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

Apple issued a press release today stating that the litigation between IBM and former IBM executive Mark Papermaster has been resolved and that Papermaster will commence employment with Apple on April 24, 2009. Papermaster will join Apple as its senior vice president of Devices Hardware Engineering, reporting to Apple CEO Steve Jobs. 

This development takes place 81 days after Judge Kenneth Karas of the Southern District of New York enjoined Papermaster from violating his Noncompetition Agreement by working in a competitive position for Apple. The April 24, 2009 date is significant because it is exactly six months after Papermaster’s October 24, 2008 resignation from IBM. As such, it appears that the parties compromised by agreeing that Papermaster would comply with half of the one-year non-compete period set forth in the Papermaster’s Noncompetition Agreement.

Judge Karas also entered a Consent Order and Stipulated Order of Dismissal with Prejudice today. That Order sets forth the contours of the Parties’ settlement in greater detail. Papermaster can commence work with Apple on April 24, 2009, but he remains under an obligation not to use or disclose any IBM Confidential Information, as that term is defined in his Noncompetition Agreement. 

In light of the fact that IBM asserted in its pleadings that Papermaster would inevitably disclose IBM’s Confidential Information by working for Apple, the non-disclosure requirement does create some enforcement dilemmas for the parties. To address those dilemmas, the Order sets forth that Papermaster will contact IBM’s Vice President and Assistant General Counsel Ron Lauderdale if he has questions as to whether specific information meets the definition of Confidential Information. IBM’s determination must be “made promptly, reasonably and in good faith,” but such a determination shall be “final and binding and not subject to review in any way.” Between July 1 and July 15, 2009 and then again between October 1 and October 15, 2009, Papermaster must execute a statement under penalty of perjury that he has not used or disclosed IBM Confidential Information, and that he does not intend to do so.

Judge Karas’s Order also dissolved the November 7, 2008 preliminary injunction in the case and dismissed IBM’s claims and Papermaster’s counterclaims with prejudice

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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.

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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.

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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.

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