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The Morton Memo - April 2014

This month we have two interesting articles written by firm attorneys Eric Morton and Caron Woodward. Eric's article discusses the complex nature of confidentiality agreements while Caron's explores the trend away from big firms towards smaller more efficient firms.

The Morton Memo is for you, so kindly email us those topics of interst to you.

>> Is Your Confidentiality Agreement Really Enforceable    

>> The Trend Favoring Smaller Boutique Firms Instead of Traditional Big Firms

 

Is Your confidentiality agreement really enforceable

By Eric D. Morton, Attorney

Data Lock

Businesses frequently try to protect their intangible property, such as written materials, customer lists and information, and other sensitive information, by having their employees and contractors sign non-disclosure and confidentiality agreement. And for good reason. I recommend that my clients have such agreements in place with their employees, contractors, and business partners.

Just because you have a confidentiality agreement with employees—even a lengthy and detailed agreement—doesn’t mean you can prevent employees from competing with you when their employment ends. In fact, for most California employers with a typical confidentiality agreement, there is little you can do to protect information that is not a true trade secret.

What most employers and attorneys do not know is that these written documents are for the most part useless in preventing an employee from leaving a business and starting up a competing business – even where the former employee uses information or know-how acquired from the former employer. In California, employees have a right to make preparations to start a competing business while employed. Furthermore, unless an employee actually damages the employer during his employment, he can use much of the information he acquired on the job.

There are several laws in California that can be used to either (a) void an overly broad confidentiality agreement; or (b) preempt the subject matter of the confidentiality agreement. In both cases, this could make the confidentiality agreement unenforceable.

In attempting to enforce a confidentiality agreement, many business owners and attorneys overlook the fact that California Business and Professions Code Section 16600, which prohibits non-compete agreements, has a much broader reach. The statute provides that “… every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Because the statute encompasses any contract that puts restraints on a person’s ability to engage in his or her occupation, its scope is not strictly limited to non-compete agreements, per se. Confidentiality agreements that are signed by employees are often very broad as to what an employee can’t use on leaving. The problems with these agreements are that they restrain the employee from working.

For instance, a typical confidentiality agreement might state that the employee may not ever use any procedures, operating procedures, methods of operation, manuals, trade secrets, systems, customer lists, pricing policies, technological know-how, techniques, ideas, processes, programs or other things of value developed by the employee while employed. The problem with this language is that it means that the employee can’t use what the employee learns while employed – and that is a restraint on the employee’s ability to work in another job. California courts have held that confidentiality agreements with such terms are void.

Employers may also try to enforce confidentiality agreements on the grounds that an employee took confidential information. However, in order to successfully sue an employee for taking information, the employer must prove that the information taken was not just “confidential” but a trade secret.

California’s Uniform Trade Secrets Act (“UTSA”) provides the means for suing for the theft of trade secrets. This statute is a very powerful law. The owner of a trade secret can receive compensatory damages, punitive damages, injunctions to prevent further use of stolen trade secrets, and attorney’s fees. However, the trade secret owner must first prove that it actually owns a trade secret as defined by the statute.

The UTSA defines a trade secret as information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

This can be a difficult standard to meet. For instance, it must not be known to the general public but also to persons in the same industry and the trade secret must be subject to reasonable efforts to maintain its secrecy. So, if the information is known by several persons outside a company or no effort is made to identify and restrict access to the information within a company, then it is not a trade secret.

And, an employer can’t sue for the use of so-called confidential information or for breach of a confidentiality agreement based on the use company information unless such information is truly a trade secret because the UTSA pre-empts other causes of action based on the use of such information.

Often an employee will take written information, artwork or other content with the employee and use it in a competing business. The employer may think it has a great case since the employee’s actions are direct and obvious. The employer might try to sue for conversion (civil theft) or breach of a confidentiality agreement prohibiting the use of such materials.

However, the owner of an intangible can’t sue for conversion for the theft of an intangible. Conversion can only be used for the theft of tangible property. For intangible property, the owner must sue under specialized statutes such as trade secret law.

In the case of written materials, artwork, website designs and the like, the owner must sue under the U.S. Copyright Act. The U.S. Copyright Act covers the rights of the owners of written works, art works, computer software, photographs, web designs and the like.

There are two important things to know about enforcing copyrights. 1) the owner must have a registration from the Copyright Office in order to bring a lawsuit for copyright infringement, and 2) copyright law preempts all other laws regarding or touching on copyrights. So, if an employee walks out with written materials and the employer has not registered the copyrights for those materials, then the employer has a very weak case. This is true even if the taking of the materials is a breach of a confidentiality agreement because the employer is really just enforcing its ownership rights and the courts can throw out a state court case for breach of contract.

So, what can a business do to protect itself?

A. Protect its trade secrets. An agreement itself will not protect trade secrets. The employer must first:

  1. Identify its trade secrets – and make sure that they are truly trade secrets.
  2. Label the trade secrets as such. Literally, make files and digital data as "trade secret".
  3. Limit access to trade secrets should only be accessed by persons who need such access and have signed enforceable agreements.
  4. Identify trade secrets in non-disclosure agreements as trade secrets and have those NDAs signed by employees who have access to them.

B. Register copyrights.  If a business has original works of art, written materials, designs, software, etc. it should register those works with the Copyright Office.  Copyright law is very strong.  A good copyright case can destroy an infringer but the registrations must be in place first. Make sure that work done by contractors is a “work for hire”.

C. Ensure that all confidentiality agreements and non-disclosure agreements are enforceable under California law and tailored to the business using them.  Ask a knowledgeable attorney to review or draft those agreements.  My firm recently persuaded a San Diego judge to throw out a confidentiality agreement that had been drafted by the legal counsel of a large, national corporation because those attorneys weren’t aware of the principles discussed above.  What chance does an entrepreneur have with something from an online legal form service like LegalZoom?

The business world is a more complicated now than in the past with the Internet and the ease in which businesses can be started.  Given that the laws protecting intellectual property are complex, business owners must be willing to look beyond their forms of agreements in order to truly protect their proprietary interests.

Eric Morton is an attorney with the firm, and he can be reached at emorton@ericmortonlaw.com. His direct number is (760) 722-6582.

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 IP circle

the trend favoring smaller boutique firms instead of traditional big firms

By Caron Woodward, Attorney

      "The larger the firm, the higher the cost," says Don H. Liu, general counsel for Xerox Corp. This is a sentiment that has been influencing the way that litigants choose their lawyers. Since the economic downturn in 2008, corporations and individuals alike have re-evaluated the traditional "Big Firm" mentality, and are getting behind the fact that, in the words of Liu, "Big law firms don't have a monopoly on talent." In fact, there are definite and powerful advantages to a smaller-firm approach.

In recent times, law firms have downsized considerably, leaving talented and ambitious attorneys to seek jobs with smaller firms, who offer less in salary but more in flexibility and opportunity. Working with a non-traditional, innovative firm allows attorneys to expedite professional growth, apply creative solutions, and maintain a flexible schedule. AdvanceLaw, a company that helps screen attorneys for companies like Panasonic and Google, reports that clients are more likely to hire these attorneys than sticking with the traditional Big Firm costs and practices. This shift is most dramatic with litigation matters, an area that traditionally was dominated by larger firms. Our firm recently represented the defendant in a high-dollar litigation matter, where the plaintiff was represented by a larger, more traditional law firm. Our approaches to the case were quite different, and in the end, our client was able to walk away victorious, having gotten the best of both worlds: hard-working and creative attorneys who were familiar with every detail of the case and focused on the winning angles of the law, at a cost that didn't break the bank. In fact, the client felt that her victory was twofold, because she felt that she had triumphed against "bullies" who viewed the ability to outspend our client as one of their greatest assets. Our firm disagreed, and fought to make sure our client was on equal footing with the big guys.

This is how smaller, innovative firms like ours are taking the legal world by force:

Efficiency

Unlike the larger law firms, in-house legal teams do not outsource tasks such as reviewing client documents, summarizing depositions, or preparing for trial. Having your attorneys and paralegals focus on each aspect of the case in this way ensures that your attorney is going to be familiar with every detail of your case. This efficient business model saves time and costs by eliminating redundancy in work product. While Big Firms stick to the tried-and-true ways of operating, newer, smaller firms are open to trying new things. New technologies, new billing methods, streamlined databases and document management allow attorneys and staff to remain agile while they focus on substantive work instead of case management.

Attention

Smaller firms offer direct access to the attorneys working on your case, so your concerns can be addressed and handled quickly. Lawyers in this less-traditional environment can meet clients in the evenings and on weekends, and answer emails anytime from a Smartphone. In a poll by AdvanceLaw, nearly 60% of respondents said that the lawyers at the bigger, elite law firms were less attentive to their concerns than other law firms. One respondent wrote, "Sometimes they are responsive, but in ways that end up being breathtakingly expensive." Which leads us to....

Cost

According to a recent study by LexisNexis, partners at bigger law firms in New York charge anywhere from $700 to $1,000 per hour, with the average U.S. law firm partner billing $381 per hour, with a 2-3 percent increase each year. Smaller firms can often bill at half those rates. By lowering overhead through smart use of office space and efficient use of technology, small firms can then pass those savings on to their clients.

Litigation can be one of the biggest challenges many of our clients face. It is critical to head into that kind of battle knowing that you have an attorney who is just as invested as you are in the process. An attorney who will do the research, formulate the arguments, and know every detail of the case. An attorney who will charge you a fair price, and will stand up to the bullies until the end to get you what you deserve.

Caron Woodward is an attorney with the firm, and she can be reached at cwoodward@ericmortonlaw.com. Her direct number is (760) 722-6582.

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