictment also alleges Zeng formed his own business in October 2007 for the purpose of marketing intumescent fire-proofing coating.
A trade secrets protection plan is critical to any action for trade secrets whether brought in civil court or pursuant to Federal Laws such as the Economic Espionage Act.