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You Want to Enforce a Non-Compete? Bad Facts, Sir, Give Me Some Bad Facts!

What is the first thing a lawyer looks for when a client wants to enforce a non-compete agreement?  What is the first thing a lawyer hopes not to find when a client is the subject of a non-competition demand letter or lawsuit? Bad facts. Did the employee take confidential information belonging to the former employer?  Did the employee contact customers of the former employer and solicit them for the prospective employer before leaving the former employer?  If the employee was an executive or owed a fiduciary duty to the former employer, did the employee solicit other employees to leave with her? If the employee did any of these things, did the employee try to cover it up?  Bad facts!  The plaintiff’s lawyer will say.  Give me those bad facts!

OK, I exaggerate a bit – of course a lawyer first wants to see if there is a written agreement that contains a non-compete provision.  But believe me, any experienced lawyer is itching to find those bad facts.  Lawyers know that judges are ambivalent about non-compete agreements, and putting someone out of work by issuing an preliminary injunction to enforce a non-compete provision is something few judges do with an easy conscience.  It’s no secret that there are some judges who will bend over backwards to find a way not to enforce a non-compete.

So, lawyers trying to enforce these agreements know that the one thing likely to motivate a judge to enforce a non-compete agreement is bad facts.  And, if there’s anything better than bad facts its bad facts and a cover-up.  After all, often the cover-up is worse than the crime.

Life Image’s lawsuit against Michael Brown, a former executive of Life Image, shows how bad facts and a cover-up can play out in a lawsuit where the former employer is seeking a preliminary injunction to enforce a non-compete agreement.  Mr. Brown violated almost every rule an employee with a non-compete agreement should follow when leaving an employer.

First, Mr. Brown (V.P. of Business Development at Life Image, a cloud-based medical imaging service) met with his prospective employer and made a suggestion to enhance its forthcoming product, while still employed by Life Image.  (Lesson to employees: do not meet with your prospective employer before leaving your current employer, other than to negotiate employment terms).

Second, Brown left Life Image with a demo copy of Life Image’s software program on his computer.  And, it appears that he copied the program to his personal computer just before leaving Life Image. (Lesson: take nothing from your former employer except your personal belongings. Nothing).

Third, Brown had communicated with his new employer using Life Image’s email system, and he deleted copies these emails from of his “sent” email folder before leaving Life Image.  (Lesson: don’t use your current employer’s email system to communicate with your prospective employer.  if you do, don’t try to cover it up.  Brown worked for a software company – he should have known that he couldn’t get away this this.  Computers never forget.).

Fourth, according to the court Brown transferred a “large volume of information” from his Life Image computer to an external hard drive after giving notice. Brown could not justify doing this as part of his job at Life Image.  (Lesson: see the second lesson, above).

Fifth, after suit was filed, and after the court had ordered Brown to return Life Image data to Life Data, Brown deleted some Life Image data from his computer. (Lesson: don’t violate court orders.  And again, computers never forget.).

Admittedly, Brown would have had a tough case to start with – he was a high level employee at Life Image.  The terms of his non-compete were reasonable, and he was made aware of the agreement as a pre-condition of his employment (as opposed to being asked to sign it after he had already started at the job).   There was no question he had gone to a competitor (in fact, he had admitted this in an email while still employed by Life Image).  According to the judge he had other job prospects, so presumably enforcement of the non-compete wouldn’t leave him unemployed.

However, Brown also had one important, sympathetic fact in his favor: Brown, a citizen of Australia, was in the U.S. on a work visa.  The judge was told that an injunction causing him to become unemployed could result in the loss of his ability to remain in the United States. However, the judge rejected this factor, noting, “it is most unfortunate that Mr. Brown put his visa status in jeopardy when he took the risk of moving to [a competitor of Life Image] with apparent knowledge of possible outcomes.”

Brown also offered the judge a compromise that would have allowed him to continue to work for the new employer, but in areas that do not compete with Life Image.  This can often work, giving the judge a way to reach a compromise decision.  However, the judge rejected this, commenting on Brown’s “lack of judgment” in deleting files after receiving the court’s preservation order, as well as the other conduct discussed above.  Based on these bad facts the judge expressed “doubt that [Brown] is possessed of the ability to wall off in his mind secret strategic marketing information about Life Image” while working for the new employer.

This case is a case study on what not to do when leaving an employer that might sue to enforce a non-compete agreement.  The tragedy (if that’s not too strong a word) is that Mr. Brown might have been able to avoid an outcome that put him out of work had he only acted legally before and after leaving Life Image.  The bad facts, not his contract, are what got him in the end.

Life Image v. Brown

Video Game Company Misreads Copyright Law, Infringes Tetris

Video Game Company Misreads Copyright Law, Infringes Tetris

Tetris.  Popular?  Perhaps the best video game yet created, with over 200 million copies sold.  Mysterious?  It was developed by a Russian programmer during the cold war.  Scientific?  Think tetrominos, not MMOGs.  If you aren’t familiar with this game you should (a) reexamine your life, and (b) check it out.

But does copyright law protect it against a knock-off that uses not only the same “ideas” (tetromino shaped tiles falling from the top of the screen, that need to be moved/rotated to fit into the openings below) but the exact screen height/width (in tile units)?  Shading and gradation of the pieces?  Creative aspects of animation (such as shadowing)?  Features, like previewing the next piece up?

Desiree Golden may have thought so at first – she asked Tetris Holding Co. for a license, with no success.  So Golden’s company, Xio Interactive, went to Plan B, and created what it concluded would be a similar but non-infringing game.  According to the court’s decision, “before releasing its product, Xio researched copyright law, both through its own independent studying and based on advice of counsel.”

However, judges have been known to disagree with lawyers, and in this case New Jersey U.S. District Court Judge Freda Wolsfon disagreed emphatically.  In her May 30, 2012 opinion she held that the appearance of Tetris was protected under copyright, and that Xio’s version of Tetris infringed Tetris based on the “total concept and feel” of the copyrighted work.   The “overall look and feel” was, she held, identical.  This, she concluded was a case of “wholesale copying.”

Xiu had argued  that anything it copied from Tetris related to rules, functions and expression essential to the game, and therefore Xiu’s program did not copy elements of Tetris that were protected by copyright.  This defense may have been correct in theory, but it failed in execution. Yes, the “idea” of a game in which Tetris-shaped pieces can be manipulated to fall into place is not protected by copyright.  However, Tetris made many aesthetic decisions that were unnecessary to the rules or functions of the game, yet were copied by Xiu.  For example, in Xiu’s game the style of the pieces — their shading and gradation, even the color scheme — were very similar to Tetris.  As the judge stated, “the style, design, shape, and mood and movement of the pieces are expression,” not “part of the ideas, rules or functions of the game.”

The protection of video games as audiovisual works under the Copyright Act is nothing new to copyright law.  For example, Pac-Man received copyright protection based on the appearance of the characters and their motions and actions.  (Atari v. North American Philips).  The video game Galaxian received copyright protection based on the “look and feel” of the characters.  (Midway v. Arctic Intern.).  Like Tetris, these games are non-functional and highly creative.  Therefore they receive broad copyright protection.

Could Xio have developed a non-infringing game of Tetris?  Absolutely, but it would have required more creativity, and a better understanding of the copyright laws, than was demonstrated in this case.

Tetris v. Zio International

Fourth Circuit Upholds Copyright Damages Based on Sales Abroad Under Rarely Applied “Predicate Acts” Doctrine

It is a well-known principle of copyright law that the Copyright Act has no extraterritorial reach.  For example, a U.S. copyright holder cannot bring suit for copyright infringement, in the U.S., against individuals or companies who reproduce and sell, outside the U.S., software, music CDs, DVDs or other copyright-protected works.

What if, however, the initial infringement occurs in the United States, and the infringer distributes infringing copies outside the U.S.?  For example, what if an employee illegally copies an employer’s software program in the U.S., transports it to France (either on physical media or electronically), and sells it in Europe?  May the U.S. copyright holder recover damages based on lost profits or infringer profits in Europe?

Surprisingly, this “infringe locally/sell abroad” issue has rarely come up under copyright case law in the U.S.  Until recently, only two courts have addressed it under the current copyright statute, the Second Circuit in 1988 (Update Art v. Modin) and the Ninth Circuit in 1998 (L.A. News Service v. Reuters).  However, in each of those cases the courts did permit recovery of damages arising from overseas infringing uses as long as the “predicate act” of infringement occurred within the United States, enabling further reproduction abroad.  By a “predicate act,” these courts meant simply that if the initial infringement took place in the U.S. and the foreign violations were directly linked to that infringement, then damages could be based on foreign sales.

This is what happened in Tire Engineering and Distribution, LLC. v. Shandong Linglong Rubber Co., a case decided by the Fourth Circuit in early June 2012.  The facts of this case (somewhat simplified) involved the copying of designs for specialized tires for underground mining vehicles.  The designs were copied in the U.S. by former and current employees of the plaintiff and provided to the foreign defendants, who sold infringing products abroad.  The case proceeded to a jury trial in Virginia, where the trial court instructed the jury that it could find damages based upon infringement that occurred outside the United States, if those infringing acts “were a consequence or result of predicate infringing acts that occurred inside the United States.”  The jury awarded the plaintiff $26 million in damages under this theory.

The Fourth Circuit upheld this verdict, holding that a plaintiff could invoke the predicate act doctrine by showing a domestic violation of the Copyright Act and damages flowing from foreign exploitation of that infringing act.  In this case, the reproduction of the plaintiff’s blueprints in the United States constituted the predicate act necessary to satisfy this standard.

While this case involved a somewhat unusual fact pattern, it points out a legal doctrine that few lawyers are aware of, but which may be applicable in an interconnected world where markets for copyrighted works are international.  The plaintiff’s lawyers in this case might easily have concluded, mistakenly, that their client would be unable to recover damages based on infringing sales outside the U.S.  Instead, they utilized a little-known principle of copyright law, proceeded through trial hoping that it would be applied in their case, and on appeal persuaded the Fourth Circuit (which had never before addressed this issue) to adopt the predicate-act doctrine.

 Tire Engineering and Distribution, LLC. v. Shandong Linglong Rubber Co. (4th Cir. June 6, 2012)