Austin Technology Law Blog : Texas Technology Lawyers & Attorneys for Copyright, Trademarks & Software Licensing in Houston, Dallas & Austin TX

Delaware courts have long been known for rendering cutting edge opinions, particularly in the area of corporate law.  The Superior Court of Delaware has now given approval for the expansion of the tort of tortious interference with a contract right.

In Allen Family Foods, Inc. v. Capital Carbonic Corporation, C.A. No. N10C-10-313 JRS CCLD, decided March 31, 2011, the Superior Court of Delaware, for the first time in Delaware, recognized an action arising under Section 766A of the Restatement (Second) of Torts.  Section 766A states in pertinent part: “One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person, by preventing the other from performing the contract or causing his performance to be more expensive or burdensome, is subject to liability to the other for the pecuniary loss resulting to him.”

Heretofore, only the other parts of Section 766 of the Restatement had been a basis for actions.  Those were the portions that stated that an intentional and improper interference with a third party, which caused such third party to breach an agreement, was a basis for an action. 

In the instant case, Allen Family Foods had a requirements contract with Capital Carbonic Corporation that stated that Capital Carbonic would supply Allen with all the dry ice Allen needed.  Supposedly, Allen thought the agreement with Capital Carbonic had expired and entered into a new agreement with Praxair for the same thing.  Capital Carbonic's attorneys sent a hotly worded letter to Praxair accusing Praxair of tortiously interfering with the contract between Capital Carbonic and Allen.  As a result of the letter, Allen ceased doing business with Praxair and re-upped its agreement with Capital Carbonic.  Allen then sued Capital Carbonic for tortious interference with its agreement with Praxair.  There was no indication in the opinion about how bad customer service got after the filing of the lawsuit.

Capital Carbonic responded that a cause of action did not exist when the alleged interference was just with the plaintiff and it merely caused the performance of an agreement with a third party to be more expensive or more burdensome.  Capital Carbonic pointed to a federal court case that stated that such court believed that an action under Section 766A would be rejected by a Delaware court because of its "...inherently speculative..." nature.

The Delaware court acknowledged that Delaware already recognized claims under "...Section 766 (tortious interference with a third party’s performance of a contract) and Section 766B (tortious interference with prospective contractual relations)".  The Court went on to say that not all 766A claims would be totally speculative and that courts dealt with speculative claims all the time anyway.  The Court reasoned that it made no sense to allow third parties to interfere in this manner without sanction, while recognizing that they could not interfere with other parts of the transaction. "The Court can think of no rational basis to encourage behavior which would be tantamount to targeted tortious interference."

Having found that a cause of action could rise under Section 766A, the Court then found that the plaintiff had not properly pled such an action and dismissed that portion of the claim.

So, look for this to be a new arrow in the quiver for plaintiffs to plead in contract interference cases.  To observe how courts across the nation deal with this and measure the damages that might accrue will be very interesting.  Stay tuned.

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While not strictly technology related, this matter has some interest among professionals and could certainly have some impact on consulting firms in the technology arena.

Doctors, lawyers, accountants and others form limited liability companies (LLCs) under various state laws to conduct their practices.  In New Jersey, the Superior Court was called upon to determine whether the clients of a LLC belong to the LLC or to the individual members.  Gaines v. Luongo,  Superior Court of New Jersey, Docket No. A-3600-09T3, Unpublished Opinion, March 25, 2011.   

An accounting firm was organized as an LLC and one member was given a 70% ownership but the two members equally shared income and losses.  Shortly after the formation of the LLC, the fun went out of the relationship and the minority member sued under the oppressed minority shareholder rules of the New Jersey corporate code.  Part of the complaint alleged that the value of the clients of the firm should be considered when determining the pay out under the dissolution.  The Court held that the the "...Partnership's clients were never carried on [the] books as an asset; no value was ever assigned to them on the Company's balance sheets; and they were free to stay in business with either partner or neither."  Therefore, the value of the goodwill ascribed to each client belonged to the individual members and would not be considered in the dissolution.

So, unless otherwise stated in the Operating Agreement or otherwise on the books of the LLC, a client's value is not the property of the LLC.

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We hold these truths to be self evident: (i) Patent rights originally vest in the inventor even if the patent was conceived in the course of employment; (ii) Most companies get assignments from their employees as to patent rights; (iii) All property obtained during marriage is presumptively community property in community property states (e.g. California and Texas); (iv) divorces can be nasty.

So, what happens if an inventor works for a company, creates a patentable invention while married, signs the standard assignment of intellectual property and the spouse does not sign the assignment.  Is that an effective assignment?

Or, what happens if an inventor develops a patentable invention, gets a divorce in which the ownership of such patent is not mentioned, then assigns the patent, the assignee then brings suit on the patent and the defendant moves to dismiss the complaint because the ex-spouse is a necessary party and was not named in the suit?

Who gives a damn?  Well, the U.S. Court of Appeals for the Federal Circuit has to decide this issue in Enovsys LLC v. Nextel et al.  In this case Nextel was sued for infringement of some GPS patents that Enovsys obtained from an inventor after his divorce.  The inventor and the spouse got a "quickie" divorce in California in which they marked a box on the divorce form that said they did not possess any community property.  The Court of Appeals thought that this was enough to vest all ownership in Enovsys and preserve their standing to sue.

Although the Court skirted the issue (no sexism implied) in this case, the issue remains as to the status of patents obtained during marriage and the proper way to assign them.  California and Texas are community property states and both states recognize that property obtained during a marriage is presumptively community property.  The Court of Appeals in Enovsys confirmed that federal patent law does not preempt state law in regard to property ownership.  The Texas Court of Appeals has said (in dicta) that "It is unquestionable that, had these patents been taken out during the marriage, the patents and the income they generated would be community property. In this, we would join other jurisdictions in which the courts treat the income from intellectual property created during marriage as marital or community property."  Alzenz v. Alsenz 101 S.W.3d 648 (2003)

Then, is it possible that a spouse or ex-spouse in a community property state has an interest in your patent portfolio?  Must you get the spouse to sign the assignment of intellectual property rights that resides in your standard forms that companies get all employees to sign?  Must you update that if an unmarried inventor gets married?  Seems like a lot of trouble, doesn't it?  Good practice may indicate that you do so, but the dearth of cases that revolve on this issue would seem to indicate that maybe the chances are so slim that it's not worth the trouble. 

What do you think?

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Trade secret law is not nearly as topical and sexy as some of the social media controversies we have been talking about lately, unless you are the one depending on trade secret protection. 

First, a primer: If something has independent value, is not generally known or readily ascertainable by proper means and has been subject to reasonable efforts to maintain its secrecy, it can qualify as a trade secret under Virginia (and most other states) law.  Software, in particular, is generally protected by a combination of copyright, trade secret and sometimes, patent law.  That's the reason that software vendors have to have non-disclosure agreements before they can allow you to review their software and the reason that most software licenses restrict the people and entities to whom you (as licensee) can provide information regarding the software.  That's part of the reasonable efforts to maintain the secrecy element in trade secret law.

The Fourth Circuit recently took up another of the elements, i.e. whether a compilation of publicly known processes combined in a way that is not publicly known or readily ascertainable can qualify for trade secret protection.  In Decision Insights, Inc. v. Sentia Group, Inc., the Court said that matter was already decided in Servo Corporation of America v. General Electric Corp. 393 F.2d 551 (1968) where it was held a trade secret "might consist of several discrete elements, any one of which could have been discovered by study of material available to the public".  In the Decision Insights case, there was testimony that although the contested part of the software was comprised largely of publicly known algorithms, the compilation and some of the methods used to cause the compilation to interact were not publicly known.  The Fourth Circuit thought that this testimony was sufficient to overcome a motion for summary judgment and reversed and remanded for further consideration of this issue and the other issues applicable in a trade secret case.

It is important to note that the Court did not say that the compilation in question was a trade secret but merely that such a compilation could be held to be if all the elements are present. 

This should eliminate (at least in Virginia) contentions that all parts of a formula or process have to be completely secret and unknown in order to qualify as a trade secret.

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Last week we talked about the Ninth Circuit refusing to set aside the Winklevoss/Zuckerberg/Facebook/ConnectU settlement agreement.  Yesterday, the famous twins decided to ignore the part of the opinion that said that now is the time for the litigation to come to an end and filed a Petition For Rehearing En Banc.  This means that they are asking all the judges of the Ninth Circuit to rehear the case rather than the panel that originally heard it. 

From the language of the Petition, the twins seem to take umbrage at some of the snarkier language in the original opinion.  They find issue with: "bested by a competitor", "backing out", "quite favorable", "enough" and allege that "sophistication is no defense".

We can only hope that a rehearing will be granted, if for no other reason than it will give us fodder for several more posts.  Stay tuned.

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You will remember that Apple has applied to the USPTO for registration of the mark "APP STORE".  Dedicated readers of this blog were informed in January that Microsoft was opposing the issuance of such mark for Apple.

Amazon.com is now allegedly using the term "APP STORE" to solicit software developers for future software development and distribution.  Apple is having none of that and has filed suit in the Northern District of California alleging that such use by Amazon.com constitutes trademark infringement and several other heinous sins.  The suit asks for injunctive relief, damages, a constructive trust and attorneys' fees.

It is evident that "APP STORE" has become part of the popular lexicon and if one party is entitled to use it to the exclusion of others, it is a very valuable property.  The holy trinity (Apple, Microsoft and Amazon.com) will continue to duke it out over this issue and the birds will just get angrier.

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We've all seen the movie.  Mark Zuckerberg versus the Winklevoss twins.  Uber-nerd versus uber-jocks.  Outsider versus the privileged and connected.  In the balance rests the right to violate the privacy of virtually everybody in the "civilized" world.

The movie shows some of the discovery proceedings in the lawsuit filed by the Winklevosses in Massachusetts alleging that Zuckerberg stole the Facebook idea.  Zuckerberg filed a countersuit in California (typical Facebook ploy, see here) against the twins and ConnectU, alleging that ConnectU had hacked into Facebook and stolen information and attempted to steal Facebook users by spamming them.  The California dismissed the action against the Winkelvosses, finding that there was no personal jurisdiction over them. The Court then ordered the parties to mediate to attempt to find a settlement to all their issues.

Then things start to get stranger.  With billions of dollars at stake, the parties mediate for one day, reach a settlement and document it with a one and a third pages of hand written notes with the title: "Term Sheet and Settlement Agreement".  This Agreement envisions the transfer of ConnectU to Facebook in exchange for cash and an interest in Facebook.  Facebook lawyers then present 130 pages of documents to flesh out the Agreement (merely 100 times the volume of the Agreement).  The deal then comes off the tracks for a number of reasons including the Winklevosses asserting that the value of the Facebook stock is less that they were lead to believe.  Facebook files a motion to enforce the Agreement.  The twins alleged that the Agreement is not enforceable because it lacks material terms and was procured by fraud.  The Court finds the Agreement enforceable and the Winklevosses appeal.

Then Ninth Circuit, in a decision released yesterday, upheld the enforcement of the Settlement Agreement.  The Winklevosses had alleged that the Agreement violated Rule 10b-5 of the Securities Act and as such was void.  The Ninth Circuit rejected this argument and found: "The Winklevosses are sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world's fastest-growing companies. They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-a-dozen lawyers to the mediation. Howard Winklevoss—father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation—also participated."

The Court also held: "The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion —3.33 times the value the Winklevosses claim they thought Facebook's shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached." (Emphasis added)

So, the poor Winklevoss twins are stuck with a deal that is only worth millions and not billions.  In the lessons learned department, we are struck by the fact that you probably couldn't turn around in the mediation room without tripping on a lawyer or a financial advisor and yet, they ended up with slightly over a page long, hand written document.  That either means you don't need lawyers at all or you really need them to do their job. 

Maybe we'll find the answer in the next sequel, "Social Network III, The Legal Grievance Phase".

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Last week we discussed the very large, very disruptive loss by Epsilon of a number of e-mail addresses and the identities of the companies with whom the e-mail owners did business. 

InfoWorld Tech Watch reports that it appears that the hack relied on the gullibility of Epsilon employees.  So, there was no midnight rappelling from the ceiling through banks of laser beam alarms like you see in the movies, but merely a "social engineering" attack using e-mails targeting Epsilon employees that contained some personal information about the employee and made them think it was from a personal acquaintance. 

The messages included links (bad idea to click links in a message) that took them to a site that downloaded one malware program that disabled the antivirus software, one that logged keystrokes and one that gave hackers remote access to the infected machines.  It also turns out that Epsilon was warned about such attacks several months ago.

In the "lessons learned" department or more appropriately, the "lessons we should already have known" department, it would be prudent for a company with large amounts of customer data (everybody on line?) to train their employees not to respond to personal e-mails at work, recognize the tell tale signs of a social engineering attack and not to click on links in a message the origin of which you do not know.

This is not hard to teach but apparently compliance is difficult.  This lesson will get expensive for Epsilon.

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You are a software licensor and you own a lot of valuable intellectual property tied up in the code and the trade secrets of your software.  You license that software to an entity and then that entity buys your main competitor.  You just know that all your valuable intellectual property is getting swapped around with your competitor.  Pop quiz, hotshot.  What do you do?  What do you do? (Yep.  Speed reference again.)

Well, if you are Edifecs, Inc. and your licensee Tibco Software, Inc. buys Foresight Corporation, you bring a suit and allege breach of contract and misappropriation of trade secrets.  Unfortunately, for Edifecs, a California court dismissed a substantial portion of their complaint and held that, under California law, allegations that failure to segregate employees and relevant documents after the Foresight acquisition did not state a claim for misappropriation of trade secrets, breach of contract or a breach of the implied covenant of good faith and fair dealing.  The Court also reiterated that California has rejected the inevitable disclosure doctrine.  That doctrine, adopted in a few states, allows a claim to proceed without evidence of actual disclosure if the circumstances are such that the court thinks that a disclosure is inevitable. Edifecs Inc. v. Tibco Software Inc., Case No. C10-330-RSM, United States District Court, Western District of Washington.  Order On Defendant's Motion to Dismiss Amended Complaint, March 23, 2011

Note that this is not a final ruling on the merits but it is does say that merely stating in California that wrongful disclosure is likely to occur will not substitute for pleading and proving that disclosure actually occurred.  Also note that a well drafted confidentiality provision would prohibit disclosure to the competitor, even if that competitor is a subsidiary of the licensee.

Other ways to prevent this result are to include a provision in your license agreement that the license terminates if the licensee acquires or is acquired by a competitor or to include a "paint your people purple" provision.  Alliteration aside, this is a provision that states that in addition to the normal confidentiality provisions, the license agreement prevents any person who worked on or had access to your confidential information from being assigned to any position that makes it likely that they would use absorbed information.  These are not usual provisions in a license agreement but could make sense in an environment where an acquisition of this nature is contemplated.

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It seems like only last week (actually, it was) when we first talked about the Zediva launch, which allowed you to view streamed videos from the cloud via a DVD that you rent played on a DVD player that you rent.  Of course, you never see or possess either, given that they reside somewhere in a Zediva leased data center.

Wasting no time, several movie studios have sued Zediva.  The complaint can be found here.  The Motion Picture Association of America detailed their members' position in a press release.

As expected, the plaintiffs allege copyright infringement, specifically, the exclusive right of the copyright holder to publicly perform their movies.

Interesting times, these.

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On April Fools' Day, Epsilon (one of the largest on-line marketing firms) announced through a terse press release that their "...clients' customer data were exposed by an unauthorized entry..." but that the information obtained had been limited to names and e-mail addresses.  Unfortunately, it was not an April Fools joke.

Some of Epsilon's customers include Citigroup, JP Morgan Chase, Brookstone, Kroger, College Board, Walgreens, TiVo, Capital One, HSN Inc., Visa, Kraft, LL Bean, Best Buy and Verizon.

So, what you need to look out for and alert your clients about is the possibility of increased "phishing" attacks.  We have all had e-mails purporting to be from some bank or other entity and requesting us to go to some website (configured to look like the real entity's website) and enter information and  possibly pick up spyware or viruses.  Since most phishing attacks are just random broadcasts, the fact that these intruders have specific names, e-mail addresses and links to specific entities with whom the targets do business leads to a more pointed attack, which is referred to as "spear phishing".  Because of the more targeted approach, the success rate is likely to be higher.

How do you protect yourself?  PC World has some good advice.  As the PC World articles states, the best way to avoid this is never to go to a website from an unknown e-mail link and don't provide any sensitive information such as password, PIN, etc.  Common sense instructions but please tell your grandma about this.

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