|
Tradesecrets
- Summer 2002 -
You’ve carefully crafted a clause in the employment agreement you
enter into with your key technical employees. The clause states that any
employee who leaves your firm is barred from working for a competitor
within a 100 mile radius of your business for two years. Your top
software engineer has resigned and has gone to work for your fiercest
competitor. The competitor’s office is located within 100 miles of your
office. A legal slam dunk?
In this new cyber age, unfortunately, things are not so simple. In
this case, your software engineer, although working for a company within
the 100 mile radius, is himself living in the mountains of Colorado
1,500 miles away, and never enters the 100 mile radius. Is he in
violation of his non-competition clause? The answer is not clear.
What’s clear is that particularly in information technology fields,
the old rules regarding non-competition clauses in employment contracts
are rapidly becoming outmoded. The rule of thumb had been that courts
would typically enforce a non-competition clause if it was reasonably
limited in its geographic scope and duration and there was a legitimate
business reason for the restriction, such as protecting customer
goodwill by preventing a former employee from exploiting relationships
established during his employment. And indeed, this type of restriction
worked fine to prevent competition from, say, a chemical salesman whose
client base would be within the restricted geographic area. But for
information technology-based businesses, whose clients are typically far
flung, and where, via telecommuting, its employees can work virtually
anywhere, this old-fashioned form of non-competition agreement is
practically useless.
It is important to note, though, that the need for non-competition
agreements with key employees is critical to protecting a business.
Without a non-compete, an employee with knowledge of trade secrets is
free to join a competitor, start his own business, and call on the
employer’s customers with impunity.
For technology-based firms the structure of non-competition clauses
must be rethought, and the clauses themselves re-engineered, to address
these new realities. The following is a brief guide to the main issues
which should be addressed in this new breed of non-competition clauses.
4 Geography
As noted above, the geographic limitation in a non-competition
agreement is a factor traditionally scrutinized by courts in determining
the enforceability of non-competition agreements. In crafting this
agreement, it is wise not to disregard this limitation. In assessing how
broad a limitation should be in the context of a technology-based
business, the employer should carefully consider several factors,
including the geographic market the employer presently serves or plans
to serve, the territory the employer is trying to protect, and the
number of competitors the employer has and where they are located.
For instance, if a software company has only two competitors, and
they are in separate locales around the country, a nationwide
restriction may be reasonable because (a) the competitive damage which
can be done where a market is divided only three ways can be
considerable; and (b) a geographic restriction other than a nationwide
restriction would be useless, because the competitors are located
nowhere near the employer.
4 Time Restrictions
Courts have in recent years begun to scale back the time limitations
in non- competition agreements in the information technology fields.
Courts have cut two year restriction periods back to nine or six months,
reasoning that the technology to which the employee has access would be
stale in a short period of time. This reasoning, though, gives short
shrift to lead times in the development and implementation of new
products and features because it may take much longer than nine months
for a product in development even to hit the market. Moreover, if an
employee has access to long term strategic or marketing plans, the
former employee has knowledge which could do damage even three or four
years in the future. Thus, it is wise to be aggressive in setting the
time period of the restriction.
In the case of a salesperson, the key element is the amount of time
necessary to hire and train a replacement and permit the replacement to
solidify customer relationships.
4 Defining the Business
A court is more likely to enforce abroad restriction in terms of time
and geography if the business in which the employee is prohibited from
working is defined relatively narrowly. A court may be reluctant to
prevent an employee from working for "any software company in the United
States," but may enforce a restriction involving "any designer and
seller of customized database software marketed to companies which mine
coal." It is critical to define a business as narrowly as possible in
the non-competition clause.
4 Defining Restricted Job
For some employees, it may make sense
to limit the non-competition restriction to the job the employee is
presently performing. A salesperson may not do any damage working for a
competitor as a customer service representative. Accordingly, for
appropriate employees, it may strengthen the enforceability of an
otherwise broad (in geographic and temporal terms) non-competition
clause to narrowly define the jobs restricted.
4 Non-Solicitation Agreements
Any non-competition agreement should,
as an adjunct, contain a non-solicitation clause as well. The
non-solicitation clause prevents the employee, for a given period of
time, from calling upon or soliciting business from the employer’s
customers or clients. This clause provides an extra layer of protection
to the employer should a court refuse to enforce the non-competition
clause or decide to reduce its scope. A non-solicitation clause is
especially useful in protecting against the harm which may be inflicted
by employees in the customer service or sales fields, and directly
prevents former employees from exploiting customer and client
relationships developed with the employer’s time and resources.
4 Injunctive Relief
Any clause in an employment contract
restricting competition should contain a clause recognizing that if an
ex-employee violates the competition restrictions the employer will
suffer "irreparable" harm and permitting the employer to seek an
injunction in court requesting enforcement of the restrictions, i.e.,
preventing the ex-employee from working for the competitor.
4 Consent to Jurisdiction and to
Application of Local Law
The employee should agree that any
lawsuit to enforce the non-competition provisions may be brought in the
home state and county of the employer. These provisions are routinely
upheld, and make prosecution of any lawsuit convenient for the employer
and inconvenient for the ex-employee (in the event that he is no longer
in town).
4 Anti-Piracy/Anti-Raiding
Provision
An employment agreement should contain
a provision which prevents an ex-employee from soliciting or otherwise
hiring the employer’s remaining employees for a competing enterprise.
This is an especially important provision in light of the tight labor
market for skilled computer programmers and other high tech workers, and
incentive programs put in place by many employers which give bonuses to
employees for recruiting their friends. It also prevents the "raiding"
of employees by a competitor, that is, soliciting the wholesale walkout
of a group or team of employees, an event which can do grave damage to
one’s ability to compete.
Turning to the rogue techie described
at the beginning of this article, careful drafting of a non-competition
agreement could have prevented that dilemma. A non-competition clause
barring the employee from working for any competitor (in a
narrowly-defined market) for 18 months to two years, no matter where the
competitor or the ex-employee is located, could put the techie out of
business whether he was working in Colorado or next door. Although not a
guarantee, this clause would have provided the best ammunition for
protecting the employer’s competitive interests.
^ Back to top
Inventors Beware
The "On-Sale Bar"
When the Constitution was drafted in
the late eighteenth century, our forefathers included a requirement for
a legal mechanism that would reward innovation and entrepreneurship. In
exchange for teaching the world a new way to accomplish a particular
useful task or the composition of a new and useful material, the
government would grant you a limited monopoly on your invention. Today,
federal statutes provide that this limited monopoly, known as a patent,
entitles the patent-owner to keep everyone else (in the United States)
from practicing the disclosed invention without the patent-owner’s
permission for twenty years (in most cases) from the date that the
patent application was first filed. It is even possible for a
patent-holder to have the U.S. Customs Office refuse to permit shipments
of infringing goods to enter the country.
According to the patent laws, "Whoever
invents or discovers any new and useful process, machine, manufacture,
or composition of matter, or any new and useful improvement thereof, may
obtain a patent therefor." Translated to English, an invention must be
new, useful and non-obvious in order to be entitled to patent
protection. These three legal requirements, however, manifest themselves
in unexpected ways – often to the detriment of the unsuspecting
inventor.
Let’s assume, for the moment, that you
have come up with an idea for a product that you think could give you an
advantage over your competitors or that you have developed a new process
that will increase your company’s productivity in a novel way. How do
you maximize the profit potential inherent in such an idea? Since the
expenses involved in applying for a patent are heavily front-loaded, the
urge to push the product to market is immediate. You may even decide to
postpone applying for a patent until the product shows a profit.
Before ramping up the marketing for the invention or putting the item up
for sale, however, there are several things that you must consider so as
not to lose those all-important patent rights.
One of the least well-known and,
correspondingly, most dangerous provisions of United States patent law
arises from the novelty requirement. Referred to by patent practitioners
as the "on-sale bar," the patent statutes state that a patent will not
issue where "the invention was (a) described in a printed publication,
(b) in public use, or (c) on sale more than one year prior to the date
the patent application was filed." In other words, if you publish your
new method in a trade journal or you sell your new product to one of
your customers, it starts to lose some of its novelty.
The rule to be drawn from this statute
is that you must file for patent protection in the United States within
one year from the date of first publication or sale. Otherwise, your
patent, if granted, will be nothing more than an extremely expensive
piece of paper. The reason that this provision is so dangerous to an
inventor is that the natural tendency of someone who has spent money
developing an invention is to try to recoup that money as soon as
possible. Unfortunately, many inventors don’t realize that the first
time they offer the invention for sale, it starts a clock that counts
down to an absolute deadline for filing for patent protection.
The publication or sale of an invention
has other ramifications that an inventor may not be mindful of at the
outset. It often doesn’t occur to an inventor that a United States
patent only provides protection in the United States. With the
increasingly global nature of business, it is necessary to consider and
evaluate the possibility of patent protection in countries outside the
United States. Unfortunately, this issue raises another potential pitfall: according to the
patent laws of a large number of foreign jurisdictions, if an invention
is published in a journal, placed on sale to the public or actually sold
at any time prior to the filing of a patent application in that
jurisdiction, the inventor will be forever barred from obtaining patent
protection in that locale. In an effort to ameliorate this harsh result
to the unsuspecting inventor, the United States and most industrialized
nations are signatories to an international treaty that allows a United
States applicant to file in another signatory country — even after
publishing or selling an invention — so long as the publication or sale
occurred after the date of application for patent protection in the
United States. Here again, there are clearly defined absolute filing
deadlines set forth under this treaty and patent protection will be lost
if strict adherence to these deadlines is not maintained.
The patent laws obviously provide
significant financial benefits for inventors. Not so obviously,
potential pitfalls such as the on-sale bar require that patent laws be
followed to the letter, or those benefits may be lost forever. If you
believe that you have a patentable idea, it is wise to consult a patent
attorney as soon as possible to ensure that your ideas are protected and
that you do not lose valuable rights.
^ Back to top
New Bill Submitted Regarding
Electronic Transaction Signatures
In October 2001, House Bill 2017 was
introduced to the Pennsylvania State House of Representatives. This Bill
amends the Pennsylvania Uniform Electronic Transactions Act, and
provides for the electronic notarization and acknowledgement of
electronic records. As readers may recollect from previous issues of
Case Notes, the Uniform Electronic Transactions Act, which was enacted
in December 1999, gives the same legal effect for electronic records and
contracts as for hard paper copy records and contracts, in essence
abolishing distinctions between the two in terms of enforceability or
admissibility in court.
Injunction Granted Against Spam
In Intel Corporation v. Hamidi, 2001,
Cal. App. LEXIS 3107, a California Appeals Court granted corporate
victims of spamming new legal recourse to prevent burdens on their
e-mail systems due to a person sending unwanted bulk e-mail. A former
Intel employee had for some time been sending spam to Intel’s e-mail
system. Intel sought an injunction directing the former employee to
cease and desist from sending further spam, claiming that the spam
harmed its ability to conduct its business and constituted a trespass
upon its property. Agreeing with the trial court, the appeals court
affirmed the grant of the injunction, finding that the conduct of the
ex-employee constituted a trespass upon the property of Intel.
Retrieval of Employee E-Mails Is
Not a Violation of Pennsylvania Wiretap Act
A Pennsylvania federal court held that
an insurance company did not violate the Pennsylvania and Federal
wiretapping laws when it obtained an employee’s e-mail communications,
stored on a company computer, noting that the case was one of the
"few... that has required a Court to interpret the Wiretapping Acts in
the context of recent electronic communications technology." The Federal
Wiretap Act prohibits unauthorized "interceptions" of electronic
communications, and typically applies in the context of telephone calls.
The court found that the retrieval by the employer of the stored e-mail
messages, maintained on company e-mail server, was not a "interception"
of an electronic communication in violation of the Wiretap Act.
Passage of the USA Patriot Act
In October 2001, President Bush signed
into law the new USA Patriot Act, which gives the United States
Department of Justice broad powers to investigate crimes, and explicitly
broadens powers of law enforcement to conduct electronic surveillance.
The new law permits a U.S. Attorney or state attorney general to order
the installation of the FBI’s Carnivore Surveillance System to record a
target’s Web Pages visited and e-mails sent and received without a court
order. In addition, biometrics technology, including devices which scan
the irises of travelers’ eyes, and fingerprint readers, are to become
part of "an integrated entry and exit data system" tracking the
movements of persons entering and leaving the United States. Also,
Internet service providers and telephone companies must turn over
customer information, including phone numbers called, without a court
order if the FBI claims that the records are relevant to an
investigation against "international terrorism."
^ Back to top
In each
issue, we will
introduce a member of our Technology Group. In
this issue, we spotlight...
Steven
B. Silverman
"In your house," says Steve Silverman,
co-chair of Tucker Arensberg’s Technology Group, "you can protect your
valuables by locking the doors and windows and setting an alarm. For a
tech business, your most valuable assets -- your employees and your
intellectual property -- can‘t be protected by a lock. You must take
careful measures, whether through employment or other agreements or
technical protections like firewalls and password protectors, to ensure
that these valuable assets are in fact protected."
Steve’s technology practice focuses on
just this issue -- helping clients protect their assets. Steve regularly
handles business disputes involving trade secret theft and restrictive
employment covenants, particularly in the context of the computer,
software and high technology industries. Steve has also written and
lectured on these topics for many groups, such as a February 2002
program titled "Tech Companies Prospering in a Tough Economy" and an
upcoming April 2002 program titled "The Law of the Internet in
Pennsylvania."
Steve teaches a class, along with
Tucker Arensberg partner John Graf, at the Graduate School of Industrial
Administration at Carnegie Mellon University titled "Labor and
Employment Issues in the High Tech Workplace."
Steve may be reached
at 412/594-5609 or via e-mail at
ssilverman@tuckerlaw.com.
^ Back to top
|
