Archive for the ‘Trade Secret’ Category

The Google Dilemma and the China Syndrome

Monday, May 3rd, 2010
Posters courtesy http://chineseposters.net, IISH, and Stefan R. Landsberger Collections

Google was the first, but it probably will not be the last.

New rules went into effect in China on May 1 that require foreign vendors of information technology devices to disclose proprietary information if they want to sell their products to the Chinese government.

Now Cisco, Symantec, and Microsoft will need to make the same difficult choice as Google did — to continue participating in and benefiting from the miraculous economic growth of the Chinese economy, or to protect their intellectual property from theft and their customers from cyber espionage by hackers based in China.

Under the regulations, vendors of secure network routers, smart cards, anti-spam software, firewall software and other products involved in protecting digital data must meet new technology standards before being certified for sale to government agencies. However, the certification testing will be performed by government-connected testing laboratories, and as part of the testing, the vendors must disclose encryption algorithms, software source code, and design specifications that, for many of the products, are regarded as sensitive trade secrets.

The Chinese government argues that the certification and testing process is necessary in order to protect the Chinese government from viruses and hackers. Officials have also previously justified the new rules on the grounds that they would assist the fledgling Chinese digital security industry. According to one Chinese official, foreign firms currently control 70% of that market in China. Chinese officials have also argued that other nations have similar disclosure and certification programs for digital security products.

But the companies and their home governments argue that disclosure of their proprietary algorithms and source code to the Chinese government, which is also trying to promote its domestic digital security industry, amounts to an unfair trade policy. A further concern (although not officially acknowledged) appears to be that possession of such information would permit Chinese government-connected hackers to gain a “pass key” to the networks of political dissidents and economic competitors. And the knowledge that the Chinese government has such a pass key would dampen purchases by other foreign governments.

The dilemma now faced by foreign digital security vendors echoes that faced by Google, which was forced to choose between access to a market of 380 million computer users, or exposing both its intellectual property and its users to cyber espionage. Google’s decision to move its offices from Beijing to Hong Kong also not coincidentally removed direct competition for Google’s domestic Chinese search engine competitor, Baidu.

The Chinese government has significantly scaled back the certification program since it was first announced. According to an article that ran in the Japanese newspaper Yomiuri Shimbun in September, 2008, the original certification program would have required disclosure of proprietary code even for consumer goods such as flat-panel televisions, and for sales to the Chinese retail market as well as to the government. Those rules were set to go into effect in May, 2009, but after vigorous protests from foreign governments, the effective date was postponed for one year, and the scope was narrowed to only goods procured by the Chinese government.

Similarly, the Chinese government has recently deleted the most controversial provisions of another program that would have required the Chinese government to give preference to Chinese companies for purchases of all information technology products.

Startup Corner: Tips To Protect Your IP

Sunday, April 25th, 2010

Intellectual property and other intangible assets constitute 80% of the market capitalization of S&P 500 companies. Nowadays, it is as critical for companies to properly maintain their patents, copyrights, trademarks, and trade secrets as it is to maintain their plant and equipment.

Below is a quick checklist of eight items your company should follow to protect and preserve its IP.

1. Implement Intellectual Property Ownership Agreements

For most forms of intellectual property, the default rule is that whoever created it, owns it, so have all employees sign employment agreements and independent contractors sign service or consulting agreements that stipulate all intellectual property they create while working for your company is either a work made for hire, or if not, that the creator automatically assigns ownership of its IP to you as of the time of its creation. For similar reasons, on joint projects that could result in patentable inventions, have co-researchers sign agreements assigning ownership of all IP to your company, or if that is not possible, specifying the terms of co-ownership of any patents. Having these agreements in place will save you from a claim that someone else owns valuable IP that you paid for.

2. Put All Licenses and Assignments in Writing

You should not allow other parties to use your inventions, creative content, software, logos, confidential information, etc., nor should you use theirs, without a license agreement in place. If there is a dispute, then at best it would be hard to prove who was allowed to do what for how much money, and at worst, you may lose ownership of your IP in part or in whole. Furthermore, where ownership in patents, copyrights, or trademarks are transferred (an assignment), then often a signed writing is required to make it legally binding.

3. Preserve Confidentiality of Trade Secrets

Trade secrets are valuable commercial information or formulas that maintain their protected status only so long as their owner takes reasonable measures to preserve their confidentiality. Therefore, companies should implement policies that require employees to preserve confidentiality of confidential information, and follow good housekeeping procedures, including: placing “confidential” or “proprietary” stamps on documents; requiring employees to sign nondisclosure agreements; requiring password protection for all computer-stored trade secrets; restricting physical access to areas containing trade secret information and implementing sign-out log procedures; and conducting exit interviews with departing employees. And before release of any valuable confidential information to an outside party, require the recipient to sign a nondisclosure agreement that requires the recipient: 1) to take at least reasonable steps to maintain confidentiality of the information; and 2) to only utilize it for the purposes allowed in the agreement.

4. Register Important Copyrights

Original, creative works such as text, images, music, websites, and software come under copyright as soon as they are fixed in a tangible medium, but in order to get meaningful enforcement capability against infringement, registration with the US Copyright Office is advisable.

5. Register Important Trademarks

Words, logos, or jingles that identify your company’s goods and services often qualify as trademarks. Some degree of protection exists even without registration, under the doctrine of common law trademark. But as with copyrights, in order to receive the maximum degree of protection, registration with the US Patent and Trademark Office is advisable. Furthermore, purchase all domain names that your company is likely to use in the future, including common variations.

6. Challenge Infringing Uses of Your IP

Perform periodic Google and eBay searches to make sure that others are not misappropriating or abusing your company’s copyrights or trademarks. If evidence of infringement is found, consult with your attorney about the advisability of a cease and desist letter or even a lawsuit. Especially in the case of trademarks, ignorance is not bliss — it can lead to forfeit of your IP.

7. Use Copyright and Trademark Notices

Use standard copyright notices, such as “© 2010 Your Company, Inc. All Rights Reserved,” for text, graphics, music, software, websites, and other original creative content, and standard trademark notices, such as “® Your Company, Inc.” or “®” (for registered trademarks) or “™ Your Company, Inc.” or “™” (for common law trademarks) next to words or logos that identify your goods or services. Better yet, have your attorney work with your marketing people to draft comprehensive guidelines for proper use of copyright and trademark notices for all products, product packaging, and company communications. This shows the outside world that you are knowledgeable and vigilant about your intellectual property rights, and also eliminates an “innocent infringement” defense in enforcement litigation. Or as Ali G says when pitching his idea for an ice cream glove to a venture capitalist, “That’s a ©, which means you can’t nick it.”

8. Post Effective Rules for Your Website

Website Terms of Service and Privacy Policies are important means of limiting your company’s legal risk and earning your customers’ trust. Although technically not IP protection devices, they are critical legal safeguards, especially for companies that engage in e-commerce.

A Bad Idea: Disclosing Ideas Without an NDA

Friday, April 16th, 2010

Potential clients often ask: “I have this million dollar idea I want to pitch to Company A, but if I ask them sign an NDA, they won’t have the meeting. Could they steal my idea?”

The answer is frequently “yes,” if the company does not sign a nondisclosure or other written agreement acknowledging the confidentiality of the idea.

That unfortunate fact was demonstrated in a case in which entertainment broker Bonnie Vent cold-called Mars Snackfoods and pitched an idea for a cross-promotion featuring characters from the Addams Family television show on M&Ms candies. According to Vent, Mars subsequently declined to use her idea, but eight months later, Mars ran advertisements featuring M&Ms candies altered to resemble the cast of the program:

In its decision, the federal Second Circuit Court of Appeals rejected her claim for compensation, and in doing so, set forth a nice primer on property-based misappropriation of ideas under New Jersey law. (Property-based misappropriation of idea claims share many elements with trade secret claims. Many states also allow contract-based misappropriation of ideas claims.)

According to the court, in the absence of a contract, an idea is protected against misappropriation only if: 1) it is novel; 2) it is made in confidence to the recipient; and 3) it is utilized by the recipient.

The court ruled that Vent’s claim failed the second requirement, because there was no confidentiality between Vent and Mars.

Vent did not claim that she offered an NDA or even discussed confidentiality during her pitch call with the Mars representative, but argued that: 1) confidentiality was implied because Mars, as the more powerful party in the relationship, had a fiduciary duty (obligation to take care of her interests); and 2) confidentiality was implied by custom in the entertainment industry.

A confidential relationship may be implied between parties if there is a fiduciary relationship between them, for example if the parties are in a relationship where one is vulnerable to or relies on special skills or knowledge of the other. This was not such a case, because Vent cold-called the Mars representative, and volunteered the information. Normally, a fiduciary relationship cannot be formed without the consent of both parties, ruled the court.

A confidential relationship may also be implied if customary in an industry, but assuming such a custom exists in the entertainment industry, the court ruled that it did not apply to Mars, which is not in the entertainment industry. (The decision referred to a case in which it was held that confidentiality is customary for idea pitches in the toy industry.)

One caveat — the law of misappropriation of ideas is state-based, with a wide variation in law among states. However, many (not all) states use some variation of the New Jersey three-part test of novelty, confidentiality, and utilization to decide when the idea originator must be compensated for property-based claims, and sometimes even for contract-based claims.

Takeaway:  granted, it is often tough to get an audience before a large company or venture capitalist to pitch your million dollar idea, but before you do so, carefully balance the benefit of requesting a nondisclosure agreement against the risk of losing the idea, or worse yet, getting ensnared in endless, Kafkaesque litigation:

Why IP Assignment Agreements Matter, Part 1

Tuesday, January 5th, 2010

Clients often ask their attorneys why they spend so much time arguing about seemingly trivial differences in contract wording.  Isn’t it just interchangeable generic boilerplate gobbledygook?

And attorneys often reply that slightly different wording in even basic legal agreements can yield radically different real world results.

Stanford University found that out the hard way when the Federal Circuit Court of Appeals in Stanford v. Roche dismissed its $200 million patent infringement lawsuit against Roche Molecular Systems because of sloppy wording in a Stanford researcher’s invention assignment agreement.

Patent rights initially belong to the inventor, which is why all companies engaged in research and development should require employees and independent contractors to sign written agreements assigning all intellectual property rights in their work product immediately upon invention.

Stanford’s agreement stated, “I agree to assign or confirm in writing to Stanford and/or Sponsors that right, title and interest in … such inventions as required by Contracts or Grants.”  Which looks okay at first glance, but if you read it again, you realize that the employee has only agreed to assign ownership of the invention at some time in the future.

Mark Holodniy, one of the researchers on a Stanford project to use polymerase chain reactions (PCR) to measure HIV concentration in blood plasma, signed that agreement.  Holodniy worked with researchers at biotech company Cetus to learn more about PCR, but Cetus required him to sign a non-disclosure agreement that said he, “will assign and do[es] hereby assign to CETUS, [his] right, title and interest in each of the ideas, inventions, and improvements” that he developed, “as a consequence of” his work at Cetus.

Since Holodniy had not yet actually assigned his rights to Stanford via the invention assignment agreement, he wound up assigning them to Cetus via the non-disclosure agreement, which was worded in the present tense.

The PCR hit the fan when Stanford sued Roche (which had acquired Cetus’ PCR business) for infringement of its PCR patents.  The court ruled that Roche could not infringe what it already owned, and threw out the lawsuit.

Takeaway: A lot of folks DIY basic contracts like employment agreements by cutting and pasting poorly drafted templates from the Internet.  A lot of other folks sign non-disclosure and similar basic agreements without a glance at the actual contents.  This case shows why neither is a good idea.

Update, 11/9/10: The Supreme Court has decided to grant certiorari and hear Stanford’s appeal of the decision. We will continue to follow this case of great importance to the university research community.