Employee Mobility Intro to IP – Prof Merges

Agenda Reverse engineering Employee invention ownership Noncompetition agreements “Inevitable disclosure” doctrine Agreements to keep secrets

Corlew’s work history Reverse engineering of nozzles and other items 1.7 years to duplicate?

IPNTA 5 th at The relevant inquiry is whether the means to obtain the alleged trade secret were proper or ‘‘honest,’’ as opposed to being obtained by virtue of a confidential relationship with an employer.

“Defendants have argued that the plaintiff’s products were simple, consisting of non- technical and few parts, that reverse engineering would take little time, and that, in any event, they only reverse engineered a small fraction, not all, of plaintiff’s products. Plaintiff has not sufficiently rebutted these contentions. Thus, because plaintiff has failed to make a clear showing that defendants improperly obtained and reverse engineered its products, trade secret protection at this stage of the litigation is improper.” IPNTA 5 at 81

Restatement of Torts § 757 A trade secret may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a chemical compound, a process of manufacturing, treating, or preserving materials, a pattern for a machine or other device or a list of customers.

Common Law Obligation: 3 categories of employee “Employed to invent” “Inventions made with employer resources” “Independent invention”

Employment Contracts: IP Assignment Clause Typically broad and sweeping (why not?) Some states regulate the effect of broad clauses – “Right to invent” states

Merges, The Law and Economics of Employee Inventions, 13 Harv. J L. & Tech 1 (1999) “Pro-employer” rules, balanced by practical issue: Difficult under patent law to prevent employees from leaving with “about to be conceived” inventions

E.g., CA Statute Contracts may not require assignment of ‘‘invention[s] that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information’’ unless the invention relates to the employer’s current or demonstrably anticipated business. Cal. Labor Code §2870

Case study: Roberts v. Sears Roebuck 697 F.2d 796 (7 th Cir. 1983) Peter Roberts invented “quick release socket wrench” while working as a salesman in a Sears store No obligation to assign; sold invention to Sears in separate K; later invalidated for fraud

Trailer Clauses General Signal: the value of waiting...

Distinguishing “general skills and knowledge” from protectable trade secrets Defining Trade Secrets in the Employment Context

Trade secret protection or noncompete agreement? Edwards v. Arthur Andersen

Noncompete agreement Cal Bus & Prof Code 16600: Strong state policy expressed

‘‘If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. [¶] For twelve months after you leave C. Misappropriation of Trade Secrets 91 the Firm, you agree not to solicit (to perform professional services of the type you provided) any client....” IPNTA 5 th at 91

HSBC Acquisition of Aandersen Acctg. Practice Required ex-Aandersen employees to agree to resign, and maintain Aandersen confidential info indefinitely Edwards refused to sign and was terminated Trial ct: termination ok; Ct of Appeal: reversed; violated 16600

IPNTA 5 th at 93: Cal Labor Code ‘‘Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.’’ The chapter excepts noncompetition agreements in the sale or dissolution of corporations (§16601), partnerships (ibid.; §16602), and limited liability corporations (§ ).”

s California Codes Brainchild of David Dudley Field ( )

California Civil Code of 1872 In general, came to be interpreted consistently with common law precedent – so more of a restatement than a true, European-style civil code But: some provisions were quite innovative and even “radical” – including Bus.Prof. Code § 16600

Maurice Harrison, The First Half Century of the Calif. Civil Code, 10 Cal. L. Rev. 185 (1922) CA code unusual – not “Napoleanic” in origin CA rejected “continental” system of code interpretation; “code uber alles” Instead, CA code to be interpreted consistently with common law; supplementary source

In the years since its original enactment…, our courts have consistently affirmed that section evinces a settled legislative policy in favor of open competition and employee mobility. The law protects Californians and ensures ‘‘that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” – IPNTA 5 th at 93

“Trade secret exception” FN 4 of Edwards “16600 invalidates provisions in employment contracts and retirement pension plans that prohibit ‘‘an employee from working for a competitor after completion of his employment or imposing a penalty if he does so unless they are necessary to protect the employer’s trade secrets.’’ (Muggill)

A. Andersen argument Agreement does not “completely prohibit” practice of profession – so does not “restrain” Edwards under the terms of the statute Cal Sup Ct: Wrong! incorporates a “strict antipathy” to restraints of trade, IPNTA 5 th at 94

The narrow restraint exception Only 6 months Only prohibited from soliciting a single customer Other similar “narrow” restraints: All Invalid

CA rule is distinct minority See, e.g., CTI v. Software Artisans, IPNTA 5 th at 96 Upholding K prohibiting employee from “engag[ing] directly or indirectly in any business within the US which is in competition with CTI”

Exceptions (1) Sale of a business; (2) “Trade secrets” exception See, e.g., Thompson v. Impaxx, Inc. (2003) 113 Cal. App. 4th 1425, 1429, 7 Cal. Rptr. 3d 427 [distinguishing “trade route’’ and solicitation cases that protect trade secrets or confidential proprietary information].

California the exception: most states ENFORCE noncompetes See, e.g., Comprehensive Technologies Intl. v. Software Artisans, Inc., 3 F.3d 730 (4th Cir. 1993). Reasonable restraints standard applied; nationwide temporary ban on practicing in field upheld

Choice of law IPNTA 5 th at 99, note 4 Competing state jurisdictions, strong policy preferences...

Annalee Saxenian, “Regional Advantage” (1994)

Inevitable Disclosure PepsiCo v. Redmond What is the IS info? Proof of misappropriation?

Confidentiality agreement Scope Proof of breach?

Teradyne and Pepsico What is the difference Specificity of info presented? Importance of position involved? Raging debate! – IPNTA 5 th at 103 n 3

Pepsico v Redmond – p. 100 Held: injunction granted in favor of Pepsico, prohibiting Redmond from immediately going to work for Quaker Oats and disclosing Pepsico trade secrets re sports drink marketing strategies

California developments Bus & Prof Code Rejection of “inevitable disclosure” theory

Defining Trade Secrets in the Employment Context A party seeking to protect trade secrets must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.” -- Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244, 253, 67 Cal.Rptr. 19.

Inevitable disclosure rejected Whyte v. Schlage Lock Company, 101 Cal. App. 4th 1443, 1463 (Cal. Ct. App. 2002)

Our survey confirms the majority of jurisdictions addressing the issue have adopted some form of the inevitable disclosure doctrine.... A smaller but growing band of cases rejects the inevitable disclosure doctrine Cal.App.4th 1443, 1460

Business and Professions Code section generally prohibits covenants not to compete, and California public policy strongly favors employee mobility. … Business and Professions Code section protects a person's right to “follow any of the common occupations of life”... and to pursue the “ ‘business or profession he may choose’ ”... We agree the doctrine of inevitable disclosure “creates a de facto covenant not to compete” and “runs[s] counter to the strong public policy in California favoring employee mobility.” Cal.App.4th 1443, 1462

Typical Confidentiality and IP Assignment Agreement P. 105, IPNTA 5 th ed. Broad definition of “confidential info”; “do hereby assign” rights over inventions; anti- solicitation provision

TS Contracts Extensions beyond public disclosure: Warner- Lambert Common provisions in nondisclosure agreements

Very common clause 2. Exclusions from Confidential Information. Receiving Party’s obligations under this Agreement do not extend to information that is: (a) publicly known at the time of disclosure or subsequently becomes publicly known through no fault of the Receiving Party; (b) discovered or created by the Receiving Party before disclosure by Disclosing Party; (c) learned by the Receiving Party through legitimate means other than from the Disclosing Party or Disclosing Party’s representatives; or (d) is disclosed by Receiving Party with Disclosing Party’s prior written approval.

In the absence of this clause... Can a TS license continue in effect even after the underlying TS has become publicly known? If so, why?

“[T]he acquisition of the Lawrence formula was the base on which plaintiff's predecessors built up a very large and successful business in the antiseptic or germicide field. Even now, twenty-five or more years after it is claimed that the trade secret was disclosed to the public, plaintiff retains more than 50% of the national market in these products.”

Headstart notion “At the very least plaintiff's predecessors, through the acquisition of the Lawrence formula under this contract, obtained a head start in the field of liquid antiseptics which as proved of incalculable value through the years.” F.Supp. 655, 666 (S.D.N.Y. 1959).

Comparison to patent and copyright licenses Can you extend these licenses beyond the statutory term? No; so why a different rule for TS licenses? – TS not based on careful policy balancing; weaker right, more freedom of K here

But... Contrary cases cited: IPNTA 5 th Page 110, note 2 Licensee may still challenge existence of TS, notwithstanding Warner-Lambert holding...