BRR’s 50 State Noncompete Chart UPDATED

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BRR 50 State Noncompete Chart 20130814The BRR 50 State Noncompete Chart has been updated to reflect various changes in statutory or case law, as well as clarifications of existing laws. Click here to get the latest version.

Fairly Competing – A New Podcast

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FairComp LogoI am thrilled to announce that I have been given the opportunity to work with two of my favorite (though far more prolific) bloggers, Ken Vanko and John Marsh, to create a brand new podcast: Fairly Competing, a Competition Law Podcast. It is among the first podcasts devoted to trade secrets, restrictive covenants (noncompetes), and related unfair competition laws.

We have recorded two episodes so far, and will be recording our third soon. We hope to record one every two weeks or so. They will generally last about 20-25 minutes, after the first episode (which was about 40 minutes). The will be available to listen to through the three speakers’ blogs, on iTunes, and on Fairly Competing.

The first episode is an examination of a few of the most significant trade secrets/noncompete/unfair competition developments in 2012 (sort of an abbreviated year in review).

For anyone interested in a more detailed review of the trade secrets developments in 2012, I have provided here my (quite lengthy) materials for the trade secrets portion of this year’s Boston Bar Association’s annual IP Law Year in Review CLE. In addition, both Ken Vanko (here) and John Marsh (starting here) have excellent posts covering similar issues.

The second episode covers the recent prosecution of internet activist and Reddit founder, Aaron Swartz, under the Computer Fraud and Abuse Act (CFAA). We discuss the forces that shaped this tragic case, consider whether changes to the CFAA are needed, and debate whether Silicon Valley Congresswoman Zoe Lofgren’s proposed amendment to the CFAA goes far enough.

The third episode will cover recent and proposed noncompete legislation around the country.

To subscribe to our podcast on iTune, click here.

We hope you will listen and enjoy them as much as we do!

Unfair Competition Basics… Boundless Noncompete Restrictions

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With some exceptions (most notably California, Oklahoma, and North Dakota) properly-drafted, properly-executed employee noncompete agreements are generally enforceable around the country, as long as, based on the attendant facts, they satisfy the applicable standards. Most often the standards require that the agreement be limited in time (duration of the restriction), space (geographic reach), and scope of restricted activities (although scope is frequently not expressly stated as a part of the test).

So, what happens when a noncompete is not self-limiting geographically?

In states that follow a red-pencil/all-or-nothing approach or blue-pencil approach, the answer is easy: The noncompete will almost certainly fail. (Few rules are absolute in the world of noncometes, however, and this is no different; for example, in some states, if the agreement is limited to specified customers, the need for a geographic restriction may be obviated.)

In states that follow the reformation approach (even when they mistakenly refer to it as “blue penciling”), the question is more difficult. In those states, in theory at least, courts have the ability to, essentially, rewrite the agreement to fit it within the particular state’s rules. And, this is just what the Kentucky Court of Appeals said in a recent case, Charles T. Creech Inc. v. Brown. (The court also has an excellent discussion of Kentucky noncompete law in general.)

In that case, the court remanded the matter back to the trial court to consider the various factors under Kentucky noncompete law. So, we don’t know what the end result will be.

The takeaway, however, is that whether enforcing or defending in a reformation state, you should not assume that absence of a stated geographic limitation – or any of the requirements of the applicable test, for that matter – will be fatal to the enforceability of the agreement. (For which states are reformation states, see our 50-State Noncompete Chart.)

IP Law in 60 Seconds

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There are basically four types of intellectual property: patents, copyrights, trademarks, and trade secrets.

Here is a very brief summary of each:

A patent is the right “to exclude others from making, using, offering for sale, or selling the invention throughout the [particular country by which the patent is granted] or importing the invention into [that country]” for a limited time in exchange for public disclosure of the invention when the patent is granted. See United States Patent and Trademark Office. The purpose of this power is to promote the public disclosure of inventions, and consequently, the advancement of science. There are different types of patents, but most often people think of patents as protecting a physical invention, such as the motorized ice cream cone (in the above image).

A copyright is the right to prevent others for a limited time from reproducing, publicly performing, publicly displaying, distributing, and making “derivative works” (i.e., a work based on an existing work) of “original works of authorship fixed in a tangible medium of expression . . . including, literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed.” See United States Copyright Office FAQs. Although copyrights exist from the moment the work is fixed in a tangible medium, registration provides additional protections, most notably, the possibility of “statutory damages” (a way to obtain damages without proof of actual loss) and attorneys’ fees. This blog post is an example of something that is copyrighted, as is the photograph above.

A trademark is any word, symbol, or combination of words and symbols used to identify the source of goods or products in commerce (read, “your brand”). See Mark My Words . . . Trademark Basics. Trademark law (the Lanham Act, as well as state laws) protects trademarks – whether they are registered or not (registration provides additional protections) – so that consumers are free from confusion about what they are buying. As a federal judge, quoting Neil Young’s “Hey, Hey, My, My” once described trademark law, “You pay for this but they give you that.” In short, trademark law prevents anyone from using any word, symbol, or combination of words and symbols, that is confusingly similar to someone else’s trademark. For that reason, trademarks can last forever. Example of trademarks are Ebay’s logo (above) and the Coca Cola logo (see the can below).

A trade secret is any information with commercial or economic value that is not widely known and is kept secret. It can be virtually any type of information, including customer lists, business strategies, technical data, computer programs, and other things, and can last forever. See Terms of Art . . . What is a Trade Secret? Given that trade secrets must be confidential, they are not registered anywhere. The classic example is the secret formula to Coca Cola.

Unfair Competition Basics: Forfeiture-for-Competition

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While most people think of noncompete agreements as the traditional, “you can’t work there” type, there is another type of agreement that can create financial incentives so great that, as a practical matter, they have substantially the same effect. They are known as forfeiture-for-competition agreements.

Typically, forfeiture-for-competition agreements impose a penalty for working for a competitor, generally, the forfeiture of the restricted party’s unvested benefits, such as severance pay or stock options or unvested stock. In a variant on the theme (called a “compensation-for-competition” clause), the penalty for working for a competitor would be an obligation to pay money, typically tied to the competitive activities. For example, the restricted party might be required to disgorge some or all – or even some multiple – of the profits or revenues derived from any competitive activities.

Although the specifics of the source of the payment vary between these two types of clauses, they are conceptually the same: a financial penalty for engaging in competitive activities.

Typically, forfeiture-for-competition clauses are subject to the standard noncompete analysis (i.e., reasonable in time, space, and scope, and necessary to protect a legitimate business interest – or whatever variation on the theme may exist in the particular state). That said, forfeiture-for-competition clauses are generally afforded somewhat more latitude than noncompetition agreements, primarily because they don’t (as a matter of law) prohibit someone from working in whatever job they wish; rather, they only impose a cost for doing so.

Even if enforceable, however, a court may still modify a forfeiture-for-competition agreement (assuming the particular state permits modification of restrictive covenants), including in the amount of the forfeiture, so as to render it reasonable.

Unfair Competition Basics: Who Wants to Live Forever? Patents vs. Trade Secrets

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Pfizer reportedly sold $11.4 billion – yes, billion with a “b” – of cholesterol-lowing drug, Lipitor, last year and is reportedly on track to sell another $13 billion this year. See here.

So, what’s the problem? The problem is that Pfizer’s exclusive right to manufacture and sell Lipitor derives from a patent, and patents that cover products such as Lipitor have a life span, i.e., a limited period during which they give their owner exclusive rights in the patented product. For most products in the United States, that lifespan is 20 years. And, the patent on Lipitor is reportedly expiring next year.

So, what happens when patents expire? The patent holder loses the right to exclusive control of the product.

What if Lipitor had been protected as a trade secret, instead of as a patent? Answer: assuming (very big assumption!) that Lipitor could not have been reverse engineered, Pfizer could have maintained its exclusive rights indefinitely.

Could that really have happened? No – someone would have reverse engineered Lipitor.

But, trade secret protection is a very real way to protect other things. For example, the secret formula to Coca-Cola, which has been protected as a trade secret for more than a century. Although the lore of the heroic protection measures taken to protect the secret formula is just an urban legend (see Urban (Trade Secret) Legends Debunked), Coca-Cola, like many other companies (e.g., KFC), have managed to keep their secret recipes – and many other types of information – protected as trade secrets.

Imagine if Coca-Cola had been patented, rather than protected as a trade secret.

In the end, which is the better protection for a particular product is a complicated analysis that must be given serious consideration before embarking on either course.

Of course, the real issue raised by this post is:  Why did I choose that picture?!

 

Unfair Competition Basics: Terms of Art … What is a Trade Secret?

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There is an endless variety of types of trade secrets and confidential information. (On the question of the significance of the distinction, see Trade Secret or Confidential Information?, posted on June 4, 2010.)  At their core, trade secrets and confidential information are any secret information.  They may include customer and vendor information, products, product development, business strategy, financial information, customer or employee lists, technical data, design, pattern, formula, computer program, source code, object code, algorithm, subroutine, manual, product, specification, or plan for a new, revised or existing product, or any business plan, marketing, financial or sales order, or the present and future business or products.

On the other side of the equation, trade secrets do not include information or methods generally known within an industry. Thus, general concepts, combined with an employee’s talent, are not trade secrets – although public information acquired through extensive effort and not generally known without such efforts, can be a trade secret.  

Certain specific types of information have received particularized treatment, and are therefore worth highlighting. They are as follows:

Customer Lists/Information:  Customer lists can, but will not always, constitute protectable confidential information. While a naked customer list is not likely to be protected in the absence of special circumstances, the more information about the customers that is included in the list, the more likely it will be protected, provided that such information is maintained in confidence.  

Financial/Business Information:  General business information and routine data are not normally protectible, although specific information can be.

Software:  While software may be subject to other protections (copyright, in particular), it may also be protected as a trade secret.

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