Are Confidentiality Provisions and I.P. Assignment Clauses In Employee Agreements To Be Treated Like Non-Compete Provisions? South Carolina Supreme Court Says No.

Almost every technology company of any variety has a couple of standard provisions in the documents that their employees sign as part of the employment on-boarding process.  Those are, of course, provisions that require the employee not to divulge certain information that they learn as a result of their employment and that provide that any intellectual property developed by the employee during the employment (and often for a period thereafter) and based on information provided by the employer, belongs to the employer.  Some agreements also contain non-compete provisions, which purport to prohibit the employee from engaging in certain kinds of employment activity after the present gig ends.

Mr. Morin went to work for Milliken & Company in South Carolina as a research physicist and worked for Milliken for nine years developing fibers.  Apparently, Mr. Morin began to make plans for his own company prior to leaving the employee of Milliken and filed for a patent on a new fiber within a few months after resigning from Milliken.  Milliken thought such behavior was untoward and filed a suit against Mr. Morin for breach of the confidentiality provisions and the breach of invention assignment provisions in his employee contract, among other things.

The appeal of this case recently found its way to the Supreme Court of South Carolina.  One of Mr. Morin's principal arguments was that the confidentiality provisions and the assignment of inventions provision were restraints of trade and as such, should be reviewed under the same standard as a non-compete provision, i.e. not favored by the courts and construed against the employer unless certain very stringent requirement were met.

The South Carolina Supreme Court disagreed with Mr. Morin and found that such provisions (confidentiality and invention assignment) were not restraints of trade and as such, were to be reviewed under the reasonableness standard, i.e. to be enforced as an ordinary contract provision unless the provisions exceeded what was necessary to protect the legitimate interests of the employer.  The court held: "We therefore hold confidentiality and invention assignment clauses are not in restraint of trade and should not be strictly construed in favor of the employee."

This confirms what most of us in this industry believed to be the law and should make it easier for well crafted provisions of this nature to be enforced in the future.

Lawyers Have An Ethical Duty To Inform Clients That Electronic Communications May Not Be Confidential.

Once again we stand at the intersection of Ethics Street and Technology Avenue and notice that the traffic signals are insufficient to avoid multiple mishaps here.  Florid prose aside, attorneys must understand that certain methods of electronic communications may put them in an ethical problem if they don't warn their client that using such method may harm the confidential nature of the communication.

You will recall that we wrote recently on a court holding that using a computer or network provided by your employer to communicate with your attorney about a potential complaint against the employer could waive the attorney-client privilege.  Now the ABA has issued a formal opinion on the subject and the gist is that the attorney has an affirmative duty to warn the client about such an eventuality.  In Formal Opinion 11-459 issued August 4, 2011 the Committee on Ethics and Professional Responsibility states that if a client communicates with an attorney about "substantive" issues and such communications originate from an employer owned computer, device (e.g. smart phone) or network (even if from a private e-mail address), the attorney must assume that the employer has a right to access such communications and therefore, the attorney has a duty to warn the client about the risk.  Also, if the client does not heed the risk, the attorney should refrain from communicating with the client via the suspect method.

This duty arises as soon as the attorney-client relationship arises and the attorney knows or should know that the client is likely to send or receive attorney-client communications where there is a significant risk that the communications will be read by the employer or another third party.  This would appear to be particularly applicable in disputes with the employer and in matrimonial issues where the other spouse may have access to the device used for communications.  It also can arise from the use of public computers like libraries or hotels or the use of borrowed devices.

So, the question then arises: What is sufficient notice/warning to comply with this requirement?  The opinion doesn't specifically state but does mention that "reasonable" efforts must be made.  Would a standard tag line on your e-mail signature such as the following be enough?

"Anyone communicating to or from this office by means of an electronic device (including computers, smart phones, tablets or others) and using electronic communication (including e-mail, text messages, instant messages, chat rooms, comments on blogs or websites or others) are advised that such communications may not be confidential, particularly in instances where you are transmitting personal information using your employer's devices or networks or where you are using you are using public computers (such as libraries or hotels) or using a public wireless internet connection.  The effect of the loss of confidentiality will be the loss of attorney-client privilege and the possibility that such communications may not be protected from disclosure in any legal procedure in which you are involved.  You are cautioned to act accordingly."

Using such language as a part of your common electronic communication signature may be advisable and probably doesn't hurt but good practice would indicate an additional communication (such as the engagement/fee arrangement letter) in which the client acknowledges that they have received and understand the warning.  Also, we run the danger of having our e-mail signatures become documents in and of themselves that require our clients to have other attorneys review (hyperbole alert).

We would be interested in any measures that other attorneys have instituted to address this issue.

Software Vendor's Worst Nightmare: Your Licensee Acquires Your Main Competitor.

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.