:Information Law and Policy Spring 10

These readings came at an apt time, just as iSchoolers are no doubt poring over arcane clauses in summer job or internship contracts. Well, wonder and worry no longer about what your brief employments will mean for your moving on to bigger and better positions in 2011.

Two of the three cases on this slate dealt with what kinds of limitations can and cannot be assumed to be in effect, or explicitly imposed, by an employer in the case of an employee who later moves on to a potential or current competitor. The balance of interests were moved towards the employee, while it was made clear that employers must make explicit covenants in their employment contracts, from the outset of hiring, that set expected limits on future competitive work.

The third case dealt was the few judicial rulings to date on Free and Open Source Software (FOSS) – an area that, if the Noise list is anything to go by, is of great interest to iSchoolers.

In Wexler v. Greenberg, the Pennsylvania Supreme Court determined that, basically, an employer cannot restrict retroactively where a former employee can work and in what capacity, at least on the foundation of trade secrets.

For something (a process, a product, research, the formula for your red-and-white-logo cola) to be in legal terms a trade secret, it must meet two conditions. First, it must be private information that is financially beneficial information and that benefit depends that others do not know it also. Second, it must be demonstrable that the owner of a trade secret has made reasonable efforts to keep this information secret. (Trade secret laws can vary slightly from state to state, but they follow this general structure.)

In this case, the issue is whether Greenberg, a former employee of Wexler’s company Buckingham Wax Co. (BWC), illegally disclosed BWC’s trade secrets when he moved to a new employer, Brite Products Co. (BPC).

Greenberg served as BWC’s chief chemist starting in 1949; his duties were split between reverse engineering competitors’ products in order to develop BWC’s versions of them, and working with chemical sourcers. It’s interesting to note that from 1952 to 1956, BPC and its predecessor company bought mostly, and sometimes exclusively, from BWC, to repackage and resell BWC’s cleaning products to industrial customers, under the Brite label.

In 1957, BPC hired Greenberg away, in order to do exactly what he’d done at BWC. As a result, BPC stopped buying from BWC, but began manufacturing their own products. These were, ironically, reverse engineered versions of BWC’s products.

The initial decision by a lower court found that the formulas for BWC products were trade secrets and that Greenberg had appropriated them, in the sense that he took to BPC the knowledge he had gained in working at BWC. The court also said that this appropriation was in violation of “the duty” the Greenberg owed to that company “by virtue of his employment.”

Greenberg appealed to the PA Supreme Court. The case law it examined included Fralich v. Despar (1894), which stated that an ex-employer was protected “provided… enforceable covenant so restricting his use” of a trade secret and Pittsbugh Cut Wire Co. v. Sufrin (1944), which found similar if the ex-employee had been “bound to secrecy” by a “confidential relationship”.

However, the court stated that all aptitude, skill, ability, and the like, were “subjective knowledge”. And that an employee, or ex-employee, can use and grow these capabilities “unless curtailed through some restrictive covenant”.

As a result, the ex-employer has the burden to show first that there is a legally protectable trade secret, and that there is a “legal basis” (such as a specific covenant, or a confidentiality agreement) “upon which to predicate itself”.

But in the case of Greenberg, there was no such thing: “At no time during Greenberg’s employment with BWC did there exist between them a written or oral contract of employment or any restrictive agreement.”

The court also took up the issue of whether the fact of an employment relationship can be enough to serve as such a restrcition.

In doing so, the court had to balance protecting companies from unfair competition (when an employee absconds to another company, secrets in hand) versus the individual pursuit of meaningful work.

The PA Supreme Court decided that past law weighs toward the individual – even when a covenant exists, courts can scrutinize it for reasonableness (see Morgan’s Home Equipment v. Martucci (1957)).

The court found that there was no violation of trust or a confidential relationship, since BWC had never included any explicit restrictions in Greenberg’s contract, and that Greenberg’s work was not guided specifically by the company, nor technically “experimentation or research” but “fruit’s of Greenberg’s own skill as a chemist”. This meant that his work was not a trade secret, but his own expertise.

In the more general case, the court stated that “ownership of a trade secret… does not give the owner a monopoly on its use” but instead “merely a proprietary right” against unfair means. And the trade secret must be pre-existing.

The relevance today is, seen cynically, all the non-compete and non-disclosure clauses in the employment contracts you’re sure to see soon, if not already. More ideally, this means that it is difficult for a former employer to come after you if you take to your new job all your skills, even if you learned some of them under their employ.

Recent high-profile trade secret laws include Apple v. Does (http://www.eweek.com/c/a/Apple/Court-Hears-Final-Arguments-in-Apple-Trade-Secret-Suit/ ) and Apple v. DePlume (http://www.eweek.com/c/a/Apple/Rumor-Site-Gains-Lawyer-in-Defense-Against-Apple/). Both involved the publication of what Apple claimed were trade secrets – unreleased product info – and both illustrated features of the CA Uniform Trade Secrets Act (CA UTSA).

The case of Whyte v. Schlage was all about the concept of “inevitable disclosure” – that is, whether you will “inevitably” rely on trade secret knowledge should you take a similar position at a new employer. That is, will your new bosses at Gimbel’s learn all about the trade secrets you absorbed when at Macy’s?

The answer is no – this was the first published case in California that dealt with this issue, and the court rejected it.

Whyte was Schlage’s vice president of sales when he was presented with a “what would it take?” offer from Kwikset, another manufacturer of locks. He accepted this dream deal on 3 June… but didn’t resign his old position until 11 days later, after a big and confidential meeting with a client both companies coveted on 5 June.

Schlage felt that Whyte was taking with his certain trade secrets, such as product line information, customer and wholesale pricing, promotions, and other things such as technical information about product manufacture (which the appeals court later termed a “quintessential trade secret”). Whyte had signed a confidentiality agreement with Schlage, but he maintained that the above were “broad” categories of business information. The trial court in the initial case of Schlage suing Whyte (what we’re talking about here is the appeal) agreed that none of these were trade secrets. The Appeals Court said “some” were, but left that finding up to the later trial.

The larger issue of inevitable disclosure has its history in the Seventh Circuit Court of Appeals case PepsiCo v. Redmond (1995). There, the court said the Illinois Trade Secrets Act (based on the general UTSA) supported a district court’s injunction of William Redmond – ex-general sales manager for Pepsi – against taking a comparable position with Quaker Oats (both companies were hotly fighting over sports drinks at the time, an area Redmond worked in).

There was no doubt Redmond has knowledge of some or many of Pepsi’s trade secrets in this area – formulation, marketing strategies, and so on. The court had to manage the tussle (to coin a term) between the employee’s ability to move jobs against protection of a company’s trade secrets. In this case, both the IL court and the Circuit Court fell on the side of the inevitable disclosure doctrine: “unless Redmond possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about [Quaker’s products] by relying on his knowledge of [Pepsi’s] trade secrets”.

The Whyte V. Schlage court noticed state and federal decisions that seemed to support this, as well as noting Whyte’s “lack of forthrightness”. But in its decision, the court wrote that “decisions rejecting the inevitable disclosure doctrine correctly balance competing public policies of employee mobility and protection of trade secrets. The inevitable disclosure doctrine permits an employer to enjoin the former employee without proof of the employee’s actual or threatened use of trade secrets based upon an inference (based in turn upon circumstantial evidence) that the employee will use his or her knowledge of those trade secrets in the new employment.”

The court also noted that this “injunction restricting employment” was effectively a retroactive non-compete clause, and said that the CA Business and Professions Code Section 16600 generally prohibits non-competes.

California law also protects trade secrets, though – tussle! But the court said that Section 16600 doesn’t invalidate employers including a “don’t solicit former customers” clause in the initial employment contract; this would satisfy Section 16600 as well as protect employers who worry about unfair competition from former employees. Without this clause in a contract, inevitable disclosure doctrines rewrite the employment contract without the employee’s consent.

It’s important to keep in mind that there can be a slim distinction between “inevitable” and “threatened” disclosure; companies can worry about employees going off to competitors, and seek relief under the U.S. USTA.

When facing contracts, be sure to know that employers must identify and protect trade secrets from the outset when you face them. And they must, if worried, have hard evidence of misappropriation of a trade secret. They cannot act upon assumptions that you will behave badly.

An interesting take on the whole thing is at http://venturebeat.com/2006/11/16/how-to-leave-a-company-and-not-get-sued/

The Jacobsen v. Katzer case (which was settled just two months ago PDF here: http://www.trainpriority.com/court_docs/404_dismissal.pdf) addressed the issue of whether a FOSS license such as the GPL or, in this case, the Artistic License, can be enforced. That’s presenting it a bit strongly, but previous to this decision by the Appeals Court, the issue had never been pressed, and the District Court ruling, which this decision vacated and remanded, had relegated the question of the Artistic License to contract law, not copyright law. If this had stood, those putting out products under any FOSS license would have as their only tool a breach of contract claim – which would be problematic with free products.

Jacobsen was a model train enthusiast, when he wasn’t a high-energy physicist at the Lawrence Berkeley Lab. He and some collaborators concocted an open-source set of Java tools (the Java Model Railroad Interface, or JMRI) for controlling their trains. They posted the tools, and their subsequent open-source Decoder Pro application, to the Sourceforge.net web site, labeling it free under the terms of the amusingly named Artistic License (AL).

This license, like the better-known GPL and BSD licenses, allow anyone to download, copy, and use the relevant applications and code. (According to gnu.org, the AL 2.0 is compatible with GPL through its licensing options.) Downloaders can even modify the code and reuse it for their own purposes and/or products. What the AL states is that this use of the copyrighted material is allowed as long as the user is sure to “duplicate all of the original copyright notices and associated disclaimers” (Section 1).

In addition, Section 3 makes specific requirements, and is worth quoting in full:

“3. You may otherwise modify your copy of this Package in any way, provided that you insert a prominent notice in each changed file stating how and when you changed that file, and provided that you do at least ONE of the following:
a) place your modifications in the Public Domain or otherwise make them Freely Available, such as by posting said modifications to Usenet or an equivalent medium, or placing the modifications on a major archive site such as uunet.uu.net, or by allowing the Copyright Holder to include your modifications in the Standard Version of the Package.
b) use the modified Package only within your corporation or organization.
c) rename any non-standard executables so the names do not conflict with standard executables, which must also be provided, and provide a separate manual page for each non-standard executable that clearly documents how it differs from the Standard Version.
d) make other distribution arrangements with the Copyright Holder.”

In 2005, Jacobsen received a set of notices and bills for licensing fees from Katzer (who owns KAMIND Associates, doing business as KAM Industries). Katzer claimed that code in JMRI infringed on a patent owned by KAM, which produced and marketed a commercial model train product called Decoder Commander. The bill was for $203,000.

Jacobsen originally filed the first suit in this saga, claiming in response that the patent was fraudulently obtained – and therefore, invalid. The source of the fraud was that Katzer’s product copied some JMRI and Decoder Pro files and used them without complying with the terms of the AL. He requested a preliminary injunction against KAM.

His claims were not that Decoder Commander contained the files. This was allowed under the AL. The problem was the violation of explicit terms of the AL; the Decoder Commander software did not include the original authors’ names; the JMRI copyright notices; and references to a COPYING file, as required by the JMRI copyright notices; the identification of Sourceforge or JMRI as the original source of the code; and a description of the changes made to the original files.

Katzer, in turn, stated that the files in question did not show sufficient originality (a topic we discussed earlier this semester) for copyright protection, since they consisted of variables JMRI members transcribed from model train reference materials. But JMRI team members demonstrated to the court that the process of selecting, arranging, and so on, of these variables met the “low threshold” required for originality.

However, though the question of copyright and ownership was settled, the District Court decided that the AL was “intentionally broad” and non-exclusive. In general, a copyright owner waives the right to sue for infringement if using a non-exclusive licence; a license needs to be “limited in scope”. As a result, the court said, the AL didn’t create liability for copyright infringement. Therefore, the court denied Jacobsen’s request for a preliminary injunction, stating that the question was one of breach of contract, not copyright infringement.

(A note on these injunctions: They are very strong once in place, and are reversible only if shown that they have a probability of success on their merits and that there is a possibility of irreparable harm, OR there is a serious question of merit where hardships are more on the moving party.)

However, the Appeals Court saw it differently. It called the “heart of the argument” whether the terms of the AL are conditions of the copyright license agreement, or “merely covenants to” it, at the District Court said. I admit to some confusion over the precise legal definition of “covenant” in this context, but the upshot is that if the AL consisted of those only, it would be relegated to contract law; if the terms can be called “conditions” instead, these are the bases for copyright claims.

The Appeals Court noticed that the AL actually used the terms “condition” a number of times when defining its terms. In addition to this textual analysis, the court said that these “conditions are vital to enable the copyright holder to retain the ability to benefit from the work of downstream users” – that is, for Jacobsen to see how people have “joined in” and built upon, fixed bugs in, or otherwise contributed to his original work.

A phrase from the decision that should be noted by all potential FOSS developers: “These restrictions [in the AL] were both clear and necessary to accomplish the objectives of the open source licensing collaboration, including economic benefit.” That is, both free (as in beer) and free (for-profit but open) projects can enforce terms of a non-exclusive contract like the AL or GPL or BSD, and under copyright law – including seeking preliminary injunctions against those who violate these terms.

Comments Off on Copyrights and Patents and Trade Secrets and Non-Competes