The Mattel Case
The IBM Case
Comment


Two recent disputes illustrate the success that employers may achieve when they seek to protect their confidential and proprietary information.

The Mattel Case

In Bryant v Mattel Inc, a case pending in the US District Court for the Central District of California, Mattel, maker of the Barbie doll, asserted that former employee Carter Bryant began drawing designs for the Bratz doll – made by his new employer MGA Entertainment – while he was still employed by Mattel. Mattel instituted the action in 2004, claiming that Bryant had violated his employment agreement which, among other things, gave Mattel rights to all his doll designs as an employee of Mattel. In August 2008 Mattel obtained a jury award of $100 million in damages for copyright infringement and contract-related claims. Thereafter, the court ruled that Mattel owned all the rights, title and interest (including all copyrights) in and to the Bratz-related works, ideas and concepts that Bryant conceived, including the Bratz name, and Mattel obtained a permanent injunction against MGA's sale of the Bratz dolls. In January 2009 the court modified its prior order to allow MGA to continue to sell Bratz dolls until the end of 2009. At a hearing in February 2009 counsel to Mattel conveyed that Mattel was interested in settling the litigation and that there had been some activity on this front.

The IBM Case

In International Business Machines (IBM) Corp v Papermaster the US District Court for the Southern District of New York ordered Mark Papermaster, a former IBM senior executive, immediately to cease working as Apple's senior vice president, devices hardware engineering, in the iPod/iPhone division.(1) Papermaster – who had worked for IBM for 26 years – had served as vice president of IBM's Blade Development Unit for the preceding two years. Throughout his tenure at IBM, Papermaster worked on a technology used to develop microprocessors and servers and he was viewed within IBM as its top expert in 'power' architecture. The court found that Papermaster was "fully aware of many of IBM's most sensitive trade secrets", having "worked for years with some of the crown jewels of IBM's technology". Because of his expertise, IBM selected Papermaster to be a member of its Integration and Values Team, an elite group of approximately 300 executives comprised of its key leaders which develops IBM's corporate strategy.

The court based its ruling on the terms of a 2006 non-compete agreement that Papermaster had signed as a condition to joining the Integration and Values Team, which prohibited him from working for competitors within one year of leaving IBM. IBM submitted evidence that only a few hundred key strategic leaders – out of nearly 400,000 employees – were required to sign the agreement.

The court ruled that Apple and IBM were significant competitors. Although there was no proof that Papermaster had actually misappropriated IBM's trade secrets, the court found "the likely inevitability of even inadvertent disclosure [of trade secrets] was sufficient to establish a real risk of irreparable harm to IBM". Specifically, the court found that:

"[I]t is likely that Mr Papermaster inevitably will draw upon his experience and expertise in microprocessors and the 'power' architecture, which he gained from his many years at IBM, and which Apple found so impressive, to make sure that the iPod and iPhone are fitted with the best available microprocessor technology and at a lower cost."

In reaching its decision, the court was persuaded by, among other things, Papermaster's acknowledgement in the non-compete agreement that IBM would suffer irreparable harm if he violated the agreement.

Apple and IBM have subsequently settled their dispute over Papermaster's hiring. Papermaster will begin working for Apple in April 2009, heading Apple's iPod and iPhone hardware engineering teams. Papermaster will be required to certify in July and October 2009 that he has not used or disclosed IBM's confidential or proprietary information.

Comment

These cases underscore just a few steps that employers may take to enhance their litigation positions prior to ever setting foot in the courthouse.

The employer should ensure that its confidentiality and restrictive covenant agreements have language confirming that inventions, innovations, processes, discoveries, improvements, ideas, system designs, technical know-how, computer programs and related documentation, literary works, artistic works, copyright works or any other works of authorship developed, created, made, conceived, invented, discovered, acquired, suggested or reduced to practice by the employee, either alone or jointly with others during the employee's employment by the employer, whether or not during working hours, and related in any manner to the work or other activities carried on by the employer, shall be (i) the sole property of the employer, and (ii) works made for hire to the extent allowed by the Copyright Act. The developments provision should also provide that, to the extent that the developments are not works made for hire, the employee assigns all rights, title and interest in the developments to the employer.

Based on the nature of the employer's business and the services that the employee will be performing for the employer, the employer should also consider requiring that at the beginning of employment the employee set forth a complete list of developments that he or she has conceived, developed, created, made, invented, discovered, acquired, suggested or reduced to practice prior to the commencement of his or her employment that he or she considers to be his or her property or that of third parties, and wishes to have excluded from the scope of the confidentiality agreement.

The employer should also consider whether it is appropriate to ask a new or existing employee to execute an agreement with non-compete restrictions. The immediate reaction of many entities is that 'tying up' as many employees as possible enhances their business goals. However, as the IBM/Apple dispute evidences, less is often more. The fact that Papermaster – exposed to IBM's most sensitive trade secrets – was one of only a few hundred of IBM's 400,000 employees required to execute a non-compete agreement weighed in favour of the court's enforcement of the prohibition against him working for competitors within one year of leaving IBM.

Furthermore, the employer should make sure its confidentiality and restrictive covenant agreements include language by which the employee acknowledges and agrees that, by virtue of his or her position, services and access to and use of confidential records and proprietary information, any violation of any of the undertakings contained in the agreement would cause the employer immediate, substantial and irreparable injury for which it has no adequate remedy at law. The Papermaster court relied on Papermaster's acknowledgment that IBM would suffer irreparable harm if he violated the agreement in finding that IBM had proven a likelihood of irreparable harm.

In cases regarding confidential information and restrictive covenants, emails between the departing employee and his or her new employer are often rich sources of favourable evidence. Employers must implement email and communications policies which confirm that:

  • electronic communications are the property of the employer and not the private property of individuals;
  • employees' electronic communications are not considered private;
  • employees shall not transmit without prior express authorization any trade secrets or other confidential or proprietary information; and
  • the employer reserves the right at any time, in its sole discretion, with or without notice, to review, monitor and disclose its employees' electronic communications. 

When a dispute arises with an employee or former employee regarding confidential information or restrictive covenants, the employer should promptly review the employee's emails to ascertain whether any incriminating evidence is included within those emails. In many industries, employers' most critical assets walk out the door at the end of each day.

The cases discussed above demonstrate that diligent employers can go to significant lengths to protect their confidential information and business interests.

For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100) or by fax (+1 212 715 8000) or by email (kleblang@kramerlevin.com or rholtzman@kramerlevin.com).

Endnotes

(1) 2008 WL 4974508 (SDNY November 21 2008).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.