Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

On November 21, 2008, Judge Kenneth Karas of the Southern District of New York published his November 7, 2008 Amended Opinion and Order granting IBM’s Motion for Preliminary Injunction against former IBM executive Mark Papermaster. Judge Karas granted the Motion following extensive briefing from the parties, as well as a November 6, 2008 hearing on the Motion. The parties did not offer in-court witness testimony at the hearing, instead choosing to rely on the affidavits that they had submitted. Interestingly, Judge Karas notes at the outset of the Opinion and Order that IBM learned for the first time at the hearing that Papermaster had started work with Apple.  

In the Facts section of the Opinion and Order, Judge Karas synthesizes the numerous affidavits submitted by the parties. Judge Karas does reference IBM’s new type of digital storage device, the mention of which led a number of tech-focused analysts following the case to write about the possibility that IBM’s new “Racetrack” technology is at the heart of the matter. That said, Judge Karas does not reference this technology in the “Discussion” section, indicating that Racetrack is not at the center of the dispute (at least not at present).

In evaluating the legal merits of IBM’s Motion, Judge Karas engages in an analysis of whether Papermaster would inevitably disclose the IBM trade secrets known to him. In so doing, Judge Karas takes IBM’s argument, which had focused on Papermaster breaching the restrictive covenants contained in his Noncompetition Agreement, and shifts it to an inevitable disclosure argument, which is more focused on trade secret misappropriation than breach of contract. 

Judge Karas articulates that Papermaster’s new role makes him responsible for improving Apple’s iPods and iPhones, “that is, to make sure that they store more information, do it more quickly, and use less power in doing so.” Judge Karas concludes that Papermaster would inevitably disclose his knowledge of microprocessors and the “Power” architecture in performing the responsibilities of his position at Apple. In support of his conclusion, Judge Karas cites to Apple’s reference to Papermaster’s knowledge of microprocessor design in its internal deliberations prior to hiring Papermaster.

Judge Karas also focuses on the sequence of events that led to Apple hiring Papermaster. Apple initially elected not to offer Papermaster the position heading its iPod/iPhone division in early 2008. Apple then purchased P.A. Semi, a microchip company that competes with IBM in the microprocessor market, in April 2008. Apple subsequently re-interviewed Papermaster and offered him the position of Senior Vice President, Device Hardware Engineering on October 10, 2008. Apple’s change of heart regarding Papermaster after it purchased P.A. Semi led Judge Karas to conclude that Papermaster would inevitably disclose IBM trade secrets in setting the technical specifications for the microprocessors that P.A. Semi may produce for the iPod and iPhone.

Although it is by no means the centerpiece of his Opinion and Order, Judge Karas also addresses IBM’s claim that Papermaster would breach his Noncompetition Agreement by working for Apple. The Judge finds that the Agreement is reasonable in geographic and temporal scope. He also determines that Papermaster would violate the Agreement by working for Apple because Apple competes with IBM in the chip market, especially after purchasing P.A. Semi.

Papermaster filed a Notice of Interlocutory Appeal on November 20, 2008. In that Notice, Papermaster is appealing Judge Karas’s decision granting IBM’s Motion for Preliminary Injunction. The Court has sent the certified record to the Second Circuit Court of Appeals, although the appeal has not yet been docketed.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There have been several developments in the litigation between IBM and its former executive Mark Papermaster since the Court enjoined Papermaster from working for Apple on November 6, 2008. First, the Court has ordered IBM to post a bond in the amount of $3,000,000 to cover any potential finding that IBM wrongfully obtained its injunction against Papermaster. 

Papermaster filed his Answer, Affirmative Defenses, and Counterclaims on November 13, 2008. In his Counterclaims, Papermaster sets forth his arguments that the non-compete provision of his Noncompetition Agreement with IBM is unenforceable. Papermaster argues that the provision purports to prevent him from working for any company that competes with IBM, even if: (1) he is not working for the part of the company that competes with IBM; or (2) he is not doing work similar to the work he performed for IBM. Papermaster also argues that the worldwide scope of the non-compete is overly broad, as is the one-year time limitation because of the speed with which information becomes outdated in the world of technology. Finally, Papermaster argues that the New York choice of law provision in the agreement is unenforceable because he lives in Texas, he will be working for a California company, and he has no contacts with New York. Papermaster does not seek any relief in the Counterclaims beyond a declaratory judgment that the Noncompetition Agreement is overly broad and that it should be governed by Texas or California law.

One particular footnote in IBM’s Reply in Support of its Motion for Preliminary Injunction has led to a good deal of speculation regarding IBM’s motivation and interest in bringing its claims against Papermaster. In footnote 1 of its Reply, IBM states that it has developed a memory device that would enable an iPod to store 500,000 songs, all while being cheaper to produce. This device also would permit an iPod to run on a single battery charge for weeks at a time. IBM does not contend that Papermaster worked on this particular technology. 

Various observers of the technology industry have speculated that the unnamed technology referenced in the footnote is “racetrack memory,” a technology that allegedly uses the spin of an electron to keep track of data. If the observers are correct, then they may have put meat on the bones of one of IBM’s arguments to counter Papermaster’s claim that IBM and Apple do not compete. The argument, as set forth in IBM’s Reply, is that Apple used to buy personal computer chips from IBM and now buys iPod and iPhone chips from Intel, an IBM competitor. If Apple used its P.A. Semi to produce chips for the iPod and iPhone, the argument goes, then it will deprive IBM of the chance to sell such chips to Apple.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

New York Supreme Court Justice Debra James has issued a preliminary injunction restraining a former employee of a dog care business, which provides services such as dog walking, feeding and grooming, from competing with his former employer within a ten (10) mile radius of his former employer’s business. The action is entitled The Paw Shop, LLC v. Brian Mestre, New York County Supreme Court, Index No.: 601950/08, and Justice James’s order has likely left the Defendant growling. 

Defendant commenced employment with Plaintiff in January 2007 as a receptionist, kennel manager, driver and assistant dog trainer. On July 27, 2007, Defendant signed an “Employee Non-Compete Agreement,” which included a two year, ten (10) mile radius restrictive covenant against direct competition with Plaintiff. The covenant was to be effective from the date of termination, and the restrictive radius was to be measured from the location of Plaintiff’s business at the time of termination; the covenant was to be effective regardless of the reason of Defendant’s termination. At the time of entering into the non-compete agreement, Defendant received a pay-raise as consideration.

Defendant’s employment was terminated in May 2008, and Plaintiff shortly thereafter commenced the action and moved for the preliminary injunction enforcing the restrictive covenant, alleging that the Defendant had been observed performing dog walking services for the Plaintiff’s clients within the restricted radius.

In granting Plaintiff’s motion, Justice James found that the duration and scope of the restrictive covenant were not “unduly burdensome to the defendant.” Although silent as to its reasoning with regards to the duration, the Court found that the ten (10) mile radius was reasonable because: “defendant lives more than ten miles away from plaintiff’s business, and during the period of the covenant may certainly provide services to dog owners in the neighborhood where he resides.”

The Court found that the Defendant’s services were likely to be “unique” and/or “extraordinary,” by reason of affidavits of former customers of Plaintiff averring such. Ironically, these affidavits were submitted by Defendant in opposition to the motion. Surprisingly, given the result, the Court found that Plaintiff had failed to make a showing that Defendant had either used Plaintiff’s customer lists or used confidential client information. Regardless of this lack of showing, however, the Court nevertheless granted the preliminary injunction, citing holding finding that Plaintiff was being irreparably harmed by Defendant’s providing dog walking services to Plaintiff’s clients within the restricted area.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On November 6, 2008, Judge Kenneth Karas of the United States District Court for the Southern District of New York granted preliminary injunctive relief to IBM and ordered that a former executive, Mark Papermaster, refrain from working for Apple. 

According to IBM’s Complaint, Papermaster worked for IBM as a member of the Company’s elite Integration and Values Team, which has a hand in developing corporate strategy. On June 21, 2006, Papermaster executed a Noncompetition Agreement with IBM that forbids Papermaster from engaging in or associating with any competitors within the area for which Papermaster had job responsibilities at IBM. At the time of his resignation, Papermaster served as IBM’s Vice President for a unit that designs and delivers servers using “blade” technology.   

Papermaster announced his intent to resign on October 13, 2008. IBM made efforts to retain Papermaster, offering him a salary increase, as well as the possibility of a year’s salary in return for not competing against the company. Papermaster declined these offers and resigned from employment with IBM on October 21, 2008. Papermaster set his last day of employment as October 24, 2008. Upon joining Apple, Papermaster was slated to become the Senior Vice President for Devices Hardware Engineering. According to Apple, Papermaster would supervise the development of iPods and iPhones in this position.

On October 22, 2008, IBM sued Papermaster in the Southern District of New York, and filed a Motion for Preliminary Injunction two days later. In the Complaint, IBM asserts that Papermaster breached the terms of the Noncompetition Agreement and misappropriated trade secrets. IBM specifically alleges that it competes with Apple in three areas: servers, personal computers, and microprocessors. The Noncompetition Agreement contains an exclusive jurisdiction clause mandating that all actions under the Agreement take place in the state and federal courts for Westchester County, New York. 

Papermaster responded to IBM’s Motion for Preliminary Injunction with several arguments. Papermaster argued that Apple does not compete with IBM because Apple is in the consumer electronic products market, whereas IBM focuses on business systems such as servers and IT infrastructure. More specifically, Papermaster claimed that the needs of microprocessors for servers and consumer electronics are different, with the former emphasizing speed and the latter emphasizing efficient use of power. Papermaster also contended that IBM could not show that it faced irreparable injury because it permitted Papermaster to continue to work for IBM and access its confidential information for two weeks after Papermaster stated his intention to resign. If Papermaster was privy to so much IBM confidential information and represented such a competitive threat, the argument goes, then why was he permitted to remain employed by IBM with unfettered access to its various systems and facilities after announcing his intention to join Apple?

Papermaster also argued that injunctive relief was inappropriate because the Noncompetition Agreement was unenforceable as written for two reasons. First, Papermaster offered that the Agreement was overbroad in that it purported to prevent him for working for a competitor, regardless of whether his acts were actually competitive. Second, Papermaster contended that the one-year time period covered by the non-compete provision was an “eternity” in the electronics industry and thus should not be considered reasonable under the circumstances. Third, Papermaster asserted that the agreement was overbroad because IBM claimed that the Agreement purported to cover the entire world. Papermaster further asserted in a footnote that because Papermaster lives in Texas and works in California, New York law should not govern the dispute, but it acknowledged that it did not have the space to fully develop this argument.  You can find IBM's reply brief here.

Although Judge Karas granted IBM’s Motion for Preliminary Injunction at the conclusion of the November 6, 2008 hearing, in the entry for the case on the Court’s docket, Judge Karas sets forth that an Opinion will follow. Until such time, it is unclear which arguments the Court found persuasive.  The case nonetheless continues.  At present, the parties are litigating the issue of the amount of a bond to be paid by IBM to the Court.  It also is likely that the parties will now want to engage in expedited discovery, a topic that will be discussed in a November 18, 2008 court conference.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In August, federal prosecutors charged Biswamohan Pani, a former Intel Corp. engineer, with theft of trade secrets from his former employer, Intel.  This week, a Massachusetts grand jury added four new counts of wire fraud.  If convicted, Pani could serve up to 10 years in prison for the theft of trade secrets count, and up to 20 years on each count of wire fraud.

Federal prosecutors in Massachusetts allege that after Pani resigned from Intel in May 2008, he downloaded confidential documents and trade secrets worth $1 billion, including new microprocessor chip designs. Pani accessed the internal Intel network via his Intel-issued laptop, downloading "mission-critical" documents.

It is reported that Pani told his supervisors that he was leaving Intel to work for a hedge fund, but in reality he had accepted a job months earlier with Intel’s main competitor, Advanced Micro Devices, Inc., and began working there days after his resignation from Intel, but while still employed by Intel.  For a brief period, Pani was on both AMD’s and Intel’s payrolls due to accrued, unused vacation time at Intel.  Intel owns 80% of the worldwide market for microprocessors, and AMD owns the rest.

An FBI search of Pani’s home recovered eight Intel documents classified as “secret,” “top secret,” and “confidential.” Pani told FBI investigators that he planned to give the information to his wife, who also works for Intel. AMD is not accused of any misconduct, and there is no evidence that AMD had any involvement in or awareness of Pani’s actions.  Pani, of course, is no longer employed by AMD. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 In RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, the Supreme Court of Canada recently addressed a verdict against a group of departing employees by a British Columbia trial court.

RBC operated an office in Cranbrook, British Columbia. In November 2000, almost every employee in the office abruptly resigned and moved to Merrill Lynch.  Don Delamont, the RBC branch manager, coordinated the move.  The departing employees copied and retained a number of files relating to RBC customers before resigning.

RBC sued, asserting the following claims:

• Against its former employees for breach of fiduciary duty, breach of implied contractual term not to compete unfairly upon leaving RBC’s employ, breach of implied contractual term to give reasonable notice of termination, and an action for misuse of confidential information;
   
• Against Merrill Lynch and its local manager James Michaud for breach of duty in tort for inducing RBC staff to terminate their contracts of employment without notice and to breach their contractual obligation not to compete unfairly; and 
   
• Against all the respondents for conspiracy and conversion, the latter related to the removal of documents known to be the property of RBC.

The trial court found for RBC and awarded damgaes on a variety of theories against the departing employees, Merrill Lynch, and Michaud.

On appeal, the British Columbia Court of Appeal overturned two categories of damages: (1) an award of five years worth of lost profits in the amount of $1,483,239 against Delamont for breaching his duty of good faith by coordinating the departure of almost all of the employees from the office that he supervised; and (2) an award of $225,000 for unfair competition against the departing employees.

On review by the Supreme Court of Canada, the highest court reinstated the award against Delamont, rejecting the Court of Appeal’s reasoning that the collapse of the branch was not a foreseeable result of Delamont orchestrating the departure of the office’s investment advisors. Instead, the Supreme Court concluded that Delamont had a duty of good faith (akin to the duty of loyalty set forth in most American states) to manage and retain the investment advisors at his branch.  The Court also decided that Delamont violated that duty by facilitating the resignation of the investment advisors and that Delamont was therefore liable for RBC’s lost profits incurred as a result of the collapse of the branch.  Notably, the dissent points out that the trial court decided that Delamont did not owe a fiduciary duty to RBC. Therefore, the dissent attacks any award of damages against Delamont based on the judicial creation of a category of "quasi-fiduciary" employees who are liable to their employers if they do not perform their job duties properly.

From there, the Supreme Court decision focuses primarily on the proper calculation of damages, finding that a former branch manager can be liable for five years' worth of lost profits for facilitating the departure of the employees under his supervision.

In contrast, the Supreme Court overturned the award of $225,000 for unfair competition against the departing employees to the extent that it was awarded based on a duty not to compete. The Court held that employees in Canada owe a duty to provide reasonable notice to their employers before resigning, but that they do not owe a duty not to compete during the notice period (absent a non-compete agreement establishing otherwise). The case highlights a difference between Canadian and American law: the requirement in Canada that an employee provide "reasonable notice" before resigning. And, courts in Canada have discretion to determine what that reasonable notice period will be.

The trial court determined that a reasonable notice period for the employees would have been 2.5 weeks and thus assessed damages in the amount of $40,000 against the employees for failing to provide notice. The Supreme Court held that this category of damages was proper, but the additional award of $225,000 based on the departing employees' competing during the 2.5 week period was not proper because the employees were not required to refrain from competing.

The Supreme Court further found that the $225,000 award against the departing employees could not be based on the departing employees’ retention of RBC documents because any award for lost profits resulting from the retention and use of the documents was covered already by the lost profits award against Delamont.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As a result of the instability in the financial markets generally and at financial institutions in particular, the financial services industry has experienced significant turnover in 2008. The below chart recently found in the New York Times reflects that the financial services industry has experienced more layoffs than any other industry.

Because of the importance of relationships between brokers and other customer-facing personnel in the financial services industry on the one hand and customers on the other, restrictive covenants are commonplace in the industry. These covenants typically take the form of: (1) customer non-solicitation covenants, in which employees agree not to solicit the clients of their former employees for a set period of time; and (2) non-disclosure covenants, in which employees agree not to use confidential information such as client lists and account or trading information.

It is likely that the significant turnover in the financial services industry will lead to an increase in the number of disputes between financial firms and their former employers, especially as those employees who were laid off find new positions in the industry and seek to mine relationships with former customers. (The obvious exception here is that employees laid off by liquidating financial institutions do not face the prospect of being sued by their former employers.)

an additional factor that can lead to an increase in restrictive covenant litigation in the financial services industry is the prevalence of larger firms buying smaller or distressed firms. Acquisitions of new companies often lead to restrictive covenant litigation because the employees of the purchased company find themselves working in a new work culture. A common scenario in such a situation is for the employee to bristle at the new culture, leave the company shortly after the acquisition, and then solicit their former clients. 

One factor that will reduce the tide of restrictive covenant litigation is the Protocol for Broker Recruiting. The Protocol, which has been signed by a number of (but by no means all) financial services institutions, identifies with particularity the information that departing brokers may take to their new employers. The Protocol also sets forth the clients that departing brokers may solicit after leaving. The Protocol was created for the purpose of reducing litigation between financial institutions and normalizing the process of broker movement. As such, it becomes especially important in the current environment for financial services institutions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link