by Lee Gesmer | Jul 9, 2013 | Contracts, Trade Secrets
A lot of non-disclosure agreements (NDAs) provide that if one party gives the other a document and expects it to be treated as confidential, the document must be marked “confidential.” Or, if the confidential information is communicated orally, the party that wants to protect it must notify the receiving party in writing within a specified number of days. (“Hey, the stuff we told at our meeting on Monday relating to our fantastic new product idea? That’s all confidential under our NDA”).
This was the situation in Convolve, Inc. v. Compaq Computer, decided by the Court of Appeals for the Federal Circuit on July 1, 2013. The NDA at issue in that case provided that to trigger either party’s confidentiality obligations “the disclosed information must be: (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated confidential in a written memorandum summarizing and identifying the confidential information.”
Big mistake. People sign agreements like this and a year later they have completely forgotten that they need to follow them. Or, employees come and go, the NDA is buried away someplace, and new employees are blithely unaware that they need to follow the terms of the NDA.
That’s what happened to Convolve. It had trade secrets relating to hard disk drive technology. It disclosed the secrets at a meeting, but it failed to follow-up and designate it confidential under the NDA. Its argument that the parties knew the information was confidential (even though it wasn’t designated), went nowhere with the CAFC:
Convolve contends the district court erred when it found that Compaq failed to protect the confidentiality of certain information because it failed to designate it as such pursuant to its obligations under the NDAs. Convolve asserts that the parties understood that all of their mutual disclosures were confidential, notwithstanding the marking requirements in the NDAs. … Convolve … contends that the parties’ course of conduct did not require a follow-up letter. … The plain language of the NDA unambiguously requires that, for any oral or visual disclosures, Convolve was required to confirm in writing … that the information was confidential. … The intent of the parties, based on this language, is clear: for an oral or visual disclosure of information to be protected under the NDA, the disclosing party must provide a follow-up memorandum. … Convolve argues that, regardless of whether the confidentiality of the trade secrets was confirmed in writing, … the parties understood their mutual disclosures were confidential, notwithstanding the NDA strictures. … [However], the NDAs do not appear reasonably susceptible to the interpretation Convolve urges.
Don’t put provisions like this in your NDAs if you want to protect your trade secrets or confidential information. Include a provision that everything you give to your business partner is confidential, and keep your options open. If something isn’t confidential, no harm done. If you think it is and the recipient disagrees, let the recipient prove it in court, should that become necessary. Better overkill than underkill.
by Lee Gesmer | Jul 2, 2013 | Employment, Noncompete Agreements
Two note-worthy decisions have emerged from AMD v. Feldstein, a trade secret case pending in federal district court in Massachusetts. At the heart of the case is the conduct of several AMD employees who left to work for Nvidia Corporation. Inexplicably, they copied and took with them huge amounts of AMD data, actions which earned them a preliminary injunction in the first of two opinions, dated May 15, 2013.
However, in the May 15th decision Massachusetts federal district court judge Timothy Hillman also addressed the thorny issue of what constitutes a “solicitation” in violation of a non-solicitation agreement, and specifically solicitation of employees (as opposed to customers) of the former employer.
The employee non-solicitation provisions in this case were fairly standard. For example, Feldstein’s provided that:
during [Feldstein’s] employment with [AMD] and for a period of one year following the termination of [Feldstein’s] employment, whether voluntary or involuntary, [Feldstein would] not hire or attempt to hire an employee of [AMD], or directly or indirectly solicit, induce or encourage an employee of [AMD] to leave his or her employ to work for another employer, without first getting the written consent of an Officer of [AMD].
However, just what kinds of behavior violate such a provision, and which do not?
Clearly, expressly asking or encouraging an AMD employee to leave AMD would do so (“you should leave AMD and come to work for Nvidia with me – you can make much more money there, and they have chair massages every day!”). But what if Feldstein, on his last day of work at AMD, tells another employee “I’m moving to Nvidia” and winks? What if, after he’s at Nvidia, he has lunch with a former co-worker at AMD and raves about how much he likes his new job, nothing more? What if, once Feldstein is at Nvidia a former co-worker at AMD approaches him and asks him questions about salary and working conditions at Nvidia, and whether there are any more job openings, and he does nothing more than answer these questions? What if Feldstein encourages an AMD employee to move to Nvidia, but the employee was unhappy at AMD, and was planning to leave in any event? The permutations are almost endless.
These examples pose perplexing problems for employers and employees alike, who must try to navigate a thin line between legal and illegal behavior.*
*As the Massachusetts Appeals Court stated in a case involving the alleged solicitation of customers, “as a practical matter, the difference between accepting and receiving business, on the one hand, and indirectly soliciting on the other, may be more metaphysical than real.” (Alexander & Alexander, Inc. v. Danahy, 1986).
There is not a lot of law to help sort out these issues. As Judge Hillman points out, “much of the case law on solicitation in Massachusetts deals with former employees soliciting customers from their former employers,” not soliciting other employees. However, he noted that “colleagues can generally be expected to have even closer personal relationships than do employees and customers; and wherever closer working relationships are, courts must bear in the mind the fact that solicitation can be quite subtle.”
Needless to say, the parties in the case took opposing views. AMD argued for something close to a “wink test”– if Feldstein says he is leaving AMD to work at Nvidia and winks at another employee he has solicited. The former employees in the case argued that AMD should be required to prove that they took “active steps to persuade” an employee to leave, and even then they were not soliciting if the person were planning to leave anyway.
Rejecting these extreme positions Judge Hillman formulated the following tests:
I will define solicitation as follows. Direct solicitation is what might be seen as traditional solicitation, encompassing any active verbal or written encouragement to leave AMD, even if not intended to harm AMD. Due to the personal relationships that develop between colleagues, liability for indirect solicitation requires a more context-sensitive inquiry. …subtle hints and encouragements … can constitute indirect solicitation. However, to preserve the public’s interest in free personal communications, such solicitation should only be found where the finder-of-fact is satisfied that the solicitor actually intended to induce the solicitee to leave AMD.
Given the paucity of precedent on indirect solicitation in Massachusetts, this decision may be the best guide to the law of employee solicitation in Massachusetts at present.* However, the definition of “indirect solicitation” is problematic: given that a former employee accused of indirect solicitation is unlikely to admit illegal intent, it may be very difficult for the former employer to prove the requisite level of intent in court. Absent overt encouragement in the form of testimony or “smoking gun” emails, what chance does the employer have of proving the “actual intent” required by this test? Under this definition “nudge, nudge, wink, wink” may be safe for the former employee.
*A caveat: this decision was issued by a federal court, not a state court. The decision may carry relatively little weight with a state court judge, who is not bound by federal court decisions on Massachusetts law. The state courts are the final arbiters of state law.
An obvious conclusion to be drawn from this case is that non-solicitation clauses (at least as applied to employees), are weak tea. A potentially more effective way of preventing an ex-employee from luring employees away to a competitor (in most states, but not all) is indirectly, through a non-compete agreement. Although non-competes have their own set of enforcement problems (see, for example, this recent post), they have fewer problems than non-solicitations.
I’ll be writing about the second important issue to emerge out of this case in a separate post.
AMD v. Feldstein (D. Mass. May 15, 2013)
by Lee Gesmer | Jun 26, 2013 | Copyright
The recording industry’s case against Joel Tenenbaum for downloading 30 copyrighted songs has almost certainly come to an end with yesterday’s decision upholding the jury’s copyright infringement verdict of $675,000, or $22,500 per song.
This case—one of only two out of tens of thousands filed against downloaders to actually go to trial (the others settled or were dismissed on various technicalities)—has been through a trial, two appeals to the First Circuit and one appeal to the Supreme Court. However, it seems almost certain that the case has reached the end of the line; all that’s left to Tenenbaum is an appeal to the Supreme Court, which has already declined an appeal from him once before.
In retrospect, this case should never have taken this path. Tenenbaum could have settled for a few thousand dollars at the outset, but he chose (along with Harvard Law professor Charles Nesson, who reportedly represented him at no charge), to pursue the case on principle. The heart of his argument has been that statutory damages under the Copyright Act (which can be as great as $150,000 per infringement) violate due process because they are not tied to the actual injury caused by his downloads. The district court judge and the First Circuit didn’t buy it, in large part because (a) the copyright statute itself provides notice of the scope of the potential award, and (b) statutory copyright damages may exceed actual damages for their deterrent effect.
It didn’t help that Tenenbaum did not make a sympathetic defendant. As the First Circuit noted, he “carried on his activities for years in spite of numerous warnings, he made thousands of songs available illegally, and he denied responsibility during discovery. Much of this behavior was exactly what Congress was trying to deter when it amended the Copyright Act.”
Of course, the RIAA also pursued the case on principle. According to press reports Tenenbaum is not wealthy, and he will be unable to satisfy a judgment of this magnitude (which will likely be even larger with pre- and post-judgment interest). As a practical matter his only option will be to file bankruptcy.
Sony BMG Music Entertainment v. Tenenbaum (June 25, 2013).
by Lee Gesmer | Jun 25, 2013 | Antitrust
If you want to bring an antitrust suit based on an illegal agreement among competitors (say, a boycott), you face a possible Catch-22: you can’t get the evidence you need to prove an illegal agreement until you file the suit (and conduct discovery), but you can’t file an antitrust suit unless you are able to provide sufficient evidence of the agreement in your complaint.
This is the problem the plaintiff faced in Evergreen Partnering Group v. Forrest, decided by the First Circuit on June 19th. Evergreen alleged that the defendants (a small group of companies that controlled the disposable plastics industry) refused in concert to deal with it—in other words, they boycotted Evergreen.
Massachusetts federal district court judge Richard Stearns dismissed the case on the complaint, holding that Evergreen had failed to plead a viable claim of conspiracy to boycott. In other words, the complaint didn’t contain enough “facts” to establish, directly or through inference, that the defendants had entered into an agreement to boycott. For example, each of the defendants could have acted alone (unilaterally), and if so there would be no antitrust violation. Evergreen was caught in the antitrust pleading “Catch 22.”
The First Circuit reversed, remanding the case to the district court for further proceedings. Interpreting the Supreme Court’s 2007 decision in Bell Atlantic v. Twombly (an antitrust case in which the Supreme Court issued an important decision establishing a “plausibility” pleading standard, as opposed to the long-standing “notice” standard), the First Circuit stated:
Twombly is therefore clear that, if no direct evidence of agreement is alleged, it is insufficient to exclusively allege parallel conduct at the pleadings stage. Rather, a complaint must at least allege the general contours of when an agreement was made, supporting those allegations with a context that tends to make said agreement plausible. … we have made clear that plaintiffs must establish that it is plausible that defendants are engaged in more than mere conscious parallelism, by pleading and later producing evidence pointing toward conspiracy. … It is also clear that allegations contextualizing agreement need not make any unlawful agreement more likely than independent action nor need they rule out the possibility of independent action at the motion to dismiss stage. Requiring such heightened pleading requirements at the earliest stages of litigation would frustrate the purpose of antitrust legislation and the policies informing it.
Evergreen met this standard, and therefore it will be allowed to proceed with its case. Whether it can come up with enough evidence to survive the next hurdle—summary judgment—and take its case to a jury, remains to be seen.
