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Go Directly to Jail

We’re always warning our standards setting clients that U.S. antitrust laws are about more than just money – you can go to jail. After a while, it feels like these warnings lose their force. This recent press release from DOJ is a reminder that a violation of the antitrust laws is both a criminal and a civil violation:

An independent consultant and two executives of Dunlop Oil & Marine Ltd., a manufacturer of marine hose located in Grimsby, United Kingdom, pleaded guilty today and have agreed to serve record-setting prison sentences for participating in a conspiracy to rig bids, fix prices, and allocate market shares of marine hose sold in the United States, . . .

. . . Under the terms of their plea agreements, Whittle has agreed to serve 30 months in jail, Allison has agreed to serve 24 months in jail and Brammar has agreed to serve 20 months in jail. These are the longest prison sentences that foreign national defendants charged with antitrust offenses have agreed to serve in the Division’s history.

‘Nuff said. This is serious stuff. You have to wonder if these guys knew that they were playing with fire until it was too late.

First Circuit Decision on Copyright Preemption

The First Circuit has published a complex decision involving copyright preemption of a state law claim for an accounting of profits between co-authors of a copyrighted work. The case, Cambridge Literary Properties, Ltd. v.W. GoebelPorzellanfabrik G.m.b.H & Co. KG (1st Cir. Dec. 13, 2007), has a tortured procedural history. In fact, the First Circuit issued an earlier decision in the case as far back as 2002.

The case is quite complex, and involves the chain of copyright ownership in the famous Hummel figurines designed in Germany in 1931 The fundamental holding is that the federal Copyright statute bars a state law action for an accounting of profits between co-owners (co-owners of a copyright work are have a duty to account to each other for profits) because the condition precedent for that claim — co-authorship status — is premised on copyright law, which has a three year statute of limitations. Here the co-ownership claim was barred by this statute of limitations.

First Circuit Judge Conrad K, Cyr, who recently assumed senior status on the First Circuit, wrote a strong dissent, calling the majority’s decision “unprecedented and potentially pernicious,” and arguing that the majority improperly interposed federal law to frustrate what was properly a state law issue.

This case addresses some very thorny issues involving the intersection of federal copyright law and state law claims, and will bear close scrutiny by litigants whose cases raise issues of federal preemption or state-federal jurisdiction.

Massachusetts Judges Reluctant to Enforce Noncompete Agreements

Further to my post below, commenting on whether the enforceability of noncompete agreements in Massachusetts has been a major factor in Silicon Valley’s relatively greater success in attracting high tech start-ups, a review of recent Massachusetts noncompete cases shows how difficult it has become to enforce these agreements in Massachusetts. Judges appear to be leaning over backwards to deny preliminary injunction motions (which is where the real action lies in these cases). Here is a quick summary of several recent state court cases.

In Bank of America v. Verille, decided by Superior Court Judge Thomas A Connors in Norfolk County in August, the Court denied BoA a preliminary injunction to enforce a non-soliciation agreement (a close relative of noncompete agreements), on the grounds that the customers that followed the former employee to his new job signed affidavits to the effect that they were not solicited by him. To put this in context, many years ago I saw a Superior Court judge state from the bench that the line between “soliciting” a customer and the customer “following” an employee is so fine that she would presume that a customer had been solicited, even in the face of affidavits from the customer stating it had not been solicited. I doubt that this judge would draw the same inference today.

In addition, in the Verille case the judge questions whether the “goodwill” (that is, the “relationship”) with these customers belongs to BoA or to the former employee, a defense to noncompetes that has definitely gained tranction in Massachusetts in recent years, after being viewed as having dubious credibility many times in the past, except in instances where the employee had pre-existing relationships with the customers (not the case here).

In Edwards v. Athena Capital, decided by Judge D. Lloyd MacDonald in Suffolk Superior Court in August, Edwards brought suit to enjoin the enforcement of his noncompete agreement with Athena, his former employer. In other words, rather than wait for Athena to sue him, he forced the issue by bringing suit first. Judge MacDonald ruled in favor of Edwards, holding that the noncompete was overbroad (it overstated the areas in which the former employee could not compete, and was of unlimited duration). In the past, the Massachusetts courts have been willing to “redline” agreements of this sort to make them acceptable (for example, rewrite the time period), but here the Court ruled against Athena based, in large part, on Edwards’ overbreadth argument.

In Boston Software Systems v. Doherty, decided by Judge Gants in the Business Litigation Session in April 2007, the Court refused to impose a preliminary injunction upon a former employee of Boston Software that had entered into a noncompete agreement. Judge Gants questioned whether the “good will” at issue belonged to the employee or the former employer (the employee had returned to her pre-Boston Software employer after being terminated by Boston Software). He also found that Boston Software would likely be able to prove any damages at trial, and therefore was unable to prove the irreparable harm necessary for a preliminary injunction. The defendant “stole the thunder” of Boston Software by representing to the Court that she would not deal with any of Boston Software’s former customers during the one year noncompete period, would work outside Boston Software’s market area during that year, and would not utilize any of Boston Software’s confidential information. The Court accepted these representations, and included them in its Order.

Going back a little farther, to October 2006, Judge Allen Van Gestel, in the Suffolk County Business Litigation Session, denied the employer a preliminary injunction against its former salesperson/employee in Tyler Technologies, Inc. v. Reidy. In that case the noncompete agreement misidentified Reidy, the former employee, as a consultant, when in fact he was an employee. This error (admittedly somewhat bizarre), doomed the effort to obtain an injunction for reasons explained in the decision. Tyler’s argument that it was clear from the context and the relationship that the parties intended Reidy to be bound by the agreement, whether it referred to him as a “consultant” or an “employee” held no water. Judge Van Gestel defended his ruling by stating that “in reading the agreement so strictly the Court may seem to be overreaching,” but this was the former employer’s agreement, “for which it is wholly responsible.”

In Advanced Cable Ties v. Hewes, decided by Judge Jeffrey A. Locke, sitting in Worcester County in October 2006, the employer sought to enforce a noncompete agreement against its former employee, Hewes, relying on Hewes’ knowledge of the former employer’s trade secrets to justify enforcement. The judge could find no flaw in the agreement itself (it was reasonable in geographic scope and duration), and found that Hewes had been given access to proprietary manufacturing information. However, pointing to extenuating circumstances (Hewes’ new employer competed with only 10% of the former employers’ product line, and Hewes had changed jobs in order to work near a sick and elderly parent), the judge refused to bar Hewes from the competing employment. Instead, he issued an order that Hewes not work on the competing product line for the duration of the one year noncompete period.

It seems clear that, although there is no statute in Massachusetts prohibiting the enforcement of noncompete agreements (as there is in California), Massachusetts Superior Court judges have gotten the message: these agreements are to be enforced only where the contract is clear and enforceable, and where the equities demand it. Maybe someone whispered in their ears – exercise some discretion in these cases, or the legislature may ensure that you have no discretion at all.

Why Has Silicon Valley Outperformed Boston/ Route 128 as a High Tech Hub?

In a post on TechDirt Mike Masnick argues (with references to supporting studies) that the fact that noncompete agreements are enforceable in Massachusetts but not in California has been a major factor in Silicon Valley’s success. A few excerpts from the article:

Ronald Gilson . . . [found that the success of Silicon Valley] had much less to do with cultural reasons and much more to do with the legal differences between the two places, specifically: California does not enforce noncompetes, while Massachusetts does. Gilson looks at a few of the other possible explanations for the difference and shows how they’re all lacking, leaving the difference in noncompetes as being the key difference between the two regions in terms of the flow of information and ideas leading to new innovations.

* * *

. . . [T]he Federal Reserve and the National Bureau of Economic Research, . . . produced some data to back up the[se] findings . . . in their report Job Hopping in Silicon Valley. Their data showed that, indeed, there was much greater mobility in Silicon Valley than elsewhere. Their research further backed up Gilson’s suggestion that it was noncompetes that made the difference by showing that other high tech communities in California outside of Silicon Valley also showed greater job mobility — suggesting it was a California-wide phenomenon.

Finally, to make the case even more compelling, some researchers from Harvard Business School . . . found that “The networks of small companies so crucial to Silicon Valley’s growth would be less likely to develop in regions that enforce noncompetes.”

Having been involved in counseling companies on noncompete issues for 20-plus years, I have to admit that I am suprised to read this. While noncompetes are pervasive in Massachusetts, many judges are unwilling to enforce them, or will enforce them only in part (i.e., “you can’t work in this particular area for a period of time”). The sense of lawyers in Massachusetts is that absent theft or trade secret misappropriate of some sort, enforcing a noncompete is an uphill fight, so better to negotiate than attack head-on. Most noncompete disputes are negotiated to a private resolution.

That being said, the pervasive use of noncompetes in Massachusetts is part of the dark matter of the legal landscape in the state. You know it’s there, exerting some gravitational force, but you can’t see it or measure it. You never really know how many employees didn’t move to another job, didn’t start their own companies, and didn’t take the risk of challenging their noncompete agreements in court. So, the studies cited in the TechDirt post may be correct; like most legal/economic analyses involving complex economies with multiple variables it’s almost impossible to prove a hypothesis with certainty. And, there are so many other tangible and intangible factors that have contributed to the relative successes of Route 128 vs. Silicon Valley that to assign too high a degree of causation to the law on noncompete agreements is probably over oversimplistic.

Ray Niro Offers $5,000 for Identity of Author of "Troll Tracker" Blog

It appears that infamous Chicago patent attorney Ray Niro has offered $5,000 for anyone who will identify the author of the Patent Troll Tracker, which Niro apparently believes has made uncharitable comments about him. The anonymous author of the Patent Troll Tracker blog takes this in good humor, describing the offer as a “bounty” and stating:

I have never had a bounty on my head before (see also blog post here). And I can’t imagine why Ray Niro would pay $5,000 to find out who I am. I emailed him to find out (from the corner internet cafe, heh). He didn’t respond. Ray: if you up it to $50,000, can I collect the reward? . . .

Yes, Ray Niro has decided to offer $5,000 to find out who I am. According to the article, he wants to know “who is saying all those nasty things” about him. . . .

PS To my very few friends, family, and colleagues in the know, if you’re reading this, please don’t call Niro and collect the bounty. That would be tacky. OK, thanks.

Wow, who knew patent law could be so interesting? More on this controversy (huh?) here.