William Carleton, Counselor @ Law

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."

Mendelson 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.

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:

The 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.

The 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?

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.

Nooks & Crannies - Part 5

To summarize where we left off in Part 4, in a consulting context, a Residuals clause can be seen as an attempt to balance the interests of a consultant and his or her customer, but from the opposite direction as compared to a non-compete. But does the Residuals clause get you to the same place as a non-compete? I think the short answer here is generally going to be ‘no.'

Consider the purpose of a non-compete and what happens when it expires.

A properly tailored non-compete prevents the consultant from working for the customer’s competitors for a certain period of time. However, during the term of the non-compete the consultant is still free to work for customers other than those precluded by the non-compete. Upon the expiration of the non-compete, the consultant can then go to work for a competitor. Does that mean the consultant is also now free to use or disclose the former customer’s trade secrets with the competitor? Or does the obligation not to use or disclose such secrets survive even after the end of the non-compete? Or is it that the consultant can use the secret so long as he or she doesn’t disclose it?

I think the answer here is it depends on what the parties have agreed to in the consulting agreement, especially the confidentiality provisions. I also think this goes to the point that Bill was getting at in his post “Footnote to Last Week’s Posts: Why Do We Draft NDAs to Doom Trade Secrets?”

Now consider the Residuals clause.

The Residuals clause is normally drafted as an unrestricted permission to use what the consultant has learned during his or her engagement with a customer, including use with a competitor. Thus, a residuals clause doesn’t necessarily get you to the same place as a non-compete.

(Image courtesy of Jennifer, used under Creative Commons license.) As a side note, in the amount of time it took for me to get around to this Part 5, the 3d Circuit Court of Appeals has issued a ruling in the Bimbo Bakeries v. Botticella case mentioned in Part 2. As I predicted in Part 2, the court had a hard time believing Mr. Botticella’s story. As such, the 3d Circuit affirmed the lower court’s decision to enjoin Mr. Botticella from working for Hostess until the trial court sorts out Bimbo’s trade secret misappropriation claim. The more interesting thing about this decision for me was that while the 3d Circuit agreed with the lower court’s decision to enjoin Mr. Botticella, it determined that the injunction wasn’t necessarily issued pursuant to the inevitable disclosure doctrine. Both sides had been arguing about the standard of “inevitability," but the 3d Circuit saw this case for what it really was – a case of threatened misappropriation.