Protect yourself against an inevitable-disclosure lawsuit

ITworld.com –

The venom in Jeff Merkey's voice was unmistakable as he described the lawsuit brought by Novell against him and fellow engineers who left in 1997 to start their own company. Novell (of Provo, Utah) obtained a temporary injunction preventing the new company, now called Timpanogas Research Group (TRG) and based in Orem, Utah, from developing a clustering product that Novell said was similar to one its engineers had worked on. Despite the absence of non-compete agreements that could have explicitly prevented the engineers from developing the product, Novell lawyers successfully argued that if Merkey and his colleagues worked at a company that developed products similar to Novell's, their employment would represent an "inevitable disclosure" of trade secrets.

The so-called secrets were my ideas. It was my work experience.

"It was one of the most unpleasant experiences I've ever been through," says Merkey, who had been Novell's chief scientist. "The so-called secrets were my ideas. It was my work experience."

According to Novell, in August 1998 the companies reached a settlement dismissing all claims by both sides. TRG had to pay Novell some money, and the injunction was made permanent. (According to Merkey and a TRG press release, the settlement coincided with the settlement of a federal suit in which TRG accused Novell and its board of sexual harassment and retaliation.) TRG's legal fees totaled $4 million. The program code for the scratched product, which cost $2.2 million to develop, is required to remain untouched on a server -- jokingly called the Toxic Server -- at TRG.

Now TRG is both a software company and a legal firm, Merkey said matter-of-factly. It has gone on to developed several new products, including an open source operating system compatible with Novell's NetWare.

Merkey derided inevitable disclosure as a "screwy doctrine" that violates constitutional rights and is tantamount to legal slavery. "It allows a company to take any confidentiality agreement regarding trade secrets and transmute it into a non-compete agreement," he said. "Here's the rule of inevitable disclosure: Don't sign trade-secret agreements."

Nothing but the facts

Though it sounds like the title of a John Grisham novel, inevitable disclosure isn't fiction. It has played an important role in a half dozen highly publicized cases in the IT industry, according to press reports and legal articles on the Web. In 1996, chipmaker Advanced Micro Devices (Sunnyvale, Calif.) used it to block five engineers from working on flash-memory projects at Hyundai Electronics America (San Jose, Calif.). Motorola (Schaumburg, Ill.) argued inevitable disclosure against Intel (Santa Clara, Calif.) and reached an undisclosed settlement. Web advertising company DoubleClick, based in New York, got an injunction against two employees who left to start their own company.

In the IT industry, engineers, programmers, marketing personnel, and upper management are most vulnerable to inevitable disclosure suits, said Elizabeth Sackett, an associate in the Boston office of Robinson & Cole, a New York-based law firm. Under inevitable disclosure, "trade secrets," says Sackett, can mean formulas and processes, strategic plans, or "anything else" that, the court says gives a competitive advantage.

Judicial interpretation of inevitable disclosure varies by state, as do punishments, according to Sackett. An injunction is the typical penalty for misappropriation of trade secrets, but fines and jail time are possible. The doctrine isn't applied abstractly. "They really go into the facts of this -- who you are, what information you have, how well protected was it, and are you really going to use it in your new job," cautions Sackett.

Sackett was part of a legal team that defended an ITworld.com employee against an inevitable disclosure charge last November. However, that case ultimately hinged on the wording of a non-compete agreement.

Negative knowledge

Merkey says a key issue in his trial was the concept of negative knowledge, which holds that knowing what doesn't work is as valuable as knowing what does. It's often a justifiable argument because without it, competitors could potentially get millions of dollars' worth of a company's research and development for free, said R. Mark Halligan, an attorney at Welsh & Katz in Chicago. Halligan maintains an informational Website on related legal issues and is chairman of the American Bar Association's Trade Secrets and Interference with Contracts committee.

Negative knowledge's relevance usually depends on whether the new employer has built up the same technology bank as the old employer. If it has gone through similar trial and error to develop a product, the employee's negative knowledge has little value. But if the competitor gets a head start from the new employee's experience, then it has an unfair advantage, Halligan said.

According to Halligan, Sackett, and several lawyers who have written on the topic, you can protect yourself from inevitable-disclosure lawsuits in several ways:

  • If your new employer presents you with non-disclosure, non-compete, or non- solicitation contracts, run them by a lawyer before signing.
  • Don't take files, documents, or other materials to your new job without your employer's permission. They could be used as evidence in a lawsuit.
  • Ask your new employer if it has policies in place to prevent illegal use of trade secrets.

The view from the other side

It's easy to be mesmerized and outraged by the horror stories of people who have been sued. But what if it were your job to protect your company's intellectual property? Some lawyers say prosecuting inevitable disclosure is necessary; the problem is that many companies and their lawyers don't know how to apply the doctrine properly.

"It's often misused," Halligan said. "It's often applied to an employee regardless of the circumstances. A lot of this goes on without the employee ever having been told what's a trade secret." IBM Corp., for example, lost a case against a former employee and his new company, Seagate Technology, because it could not show that actual trade secrets had been "misappropriated," according to a Web article by Pascal DiFronzo, the defendant's lawyer. (See the Resources section below.)

To protect your company's trade secrets, the lawyers consulted for this article advise that you:

  • Clearly label what's company confidential.
  • Require new employees to sign a confidentiality agreement that clearly spells out your definition of trade secrets. "If he doesn't sign it, that later can be used as evidence of bad intent," said Halligan.
  • Hold trade-secret exit interviews with departing employees.
  • Hire a lawyer to do an audit identifying missing documents, policies, and procedures that could improve your chance of winning lawsuits.
  • Organize trade-secret training sessions for all employees.
  • Don't delay in filing a lawsuit. If you do, your information will become less valuable and your case will become weaker.

Resources

Article by attorney in IBM Corp. v. Seagate Technology Inc. and Peter Bonyhard: http://www.law.com/professionals/iplaw.html

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