by Lee Gesmer | Mar 29, 2006 | Noncompete Agreements
Noncompete Agreements. Clients frequently present the following issue: we have existing employees who have not signed noncompete agreements. We’d like to ask them to sign them. Any problem with that?
The knowledgeable lawyer then struggles with the following question: does the employee need to be given some consideration for the noncompete to be enforceable? Consideration is not an issue when an employee signs a noncompete at the beginning of employment, since the job itself provides the consideration. But when the employee already has the job, does the employer have to give the employee some new consideration? – a raise, a bonus, a promotion?
There is a line of Massachusetts cases suggesting that continued employment (for an at-will employee) is itself adequate consideration, but the rule is not as clear as most lawyers would like, and many lawyers are forced to equivocate on this issue. And, some states have clearly held that continued employment is not adequate consideration, adding to the uncertainty.
In a decision issued on February 2, 2006 in Metropolitan Removal Co. v. D.S.I. Removal Specialists, Inc. [click here for the decision] Superior Court Judge Peter Agnes, a well-respected judge in Massachusetts, held that a noncompete agreement was not enforceable where the employee did not receive new consideration. Citing no cases one way or the other, Judge Agnes noted that the employee “did not receive consideration in return for signing this agreement whether in the form of increased compensation, increased authority, or both. Neither his job title nor his job description changed after he signed the agreement.”
Massachusetts companies seeking to impose noncompete restrictions on existing employees should take note.
by Lee Gesmer | Mar 27, 2006 | Business Lit. Session, Procedure, Trade Secrets
Trade Secrets, Procedure. Warning: if you’re seeking discovery in a trade secret case in the Suffolk Business Litigation Session make sure that you have (a) provided the court with a detailed description of your trade secrets, and (b) filed a protective order that strictly complies with the Uniform Rules of of Impoundment.
For a recent decision making these points, written by Judge Allan Van Gestel in the Suffolk Business Litigation Session, click [here]. The decision, Tourtellotte Solutions, Inc. v. Tradestone Software, Inc., was featured on the front page of Massachusetts Lawyers Weekly last October. In a nutshell, the plaintiff asked for expedited discovery (in other words, the right to take discovery on a schedule faster than allowed in the ordinary course by the rules of civil procedure), so that the plaintiff could obtain evidence necessary to bring a preliminary injunction against the defendant. The plaintiff’s basic claim was that the defendant had engaged in “software misappropriation,” a term that Judge Van Gestel stated “sounds very much like trade secret misappropriation.”
The judge denied the motion, stating: “a detailed description of what is claimed to be a trade secret must be provided and a protective order of some sort needs to be worked out.”
Neither conclusion is surprising in the least. Many decisions in trade secret cases have held that the plaintiff must identify its trade secrets with particularity. The courts recognize that to permit the plaintiff to launch a “fishing expedition” into the defendant’s technology before identifying its trade secrets is fundamentally unfair. California has even codified this rule by state statute. What is surprising is when (as we have seen from time-to-time), a court does not compel a plaintiff to describe its trade secrets with particularity before commencing discovery.
On the subject of an acceptable protective order, Judge Van Gestel was offended that the protective order proposed by the plaintiff did not comply with the Uniform Rules of Impoundment, which require that a “sealed” filing (in other words, a filing in a sealed envelope that is segregated from the case file that is available to the public) be preceded by a motion and an affidavit explaining why the court should deviate from the standard procedure of making all documents filed with the courts available to the public. Because filing documents “under seal” requires the clerk’s office to go to the inconvenience of identifying and segregating these filings (with the concomitant risks of lost documents and inadvertent disclosure), the party seeking this exception must obtain the court’s permission before putting the court to this inconvenience. Lawyers requesting protective orders in the Business Litigation Session (which are standard in trade secret cases and many other types of business litigation) should keep Judge Van Gestel’s warning in mind. An example of a protective order referencing the Uniform Rules of Impoundment can be found here: [link]
by Lee Gesmer | Mar 22, 2006 | Patents
Patents. On Wednesday, March 29, 2006, the Supreme Court of the United States (SCOTUS) will hear oral argument in eBay v. MercExchange. The issue is whether the owner of a patent (in this case MercExchange) has the right to enjoin (or stop) an infringer (eBay) from selling an infringing product or service – in this case eBay’s popular “Buy It Now” (or, to eBay aficionados, “BIN”) purchase feature.
A jury has already found that eBay infringed MercExchange’s patent on this technology, and MercExchange is attempting to invoke the general rule that a successful patent plaintiff can shut down an infringing product, pending appeal. It was just this threat — the threat of a shut down — that led to Research in Motion paying a $612.5 million settlement to NTP in February. eBay is asking SCOTUS to modify the traditional rule and permit it to continue to use this service pending appeal. In patent circles this is a very big deal, and the outcome is expected to be a “landmark case.”
For an interesting discussion of the patent policy issues underlying this dispute see the article by Sam Williams in the MIT Enterprise Technology Review [link].
For a primer on software injunctions, and links to many of the briefs filed in the case, see this article in the “Patently O” patent blog [link].
by Lee Gesmer | Mar 21, 2006 | Business Lit. Session, Noncompete Agreements
Noncompete Agreements. If I had a dollar for every time a client who had been sued asked me if they could recover attorney’s fees or damages if they won, I’d have, well, probably hundreds of dollars. Even when a lawsuit proves to be frivolous the Massachusetts courts have traditionally been extremely reluctant to turn the tables on a plaintiff and make it pay damages for the harm its suit has caused to the defendant.
Every once in a while, however, a judge shows some courage and punishes a company the judge concludes has brought a frivolous case. In January 2006 Judge Gants, in the Suffolk Business Litigation Session, turned the tables on Brooks Automation, a Massachusetts company with a billion dollar-plus market valuation, ordering it to pay over $600,000 in damages for bringing a frvolous lawsuit against a former employee. After a trial Judge Gants concluded that the suit was devoid of both any reasonable factual support or any arguable basis in law. A link to the decision is [here].
Judge Gants found that the suit, which Brooks brought against a former employee and a new company he had formed to compete with Brooks (but which was not, as yet, actually competing), had been filed with “reckless disregard” for its merits and to disrupt a potential relationship between the former employee and one of Brooks’ customers (Brooks actually emailed the complaint to the customer, Applied Materials, immediately after filing it, and before even serving it on the former employee).
After an expedited discovery and trial schedule (trial took place only two months after Brooks filed suit), the jury held that the employee had not stolen Brooks’ trade secrets and had not violated his noncompete agreement. The jury did, however, find that Brooks had intentionally interfered with the employee’s relationship with Applied Materials, and awarded the employee $200,000 in damages. Talk about your case backfiring.
The Judge then found that this interference was a violation of Mass. Gen. Laws. c. 93A (which makes illegal “unfair and deceptive acts or practices”), and trebled the $200,000 award. While not mentioned in the decision, the judge is almost certain to also award the former employee his attorney’s fees.
Importantly, the Judge made it clear that he intended to send a message: Judge Gants wrote that his decision was –
necessary to send a loud and clear message to Brooks and to any other corporation that seeks to abuse the right to sue in order to interfere with a competitor’s efforts to develop a contractual relationship with a coveted customer. A start-up company is especially vulnerable to such an abuse of process, since time, effort, and money are needed to defend even a frivolous lawsuit and all are generally in short supply in a start-up company. It is important to make clear to any corporation that contemplates crushing a vulnerable competitor by conjuring a frivolous lawsuit that it will pay dearly for its misuse of the judicial process.
One case does not make a trend, and cases like this do appear occassionally in the decisions of the Superior Court. However, because this decision originated with the Massachusetts Business Litigation Session it carries more weight, and sends a stronger message to the business community and the bar, than if it it had been decided by one of the non-Business Litigation Session judges. Massachusetts lawyers who are defending former employees (and their new employers) will be well served by studying this decision carefully and keeping its teachings (which have been greatly abbreviated here) in mind in defending cases of this sort. Of course, Brooks still has the right to appeal this decision. If it does, I’ll report the outcome.
by Lee Gesmer | Mar 20, 2006 | Antitrust, Patents
Patents, Antitrust. Suppose that you live in a small farming community, Village 1, that relies entirely on its own members for food supplies. I have the only farm that grows corn. Whenever you come to me to purchase corn I tell you that I will only sell you my corn if you also buy a pound of cauliflower for every pound of corn you purchase. Cauliflower is plentiful, and you don’t want to buy my cauliflower (in fact you don’t even like this vegetable), but since you (and your fellow citizens) need corn you have no choice.
Assume that you move to a new community, Village 2. You still need corn, but you discover that there are several purveyors of corn in your new town. You go to the closest of these, and you discover, to your dismay, that this farmer also insists that if you buy his corn, you must also buy his cauliflower. Before purchasing you check around, and learn that the other corn vendors do not require that you purchase cauliflower as a condition to purchasing corn, and you happily proceed to do business only with them in the future. You later learn, to your satisfaction, that the corn farmer that you first encountered in Village 2 has gone out of business.
Thie simple example illustrates one of the more complex and vexing doctrines of U.S. antitrust law, the doctrine of tying arrangements. At its most simple, this intimidating term means that if you want to buy one product from me, you have to buy another that you may not want at all.
In antitrust parlance, corn is the “tying product,” and cauliflower the “tied product.” The product you don’t want (cauliflower) is “tied” to the product you do want (corn).
In Village 1 the corn farmer had what antitrust types call “market power” – in fact, he had a monopoly. If you wanted corn, you had to get it from him, and because he had a monopoly in corn he had the power to force you to buy his cauliflower as well. U.S antitrust law has long held this practice to be illegal per se, meaning there is no legal justification that would excuse it.
In Village 2, the first corn farmer had no market power at all. Because he foolishly insisted that a purchase of corn be accompanied by a purchase of cauliflower, he was soon out of business. In cases where the seller has no market power in the tying product, anitrust law has almost always found that a tying arrangement is permitted. After all, since the purchaser has the option to go to other sellers, how can the seller who lacks market power harm competition?
All of this seems intuitive and makes perfect sense, but lawyers being what they are nothing is ever this simple. What is the market? In the market, what is market power, and how do you measure it? How much is too much? Are there situations where there is a justification for requiring people who want product A to also buy product B (such as safety or cost efficiencies)? Are products A and B so closely related that they aren’t really separate products at all, but actually one product? These questions, to name just a few, have occupied the minds of judges, lawyers and economists for over one hundred years, and have resulted in enough pages of briefs, decisions and legal and economic treatises to reach from here to Pluto (well, not quite, but you get my point).
The most recent twist on the law of tying arrangements is the Supreme Court’s March 1, 2006 decision in Illinois Tool Works v. Independent Ink, Inc.
In this case the Supreme Court considered the question of whether one who holds a patent in Product A (remember, this is the “tying product” – the one you want) should be presumed to have market power simply by virtue of holding that patent. After all, once you obtain a patent you have a government-granted monopoly in products that incorporate the patent, don’t you? How could there be any doubt that the patent holder has market power?
This argument was accepted for over 40 years [link]. However, the prevailing winds at the all-powerful academic institutions and federal agencies (the antitrust division of the U.S. DOJ and Federal Trade Commission) that influence antitrust policy have shifted, and the Supreme Court decided to catch up with current economic thinking and put an end to the “patent-equals-market-power” presumption. In Illinois Tools the Court reversed this 40 year line of precedents, holding that one challenging a tying arrangement must show power in the relevant market, rather than relying on a mere presumption of power based on patent ownership.
Does this decision make good economic sense? In today’s environment, it probably does. Not only are most patents of little or no value, but in a 21st century economy there often are non infringing alternatives to the patented product that serve as substitutes, robbing the patent holder of market power. The Supreme Court has joined the Justice Department and the Federal Trade Commission [link] in concluding that it is implausible to presume that the owner of a patent possesses market power merely by virtue of the patent. However, because patents have become such an important part of the economy, the case is highly significant, and can be expected to have broad application.
