17 posts categorized "NDAs & Trade Secrets"

VCs, Protecting Ideas, and NDAs -- the Nextdoor.com Abhyanker Saga Continues

Nextdoor.com, Inc. v. Abhyanker, C-12-5667 EMC (N.D. Cal. July 19, 2013)

[Note from Bill: this is a post by Venkat Balasubramani, legal blogger par excellence. I am thrilled that Venkat is breaking, here on Counselor@Law, fresh new developments in this important, ongoing lawsuit. The case is not over, but it's getting juicy, and it throws into one package many of the disparate topics we like to cover on this blog (all that's missing is a securities law angle). Click here for a pdf of the written court ruling Venkat is analyzing.]

Abhyanker, who is a lawyer and well known entrepreneur, alleges that he tried to develop a neighborhood-based networking concept known as “Nextdoor,” that someone else ultimately took and ran with, to form Nextdoor.com. According to him, his Nextdoor idea was a spinoff from his concept called LegalForce, which was a private social network for inventors. He also developed “Fatdoor,” a Wikipedia-like public database of neighbor profiles. [sounds scary from a privacy standpoint!] Fatdoor’s assets were ultimately purchased by Google. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea.  

2757328137_b728306d92_zAbhyanker alleges that he told two people about his Nextdoor ideas and trade secrets: (1) Benchmark Capital; and (2) Sandeep Sood, a designer and contractor for LegalForce. At some point, Abhyanker pitched the Nextdoor idea to VCs, including Benchmark Capital. Although he did not discuss any confidential information in the initial meeting, he supposedly sought and obtained “assurances” from Benchmark that any confidential information disclosed by Abhyanker would be kept confidential. According to him, relying on these assurances, he pitched the Nextdoor idea to Benchmark. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea. According to him, while he returned to focus on his Nextdoor idea, others were independently working on the Nextdoor concept, and used confidential information and trade secrets to swoop in on the nextdoor.com domain name that Abhyanker had been pursuing for years. The Nextdoor.com founders were Benchmark capital “entrepreneurs in residence,” and Abhyanker alleges that the founders gained access to Nextdoor trade secrets through their work at Benchmark. 

These were just the counterclaim wranglings. The case was preceded by a (still-ongoing) proceeding in the Trademark Trial and Appeals Board, and a short-lived state court proceeding (which Abhyanker filed and dismissed).  

Abhyanker initially asserted several other counterclaims, but withdrew those and filed an amended pleading asserting only a trade secrets claim.  Nextdoor.com (& Sood) moved to dismiss Abhyanker’s trade secret claims. 

Adequacy of trade secrets allegations: Nextdoor argued that Abhyanker’s trade secrets claim failed because he failed to set forth the alleged trade secrets with the sufficient degree of particularity. The court rejects this argument, saying that Abhyanker’s laundry list is sufficient, and requiring him to be more specific would run the risk of forcing him to disclose his trade secrets at the pleading stage. Nextdoor also argued that there were no allegations of how it allegedly exploited Abhyanker’s trade secrets, but the court says there are some allegations—principally, Abhyanker alleges that Nextdoor used the bidding history for the nextdoor.com domain to its advantage. 

The court does say that the parties should work together to come up with a process for identifying the trade secrets and whittling down Abhyanker’s laundry list.  After this process is over, the court says that Nextdoor can revisit the trade secrets issue at the summary judgment phase, hinting that Abhyanker's trade secrets claim may not be all that they are cracked up to be. 

Public disclosure of trade secrets: Nextdoor also argued that Abhyanker disclosed the trade secrets in question in a patent application. Nextdoor says that Abhyanker had filed a patent application disclosing much of the trade secrets at issue in connection with his Nextdoor idea; Abhyanker disagrees, and says that the patent application covered Fatdoor (the wiki site) technology. The court does not delve into the details regarding what facts were disclosed in the patent application (presumably because the facts regarding what Nextdoor does are as yet undveloped), but does say that the patent application discloses the use of nextdoor.com in connection with a  networking site. The court dismisses Abhyanker’s trade secrets claim to the extent it’s based on Nextdoor.com’s alleged misappropriation of “using the name nextdoor.com in connection with a  neighborhood-based social network.”

In addition to the above rulings, the court also (1) says that Abhyanker’s alleged admissions in other proceedings that he does not own the trade secrets at issue (and that the trade secrets were part of FatDoor, which was ultimately acquired by Google) are not necessarily binding against Abhyanker in this matter; and (2) strikes a few of his affirmative defenses. 

Finally, the court also denies Abhyanker’s request to disqualify Nextdoor.com’s law firm, Fenwick & West, on the basis that they previously represented LegalForce. Abhyanker says that Fenwick assisted him in protecting his IP for LegalForce, including preparing non-disclosure and invention and assignment agreements. Fenwick, for its part, had an independent Fenwick attorney review the files and billing records. This lawyer concluded that Fenwick did not really help LegalForce with its IP strategy and at most provided LegalForce with some form documents. The court credits Fenwick’s view, rather than Abhyanker’s view, and also says that the matters in question (this dispute and the prior representation of LegalForce) are not related. The court also says that Fenwick was not likely to glean confidential information relevant to this dispute as a result of its limited representation of LegalForce. (The court also notes that Fenwick implemented an ethical screen between the lawyers working on litigation matters against Abhyanker and lawyers who worked on LegalForce, the bulk of whom are no longer at Fenwick anyway.)

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Yikes. A messy dispute that weakly promises to get at the answer of whether, patents aside, ideas are protectable in this context. In terms that will resonate with entrepreneurs, this case gets at the perennial question of "if I have an idea and a domain name, or the name of an app" should I require someone to sign a NDA before I disclose the details?" My money is on the parties running out of gas to pay their lawyers and eventually coming up with some sort of settlement.

Abhyanker has weak trade secrets claims overall. But he was undoubtedly pursuing nextdoor.com. The fact that after pitching it to Benchmark, it showed up as an idea pursued by former Benchmark entrepreneurs in residence can’t look particularly good for Benchmark. (In addition to the domain name, he also pointed out that the prototype used by Nextdoor.com was for the same neighborhood that Abhyanker focused on when he was working with concepts around next-door.) That said, VCs don't sign non-disclosure agreements for this very reason, and although they are from time-to-time accused of taking an idea that they may receive via a pitch and running with it using another team, I don't get the sense that what happened here is wildly outside the expectations of most entrepreneurs. (It's possible that I'm way off on this, feel free to correct me in comments. It's also worth noting that as domain names become scarce and more valuable, Abhyanker's allegations regarding the domain name--while seemingly menial--do get at an important part of a start-up's trajectory.) 

I’m curious about why Abhyanker withdrew his breach of contract claims that presumably included claims based on non-disclosure obligations Benchmark agreed to? Common wisdom suggests that non-disclosure agreements are over-rated and may even make you look amateurish, but you wonder whether a robust non-disclosure agreement would have helped Abhyanker in this scenario? 

Apart from the merits of the dispute, the disqualification ruling is very interesting. Fenwick, which is one of the go-to firms in Silicon Valley (and in Seattle), works with a huge number of entrepreneurs and ventures. To the extent the judge here would have disqualified it, I would guess it would end up taking a second look at its policies around conflicts and whom it can continue to represent when clients (or former clients) have disputes against one another. I’m not saying its representation of Nextdoor.com against Abhyanker here is improper, but I found it very curious that the court relied heavily on summaries of billing records, when it’s widely known that lawyers in this space often work with smaller clients in the hopes that they may grow into more viable clients—it’s not about billing in the early stages of the relationship. Abhyanker’s testimony about him going to his “family friend,” Fenwick attorney Rajiv Patel, for help regarding intellectual property protections for stuff Abhyanker was developing (based on the partner’s IP expertise) did not put Patel in a particularly favorable light. Abhyanker’s argument is that this IP protection involved protection for situations such as when Abhyanker was pitching the nextdoor concept to Benchmark, or working with contractors such as Sood. How can Fenwick, who signed up to help him with these issues, now represent an adverse party in a lawsuit involving these same issues. Not a terrible argument in my opinion. 

Anyway, a crazy dispute that continues to grind on, but one that raised some interesting points.

The takeaway: to the extent you are looking to protect something like an idea and a domain name, I wouldn't rely on trade secrets. Any sort of implied confidentiality obligation is tough to enforce as well. You have to weigh the extent to which doors will slam in your face as a result of requesting an NDA, but that's what would have probably saved Abhyanker here.

Added: Check out the comments below. Also, as Jeff John Roberts noted in this story from January of this year ("Kickstarter project wants to expose idea thieves of Silicon Valley"), Abhyanker launched a Kickster project titled "Entrepreneurs in Residence"!

Photo: Kelli Anderson / Flickr.

Federalizing state trade secret law

From a post by Jessica Mendelson and Robert Milligan on the "Trading Secrets" blawg, I learned about proposed legislation in the US Senate that seeks to, in the words of the writers, "allow American companies dealing with economic espionage and trade secret theft to seek redress in federal courts, rather than having to file suit in individual state courts."

Alfred_hitchcock_secret_agent_argentine_movie_poster_2aMendelson and Milligan place their discussion of this bill in the context of a reminder that Congress is awash in concern about "foreign espionage," and that we don't yet know which of various alternative initiatives may take hold in federal law.

So no need to get worked up about this particular bill. Possibly.

Though I'd like to raise one hand and ask, is it really necessary to keep tacking to policy reforms that essentially privatize law enforcement? (This is something that the motion picture industry and the music industry keep pressing for; and they are succeeding, too, to the extent they strike private agreements with cable companies and other internet service providers to blacklist people they don't like, bypassing courts and due process altogether!)

There is already a federal trade secret statute on the books, a law that makes it a crime to steal trade secrets knowing that the theft will "benefit any foreign government, foreign instrumentality, or foreign agent." That's pretty heady stuff.

There's also a right of civil action in federal courts, today, for the Attorney General to obtain "appropriate injunctive relief."

This new Senate bill would expand the right of civil action in federal court, bestowing it also upon any person who is "aggrieved." Not only that, but - if I am reading the legislation correctly - it would give the private litigant more grounds for complaint than the Attorney General has, and it would allow persons to sue domestic defendants, too - products "produced for or placed in interstate or foreign commerce" would be entitled to protection.

In addition to the stuff the Attorney General can sue about, the Senate bill would grant an exclusively private right of action for "misappropriation." What's "misappropriation?" A lot of stuff that's not criminal, including use of a trade secret when you "had reason to know" that your knowledge of the trade secret was via a person who "owed a duty to the person seeking relief." Because the action is not limited to "foreign espionage," it may not be overly dramatic to wonder if this bill would essentially federalize trade secret law.

NDA as Poison Pill

Just catching up to the news of a Delaware court opinion that shows, in yet one more way, how important a confidentiality agreement (or "NDA") can be.

The case involves a hostile tender offer by Martin Marietta Materials, Inc. for control of Vulcan Materials Company. The tender offer was enjoined (stopped) by court order this month, though from googling I can see that perhaps that order has been or may be appealed.

1024px-Frans_Floris_-_Venus_at_Vulcan's_Forge_-_WGA7950

But the instant fascination with the case is how a mutually negotiated confidentiality agreement - one that we're told contained no "standstill" clause or other express prohibition of a hostile tender offer - can be enough to prompt a court to intervene and stop an unwanted bid.

The basic proposition is that Martin Marietta had signed an NDA under which it had agreed not to use the material Vulcan had disclosed to it, except in furtherance of a transaction. (I put that word in italics because we have already gotten to the juncture where exact words can have exacting consequences. Hold that thought.) Martin Marietta then used Vulcan's confidential information to help it formulate a hostile tender offer. The question presented: was Martin Marietta's use of Vulcan's information a use permitted by the NDA, or was it a breach of that NDA?

The court's opinion gives us this telling glimpse into the drafting history of a key section of the NDA:

Screen shot 2012-05-29 at 9.50.11 PMThe wordsmithing makes a real world difference. Had "Transaction" remained defined as "a possible transaction . . . involving" the two companies, Martin Marietta's use of Vulcan's information to plan a unilateral (as opposed to mutually agreed) takeover might well have been a permitted use under the NDA. But "Transaction" was not defined that way; instead, it was narrowed to mean a "business combination . . . between" the parties.

The choice of the preposition, "between," is pivotal. Unlike "involving," which allows that one party may be passive or even uncooperative, "between" implies mutuality.

Bet we'll all look just a bit more closely at that next "boilerplate" confidentiality provision that crosses our screens!

Picture from Wikimedia: Venus at Vulcan's Forge by Frans Floris.

eBay Sues Google and Former eBay/PayPal Execs

eBay sued Google Thursday over what eBay alleges were and are illegal actions to usurp its PayPal subsidiary's proprietary efforts to develop mobile payment services.

Screen shot 2011-05-28 at 8.36.39 AMThe case seems to spring from Google's hiring of long time PayPal/eBay employees (also named as defendants), including Osama Bedier, who the complaint says worked for PayPal for ten years. "At the time of Bedier’s departure from PayPal," the complaint says, "he served as Vice President of Platform, Mobile, and New Ventures." The complaint alleges that Bedier "now fills a similar role at Google."

I haven't read the whole complaint yet -- just seeing it this morning -- but it looks like eBay will argue "inevitable disclosure." That is, that Bedier and perhaps others were so centrally involved in leading PayPal's efforts to develop and commercialize mobile payment technologies and services, it will be inevitable that they will draw on PayPal trade secrets in working for Google to accomplish the same goals.

Not that the complaint is entirely forward looking:

"[F]rom 2008 to 2011, Google and PayPal were negotiating a commercial deal where PayPal would serve as a payment option for mobile app purchases on Google’s Android Market. During that time, PayPal provided Google with an extensive education in mobile payments. Bedier was the senior PayPal executive accountable for leading negotiations with Google on Android during this period. At the very point when the companies were negotiating and finalizing the Android—PayPal deal, Bedier was interviewing for a job at Google — without informing PayPal of this conflicting position. Bedier’s conduct during this time amounted to a breach of his responsibilities as a PayPal executive."

This conflict of interest or breach-of-duty-while-yet-employed-and-talking-to-a-competitor/customer argument is not something I recall offhand from the HP complaint against Mark Hurd. It may be one more legal theory that could be developed to "get around" California's legal disdain for noncompetes.

Protecting Customer Lists is So Pre-Internet

Venkat Balasubramani recently posted a rundown on a decision of a federal court that speaks to how easy it can be to reconstruct the customer list of a business using Google.

In the particular case Venkat discusses, the plaintiff argued that its client list was a trade secret.

It appears that the defendant put on a demonstration for the court, impressing it with how easily the allegedly protected information could be reproduced through simple searches on Google and through Bloomberg.

The upshot, Venkat writes, is this:

"In the modern era where professional networking on the internet is the norm, things like client lists will become increasingly difficult to protect as trade secrets. If the information you are seeking to protect as a trade secret is available on the internet (and the defendant can access it with clean hands), you're going to have an uphill battle."

Speculating About the HP-Hurd Settlement

Why would HP settle its lawsuit against former CEO Mark Hurd not two weeks after filing it?

Why would Hurd agree so quickly to give up HP restricted stock units that, at least according to an HP filing with the SEC, "represent the only remaining compensation that Mr. Hurd was entitled to receive" under a mutually agreed severance agreement?

Footba11-punt The severance agreement itself was only signed a month and half ago.

I don't know the answers to these questions, but factors swirling around as possibilities include:

  • HP worried that it would be difficult to prevail under California law.
  • Hurd and his new employer, Oracle, worried that HP's legal argument was tailored narrowly enough to represent a possible real impediment to Hurd's effectiveness at Oracle.
  • Both HP and Oracle worried about alienating mutual customers.
  • All along, HP only wanted some face-saving "refund" of a rich severance package only just doled out, but Hurd, emboldened by Oracle CEO Larry Ellison's aggressiveness, forced HP to actually file suit he took HP seriously.

This might not be over. HP may simply have punted the ball.

I say that because, while announcing a settlement of its lawsuit, HP also stated that the terms of the six week old HP-Hurd severance agreement "have not otherwise been modified."

Under that severance agreement, Hurd acknowledged that certain post-termination "protective covenants" contained in a series of agreements with HP would survive. In fact, Hurd agreed that those "protective covenants" would be extended from one year to two.

Here's the section of the severance agreement on this point:

    5. Continuing Obligations. You acknowledge and affirm your continuing obligations under the HP Agreement Regarding Confidential Information and Proprietary Developments you signed on February 6. 2008, February 26, 2009 and February 12, 2010, (the "Confidentiality Agreements"); provided, however, that you hereby agree that Section 7 of the Confidentiality Agreement (Protective Covenants) shall apply for the period of twenty-four (24) months commencing on the Separation Date and, provided, further, that you agree that Section 2 of the Confidentiality Agreement (Confidential Information) shall apply at all times following the Separation Date.

Now, at least for purposes of its complaint against Hurd, HP has stated that it will be impossible for Hurd to act as Oracle's President without violating these very same "protective covenants."

Does this mean Hurd and Oracle have now agreed to limit what Hurd can do at Oracle? But if Oracle will have to restrict certain of Hurd's duties in order for Hurd to honor his severance agreement with HP, wouldn't that be a material fact that Oracle should disclose to its shareholders?

Detail in HP Complaint vs. Mark Hurd

Hewlett-Packard's complaint against former CEO Mark Hurd is pretty specific about how HP fears Hurd may hurt the company by working for Oracle, so soon after leaving HP.

Here are key excerpts from the complaint, filed Tuesday in a state court in California:

"HP's key management personnel, headed up by Hurd, participate [sic] extensively in the design and implementation of annual business plans. Hurd was responsible for the creation of HP's strategic plans, including its FY 2010 and FY 2011 business plans. He was responsible for creating a plan to compete against HP's competitors, including Oracle. . . .

". . . On March 18, 2010, Hurd was presented, along with other members of the HP Board of Directors, with a highly confidential competitive internal analysis of Oracle.

"HP's trade secret business and customer information is of great value to HP and such information would give any competitor who improperly acquired such information an unfair competitive advantage by: not expending the time and resources to develop the trade secret information as HP as done, quickly developing products and technologies to unfairly compete with HP in order to diminish HP's head start, and even alerting a competitor as to initiatives that should not be pursued, as well as other improper advantages.

"While employed by HP, Hurd . . . was privy to the pricing, margins, customer initiatives, allocation of resources, product development, multi-year product, business and talent planning, and strategies being utilized by HP and which would give Hurd and Oracle an unfair advantage in soliciting customers, utilizing vendors and developing products."

The excerpts are from numbered paragraphs 20, 37, 48 and 51 of the complaint.

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