Confidentiality Agreements Michael I. Shamos, Ph.D., J.D. Institute for Software Research School of Computer Science Carnegie Mellon University LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreements An agreement not to disclose or use confidential information The “confidential information” need not qualify as a “trade secret” For what period of time? For what purpose? What happens if the confidential information becomes public during the confidentiality period? What remedy? Which court? LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreements Typically used in employment agreements evaluating business plans preliminary business negotiations disclosing ideas and inventions LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Obligations Imposed by Law One may have a duty to keep information confidential even if there is no written agreement Examples: attorney-client communications doctor-patient But: written agreements are a good idea: Remind the parties Make the obligation definitive and explicit Provide evidence for later litigation LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement PARTIES, PURPOSE MUTUALITY LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement DEFINITION OF CONFIDENTIAL INFORMATION (CRITICAL) LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement EXCEPTIONS TO CONFIDENTIAL INFORMATION (CRITICAL) BECOMES PUBLIC PREVIOUSLY KNOWN TO RECIPIENT OBTAINED FREELY FROM A THIRD PARTY DEVELOPED INDEPENDENTLY DISCLOSED BY PERMISSION LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement SAVING CLAUSE LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement PERMITTED USE RESTRICTIONS ON DISTRIBUTION NEED TO KNOW LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement CONFIDENTIAL MARKINGS RESTRICTIONS ON REPRODUCTION LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement INJUNCTION CLAUSE ATTORNEY’S FEES LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Confidentiality Agreement DURATION CHOICE OF LAW CHOICE OF FORUM LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Inevitable Disclosure Doctrine A trade secret owner can stop a former employee from working for a competitor if it can show that the new job would inevitably cause the employee to rely on knowledge of the trade secrets It does not require proof that the employee has taken or threatened to use the trade secrets LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Non-Competes in California California maintains a strong public policy against non-competition agreements is embodied in Business & Professions Code section 16600: “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.” Policy in California is that an employer or contractor may not require an employee, subcontractor or vendor to sign a post-termination non-competition agreement. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Inevitable Disclosure in California California does not recognize “inevitable disclosure.” Proof of misappropriation or threatened misappropriation is required LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Schlage Lock Co. v. Whyte (Cal. App. 4th Dist. 2002) We hold this doctrine [inevitable disclosure] is contrary to California law and policy because it creates an after-the-fact covenant not to compete restricting employee mobility. Schlage and Whyte did not agree upon a covenant not to compete. We decline to impose one, however restricted in scope, by adopting the inevitable disclosure doctrine. Lest there be any doubt about our holding, our rejection of the inevitable disclosure doctrine is complete. If a covenant not to compete (which would include, for example, a nonsolicitation clause), is part of the employment agreement, the inevitable disclosure doctrine cannot be invoked to supplement the covenant, alter its meaning, or make an otherwise unenforceable covenant enforceable.

Temporary Restraining Orders A temporary restraining order (TRO) preserves the status quo (the last uncontested status between the parties) until a hearing can be held A TRO may be granted without notice to the adverse party only if immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party can be heard in opposition Every (federal) TRO must expire within 10 days If a TRO is granted without notice, a preliminary injunction hearing must occur at the “earliest possible time” and takes precedence of all matters except older matters of the same character F.R.C.P. Rule 65 TROs are often issued in trade secret cases LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

EarthWeb v. Schlack 71 F. Supp. 2d 299 (S. D. N. Y EarthWeb v. Schlack 71 F.Supp.2d 299 (S.D.N.Y. 1999), aff'd in part (2d Cir. 2000) EarthWeb provides online IT products and services through its websites Schlack was VP, Worldwide Content, for EarthWeb International Data Group (IDG) is a $1B IT media company, with a subsidiary ITworld.com, a site to be launched ITworld.com hired Schlack to perform substantially the same job EarthWeb sued, alleging Schlack would disclose (1) strategic content planning; (2) license agreements and acquisitions; (3) advertising; and (4) technical knowledge

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS EarthWeb v. Schlack EarthWeb obtained a temporary restraining order to keep Schlack from starting his new job. It had to keep paying his salary (The last uncontested status was Schlack still working for EarthWeb) A preliminary injunction hearing was held (to decide whether Schlack should be prevented from working for ITworld.com during the lawsuit Schlack had an employment agreement LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

EarthWeb v. Schlack The “Proprietary Information” section stated, “(a) [Schlack] will not disclose or use, at any time either during or after the term of employment … any Confidential Information … ‘Confidential Information’ shall mean all proprietary information, technical data, trade secrets, and know-how, including, without limitation, research, product plans, customer lists, markets, software, developments, inventions, discoveries, processes, formulas, algorithms, technology, designs, drawings, marketing and other plans, business strategies and financial data and information … whether or not marked as ‘Confidential.’ ‘Confidential Information’ shall also mean information received by EarthWeb from customers of EarthWeb or other third parties subject to a duty to keep confidential.”

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS EarthWeb v. Schlack A “Limited Covenant Not to Compete” section stated, (c) For a period of twelve (12) months after the termination of Schlack's employment with EarthWeb, Schlack shall not … (1) work as an employee, employer, consultant, agent, principal, partner, manager, officer, director, or in any other individual or representative capacity for any person or entity that directly competes with EarthWeb … ‘directly competing’ is defined as a person or entity or division on an entity that is (i) an on-line service for Information Professionals whose primary business is to provide Information Technology Professionals with a directory of third party technology, software, and/or developer resources; and/or an online reference library, and or (ii) an on-line store, the primary purpose of which is to sell or distribute third party software or products used for Internet site or software development LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

EarthWeb v. Schlack The court found that use or disclosure was not “inevitable” and declined to transform the very general proprietary information clause into a non-compete agreement It then turned to the non-competition covenant, which it construed strictly according to its terms The “primary business” of ITworld.com was not to offer a directory, library or online store for IT professionals. At most 2% of its business would involve that. Even if it were ITworld.com’s primary business, EarthWeb would have to show that the non-competition agreement was reasonable and necessary to protect its legitimate interests.

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS EarthWeb v. Schlack “The policy underlying this strict approach rests on notions of employee mobility and free enterprise. Once the term of an employment agreement has expired, the general public policy favoring robust and uninhibited competitions should not give way merely because a particular employer wishes to insulate himself from competition.” The one-year duration was too long given the fast-moving nature of the Internet Schlack’s services were not “unique and extraordinary” “Strategic thinking” is not a particular marketing plan deserving of protection. INJUNCTION DENIED. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Enforceability No “blue lining.” Several states, Missouri and Georgia being two, hold that courts may not "blue pencil" or amend defective elements of noncompetition agreements ancillary to employment. See Palmer & Cay, Inc. v. Marsh & McLennan Companies Link. In these states, an employer must be very careful in drafting a noncompete agreement. When bringing an enforcement action against the employee, it's all or nothing. Either every material provision of the noncompete is held valid or the agreement completely fails. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Major Ideas Confidentiality agreements should be very specific and limited in scope and duration “Inevitable disclosure” is difficult to prove Non-competition arguments are not favored, will be strictly construed against the employer If one clause is found invalid, the whole non-compete agreement may dissolve California does not permit non-competes except in special circumstances (such as sale of a business) LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Q A & LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS