As Patent Litigation Wanes, Businesses Increasingly Turn to Trade Secret Law to Protect Digital Assets

The popular dating app platform Tinder and its parent company Match recently succeeded in having a patent infringement lawsuit tossed. Like many companies accused of infringement today, it accomplished this by going on the offensive and challenging the fundamental validity of the patents they were accused of stealing.

Tinder’s success against Texas-based NetSoc is just the latest example of how the Supreme Court’s 2014 Alice ruling has upended patent infringement litigation. It’s also Exhibit A for why trade secret theft litigation is on the rise as the number of patent lawsuits falls.

In the NetSoc v Match case, U.S. District Judge David C. Godbey ruled in a six-page opinion that the claims in NetSoc’s patent rely on conventional technology and fall well below the threshold of what the Federal Circuit has said comprises an inventive concept.

The high bar that many technology patents now face as a result of the Alice opinion is one reason why patent infringement litigation has dropped three years straight. Because patents are public by design, the risk that comes with having a patent deemed invalid extends far beyond any particular lawsuit. If patented ideas, processes or technology are later found to be invalid, you have lost exclusive rights to it and have essentially given up the crown jewels. It’s not an option to retroactively seek trade secret protection because the secret is already out.

When considering patent vs. trade secret protection, the risk-reward analysis is shifting in many cases because defenses that have turned the tables on patent infringement litigation do not apply to claims of trade secret theft. The central issues revolve around showing a judge or jury that the trade secrets are commercially valuable, that the business has taken measures to protect their secrecy, and that the trade secret cannot be ferreted out independently through tactics like reverse engineering.

As a result, trade secret litigation has increased threefold since passage of the Defend Trade Secrets Act of 2016 created a federal cause of action for trade secret theft claims.

Put simply, there are strong arguments for businesses to protect their ideas and technology as trade secrets rather than pursuing the long, expensive and increasingly risky route to obtaining a patent.

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Backlash Builds for Noncompetes

For a generation of workers, noncompete agreements have steadily crept into more and more facets of the working world to the point that even low- and middle-wage earners are increasingly being asked to sign the agreements as a condition of employment.

But as the labor market continues to tighten and studies show that noncompete agreements have a negative effect on wages, mobility and innovation, a movement is building to reign in the overuse of these contracts.

An analysis by the Wall Street Journal notes that several states have recently passed or are in the process of passing laws that make noncompetes unenforceable for certain workers. Washington state passed a law last month excluding workers making less than $100,000, and Massachusetts tightened conditions for noncompetes, while Hawaii banned noncompetes from technology jobs in 2015. Similar bills are in the works in New Hampshire, Pennsylvania and Vermont.

Writes the Wall Street Journal:

A national backlash is building against employers that make such movement harder with noncompete agreements that bar departing employees from taking jobs with industry competitors for certain periods of time. That’s good news for workers, because eliminating barriers to job-hopping could help stir the kind of wage growth workers haven’t seen since before the last recession. … A low unemployment rate might help shift that balance of power back toward workers.

This is an important topic for Texas, where employers in the oil patch routinely use these contracts. The overuse of these agreements is an issue I’ve written about before.

While the trend against noncompetes is growing nationally, legislative and judicial resistance to these agreements in Texas has not yet surfaced to the same degree. Texas venues are likely to continue to enforce reasonable noncompetes – ones that that do not go beyond an employer’s legitimate business interest or prevent employees from working with a competitor. A narrow, well-crafted noncompete designed to protect an employer’s business interest should be fine for the foreseeable future. Along with confidentiality agreements, energy companies operating in Texas are likely to continue reaching for these tools when appropriate.

Clearly, there’s a time and place for noncompete agreements for high-level employees and those with access to proprietary information in an increasingly knowledge-based economy. But businesses are hurting themselves and the larger regional economy when they limit the choice and mobility of workers. Employers lose out on things like creativity, enthusiasm and innovation when their employees feel like indentured laborers.

Posted in Covenants Not to Compete, Non-Competes, Restraint of trade, Retention agreements, Severance Packages, Uniform Trade Secrets Act | Tagged , , , , , , , , , , , , | Comments Off on Backlash Builds for Noncompetes

For Execs Confronting Extortion Shakedowns, Few Reasons to Participate

A juicy corporate scandal has a unique ability to wipe away billions from a corporation’s market cap with frightening speed, so it’s no wonder that executives are prone to quake when faced with the prospect of responding to the threat of negative PR.

That fear is understandable, but it’s also what makes business leaders a common target for extortion threats. Recent high-profile cases involving Nike and Amazon demonstrate that it’s simply not worth it to engage with a bully. Likewise, individuals trying to monetize such information should think long and hard about the legal way to blow the whistle before going down a road that could lead to criminal charges and prison time.

The Nike case unfolded with surprising speed before it backfired spectacularly for TV lawyer Michael Avenatti, according to investigators.

Writes the Wall Street Journal:

[Avenatti] walked into a March 21 meeting in New York with lawyers for Nike Inc. and threatened to expose what he said was wrongdoing by the apparel giant. Unbeknown to him, Nike’s lawyers were recording the profanity-laden encounter for federal investigators. Days later, authorities arrested Mr. Avenatti and charged him with attempting to extort more than $20 million from the sports-apparel giant. 

 In the case of Jeff Bezos, the Amazon CEO was reportedly threatened by National Enquirer owner David Pecker with the publication of embarrassing photos and communications with his lover unless he put out a false statement recanting his prior statements that AMI’s coverage of him had been politically motivated. Instead, Bezos bravely exposed the scheme.

Having been on both sides of the table on this, it’s clear that Bezos and Nike did the right thing in these cases. It’s also clear that most people are inclined to do the same and expose corruption when faced with such threats.  While sometimes the urge to comply with such threats and demands is enormous – to avoid negative market-moving news in Nike’s case and to avoid personal embarrassment in Bezos’ case.  But beyond being the right thing to do ethically, there are plenty of other reasons for execs to take such a position in the face of extortion threats. No. 1, once you pay off a bully, that person is not likely to ever go away completely. More often than not, they only return to ask for more.

And frankly, even if subconsciously, most companies realize this.  So, on the other side of the table, an executive trying to negotiate a severance should be aware that extortion is not just wrong, unethical, and illegal; it is also rarely effective.   No one likes to be extorted and few will comply.   Rather, they usually prefer to turn the table as Nike and Bezos did.  Of course, it helps to have good and ethical counsel in this regard to prevent the executive from making a colossal misstep. Because, in addition to the risk of criminal charges and prison time, the executive, and their lawyer if they participate in the scheme, run the risk of losing whistleblower protections and potential monetary payouts if they try to extort before going to the government.

The takeaway to remember: The carrot is always better than the stick, especially if the stick is dirty.

Posted in CEOs, Complaints Against Executives, Confidential Information, Executive contracts, Executive Management Style, Whistleblowers | Tagged , , , , , , , , | Comments Off on For Execs Confronting Extortion Shakedowns, Few Reasons to Participate

NFL’s Goodell Faces Leadership Challenge in Latest Patriots Discipline Probe

The sports metaphors are overflowing when it comes to the challenge that NFL Commissioner Roger Goodell faces with the prospect of investigating and meting out appropriate punishment for New England Patriots owner Robert Kraft. Let’s just say this: Welcome to the big leagues.

As the NFL considers punishment options for Kraft after his arrest for soliciting prostitution at two south Florida massage parlors, Goodell’s task is made more difficult by his and the league’s past inconsistencies in disciplining players, personnel and owners.

To top it off, Goodell and the NFL are on record as pledging that league owners should be held to a “higher standard” under the organization’s personal conduct policy. Finally, the charges against Goodell are particularly sensitive given that this is just the latest NFL investigation related to offenses against women.

According to police reports, the 77-year-old Kraft was twice videotaped in a sex act at a shopping-center massage parlor in Florida. The charges came amid a crackdown on sex trafficking in which hundreds of arrest warrants were issued.

With such high stakes, any action that Goodell takes will almost certainly be met with some amount of armchair quarterbacking. But leaders in these situations can and should take certain steps to make sure the outcome is as transparent and objective as possible. That’s the ultimate antidote to criticism and second-guessing.

In isolation, some might think it’s a mistake for an organization to hold some members to a higher standard. In reality, there’s a strong argument for such a policy. After all, we expect leaders to lead, and therefore it’s reasonable to expect them to lead by example.

Goodell certainly faces a tough task, but it’s not uncommon at all in business. CEOs frequently come under harsh public scrutiny, and there are ways that corporate boards ensure an objective investigation. That almost always starts with the use of competent outside counsel with no previous ties to the organization to conduct a thoroughly independent probe. Once the outside review has concluded and findings have been reached, the NFL should follow those discipline recommendations and release as much detail as possible about how and why its decisions were made. Such transparency is the only way to avoid the kind of what-about-isms that can sabotage even the best-laid plans.

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For Politicians and Business Leaders, Dusty Yearbooks Hide Ticking Time Bomb

A cascade of yearbook scandals and confessions of disreputable behavior is sending quakes through Virginia political circles and beyond after decades-old yearbooks surfaced with references to racial slurs, images of students in blackface and other behavior unbecoming of those in leadership roles.

Writes the Washington Post:

The Virginia governorship was roiled by the revelation that Gov. Ralph Northam had appeared in blackface in 1984 (a Michael Jackson costume, and potentially on another occasion, though he denies that charge). The governorship was roiled again when the next politician in line, Lt. Gov. Justin Fairfax, was accused of a sexual assault, not 30 years ago but 14. And the governorship was roiled a third time when the next politician in line, Attorney General Mark R. Herring, announced he’d also appeared in blackface in the 1980s — darkening his skin as part of a Kurtis Blow costume at a college party.

Watching political leaders squirm in the hotseat underscores a new reality for a generation of business leaders who have, until recently, avoided real concern about any participation in embarrassing, disrespectful, ill-thought and outright racist youthful behavior from a pre-internet and social media era. These leaders are becoming increasingly aware that any toxic material that might exist could surface at any time and demand a public reckoning. As a result, anxiety is rising in C-suites, boardrooms and among executives imagining a day when such questions bubble up without warning within their organization.

Publicly traded companies and their boards should be doing everything possible to avoid being surprised by such revelations from within the leadership ranks. After all, these companies must answer to shareholders and the public when such details reflect badly on the company. The “But I was young…” defense simply is no longer effective in most cases because a good chunk of the public simply won’t buy it. Likewise, it’s now exceedingly difficult to argue that society is unfairly applying an evolved view of the world to a less-enlightened bygone era.

If an exec has this in their background – whether it’s sins of youthful ignorance or sins of intent – there’s no easy PR response except to start by saying unequivocally that the actions were wrong – wrong then and wrong now. The path to redemption is rockier for behavior that occurred more recently, such as the case of Florida Secretary of State Michael Ertel, who stepped down after images emerged of him dressed in blackface mocking Hurricane Katrina victims at a Halloween party. Likewise, turmoil within the C-suite is more dramatic when a board is surprised by a public disclosure compared to when an executive self discloses proactively. These recent events should spur organizations to step up their due diligence and proceed cautiously.

Posted in CEOs, Complaints Against Executives, Corporate culture, Criminal Background Checks, Executive contracts, Executive Management Style, Legal, Social Media | Tagged , , , , , , , | Comments Off on For Politicians and Business Leaders, Dusty Yearbooks Hide Ticking Time Bomb

C-Suite Lessons from Ghosn’s Nissan Ouster

For Carlos Ghosn – one of the highest-flying chief executives in the world (literally) – home has been a 50-square-foot cell since Japanese authorities announced a series of vague allegations against him for underreporting his compensation and misusing company property.

He’s been held without details of the allegations against him, denied bail, and has been subjected to daily interrogations without legal representation.

Ghosn’s spectacular fall from grace is truly bizarre and sheds light on Japan’s opaque legal and regulatory system for investigating corporate compliance issues. But while the circumstances of Ghosn’s problems are unique to Japan’s corporate governance practices, executive pay remains a career minefield for U.S. execs and is one of the most common sources of c-suite scandal and intrigue.

The source of Ghosn’s current troubles can be traced to his ability to set his own compensation (something unheard of in U.S. for publicly traded corporations), as well as a decision following the global recession to reduce his take-home compensation in lieu of deferred compensation, which grew to a reported $80 million. Japanese authorities also accuse him of misusing company property, including two private homes and a corporate jet.

 Writes The Economist:

If true, however, [the allegations] reflect as badly on Nissan as on him … Public filings on Mr. Ghosn’s pay and perks would have been Nissan’s responsibility as well as his; any shortcomings should have been flagged up by internal as well as external audits. In a country that is at last overcoming decades of resistance to corporate-governance reform, the apparent lack of oversight is a stain on the reputation of Nissan and its board of directors. The more powerful Mr. Ghosn became, the more essential the need for close board supervision.

Troubles that can befall occupants of the c-suites in the U.S. often involve compensation issues, too, but their origins tend to be different. For publicly traded companies, there are just too many checks for something like that to fly under the board’s radar. A corporation’s compensation committee, for example, typically is charged with setting the CEO’s salary. Issues can surface when CEOs are too close to compensation committee members, but at the end of the day, compensation for CEO’s in publicly traded companies must be publicly disclosed.

Expense report violations are another common source of executive compensation problems and can lead to serious actions against U.S. executives. Whether it’s taking vacations on the company dime or sending work to a vendor that happens to be a shell company run by an exec’s mistress, expense issues are a regular source of compliance problems.

As Ghosn remains in custody, more details will certainly emerge about what he did or did not do. For the integrity of Japan’s corporate compliance system, hard questions also must be asked about the failure of board oversight that would have allowed these alleged excesses to occur. For U.S. business leaders, the screaming newspaper headlines about Ghosn offer a cautionary tale and some universal takeaways: 1) expenses that are reimbursed by the company should be transparent and backed up 2) don’t seek reimbursement for personal expenses and 3) when in doubt, disclose, disclose, disclose.

Posted in CEOs, Complaints Against Executives, Confidential Information, Corporate culture, Criminal Prosecutions, Executive Compensation, Fraud | Tagged , , , , , , , , , | Comments Off on C-Suite Lessons from Ghosn’s Nissan Ouster

Dallas Morning News Interviews Joe Ahmad About Clash of the Dating App Start-Ups

The Dallas Morning News took a close look at a raft of lawsuits facing Dallas-based online dating company, including a series of bitter lawsuits with rival startup Bumble, which I’ve written about previously on this blog. DMN Reporter Danielle Abril asked me for insight into how litigation figures into the growing pains faced by fast-growing startups like Match’s Tinder app, which has seen its stock price double amid a flurry headline-grabbing litigation ranging executive compensation disputes to patent infringement and trade secret theft.

Writes Abril:
Now, amid this historically high-growth period, the $1.3 billion publicly traded online dating juggernaut is working through its latest relationship squabble: two high-profile and high-stakes legal battles that some worry could derail the company’s trajectory.

“It’s impossible to know the truth of it, but they’re the kind of allegations that could cause serious distraction,” said Joseph Ahmad, founding partner of Houston-based Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing PC law firm and a commercial litigator not involved in Match’s lawsuits.

Read the entire Dallas Morning News article here.

The online dating industry is evolving by the week with all players involved keeping a close watch on Facebook’s moves to enter this market. Abril notes that these market forces – plus’s internal drama and dynamics – are an important leadership test for CEO Mandy Ginsberg.

“Good executives in this position know how to deal with an unexpected major crisis,” Ahmad said. “This is the test — is it going to take you down or can you manage your way through this crisis and still perform on a business and operational level? From what I’ve seen on the legal side, I’m confident in saying that is not an easy job.”

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Whistleblowers Receive Whopper Payouts as SEC Proposes New Rules to Limit Future Awards

The U.S. Securities and Exchange Commission announced two large whistleblower payouts last week, bringing the total paid-out bounty for the program to more than $320 million since it was created as part of the 2011 Dodd-Frank Act.

The $39 million and $15 million awards are the second- and eighth-largest payments distributed in the program’s history. Like most of these cases, the whistleblowers’ identities and other key details have remained confidential.

Reports of these mega bounties have made the SEC becoming a magnet for tips, both good and bad. But the flood of tipsters means the whistleblower review process now takes more than two years to reach resolution, with some taking four years or more. Tipsters who provide the SEC information that leads to sanctions in excess of $1 million can receive 10 percent to 30 percent of the money collected. Payments are funded by monetary fines collected by wrongdoers.

Writes the Wall Street Journal:

Deciding who gets paid is a demanding process that involves vetting each request to determine how important the person’s tip was, according to current and former officials. When multiple whistleblowers are involved, decisions are more challenging because the SEC has to measure each tipster’s value to the case.

Hoping to get a handle on the backlog, the SEC is proposing a new procedure with the goal of creating a way for the agency to quickly reject what it considers to be less-deserving applicants so it can focus on better-quality whistleblowers reporting waste, fraud and abuse. The proposed amendment also includes a controversial plan to potentially increase payouts for relatively small cases under $2 million (which make up 60 percent of the rewards program payouts) and limit the size of the relatively small amount of very large recoveries. According to the proposal, whistleblower awards over $30 million could be reduced at the commission’s discretion based on the “value of the whistleblower’s information and the personal and professional sacrifices made in reporting the information.”

SEC commissioner Kara Stein – who voted against the amendments – expressed concern that the changes could weaken incentives for whistleblowers to come forward.

“This means the Commission can reduce the award if, in its sole discretion, it thinks the award is ‘too large.’ I am worried that this subjective determination will be used as a means to weaken the Whistleblower Program.”

Some, perhaps many, whistleblowers are motivated by the prospect of a monetary award. In this respect, it may be a positive step to provide commissioners with the ability to increase payouts to the large percentage of smaller whistleblower claims. However, it seems the overall intent behind this proposed amendment is to dissuade whistleblowers, and procedural changes aimed at reducing the backlog will not necessarily result in a better or more efficient system. It’s critical to bring issues of fraud related to publicly traded entities to the SEC’s attention. Any change that allows such fraud to be kept concealed only serves to protect fraudsters and harm the public.

Posted in Business Continuity, Complaints Against Executives, Dodd-Frank, Fraud, Whistleblowers | Tagged , , , , , , , , , , | Comments Off on Whistleblowers Receive Whopper Payouts as SEC Proposes New Rules to Limit Future Awards

#MeToo Zeitgeist Sends Quakes Through C-Suites

CEOs from three big U.S. chipmakers made unexpected career exits for improper behavior in the last two months alone, some on the job barely long enough to get their new business cards.

Most recently and perhaps most surprising, Texas Instruments’ Brian Crutcher had just been promoted and was on the job as CEO for six weeks when TI announced his departure, noting that it was related to “personal behavior that is not consistent with our ethics and core values, but not related to company strategy, operations or financial reporting.”

Crutcher joins Rambus’s Ron Black and Intel’s Brian Krzanich in being shown the door this summer by increasingly vigilant boards and a realization that even those at the very top are not immune from the #metoo movement.

Not that long ago, denizens of the c-suites, particularly CEOs, could skate by anything but the most severe allegations. The bar for removing execs has dropped along with everyone else. And as we see in this case, the consequences can be swift and severe – Crutcher was cut loose after more than two decades at TI with no severance.

It has been a long time coming, but as a result of boards now rigorously taking action on complaints related to sexual harassment, many who previously felt fearful of coming forward, no longer do. Therefore, one can expect more complaints of this nature, and more top executives to fall.

Writes the Dallas Morning News: Emboldened by the growing list of high-placed executives laid low – many by the #metoo movement – those who see something are increasingly open to say something, at times leading to dramatic results. And boards of directors, once derided as being mere appendages of the CEO, have stepped up their response to personal conduct violations and are showing even wunderkinds the door.

For businesses, sweeping bad behavior under the rug to protect the figurehead is simply no longer an option. The first priority for boards in most cases is to take action in response to misconduct and deal with succession planning and PR subsequently. Barring unexpected new revelations, it’s unlikely that TI – a corporation known for its button-down culture – will suffer lasting PR damage from this move. In terms of the executive employment landscape, beware to any Master of the Universe living under a rock who may not be aware of this new reality.

The bottom line is that while not all affairs are frowned upon by a board of directors, senior executives in any relationship or inappropriate communication with a coworker, vendor, customer/client, investor, or anyone else involved in the business, is certainly at risk. These relationships invariably violate company sexual harassment policy, or perhaps another policy regarding conflict of interest. All executives would be wise to steer clear of any such relationships even if they are not the aggressor.

Posted in CEOs, Complaints Against Executives, Corporate culture, Executive contracts, Executive Management Style, Workplace Romances | Tagged , , , , , , , , , , | Comments Off on #MeToo Zeitgeist Sends Quakes Through C-Suites

Fifth Circuit Reminder: Words Matter in Employment Contacts, Restrictive Covenants

Sometimes the most fundamental legal concepts are so basic and intuitive that they tend to fall by the wayside in practice. Case in point is a recent Fifth Circuit opinion throwing out an arbitration agreement because the employer didn’t follow its own instructions spelled out in the agreement.

In this case, the Fifth Circuit sided with employee Kimberly Huckaba, who sought to nullify her arbitration agreement in a sexual harassment and retaliation claim against her former employer, Texas-based engineering and construction services firm Ref-Chem LP.

The appellate decision focused on a dispute resolution agreement signed by Ms. Huckaba that mandated arbitration for such claims and included boxes for both employer and employee to sign. No one from the company signed the document, which would not normally be a problem because Texas courts have previously held that such signature blocks are insufficient to establish that signatures are required. The problem for Ref-Chem is that the agreement specifically spelled out that both parties were required to sign for it to go in effect.

The case is Kimberly Huckaba v. Ref-Chem LP, case number 17-50341, in the U.S. Court of Appeals for the Fifth Circuit.

In this case, we have more than a blank signature block that speaks to the parties’ intent,” the opinion reads. “The agreement also contains language that the parties need to sign the agreement to give it effect or to modify it. Thus, the question of Ref-Chem’s intention is answered by the agreement it drafted.”

Writes Law360:

The panel wrote that if it adopted Ref-Chem’s argument, the words of the agreement would have no meaning, and also that the company could “have it both ways,” by arguing it did not intend to be bound because it didn’t sign the agreement, or argument it did because it kept the agreement on file.

When it comes to things like contracts, restrictive covenants and employment policies, words really do matter. Too often, employers simply hand new arrivals a stack of on-boarding documents and policy handbooks, but never bother to make sure they are returned or properly signed. Years later when faced with noncompete violations or any number of contract breaches, the company discovers, too late, that there is no contract or the one in hand has not been properly executed.

This case is a potent reminder for employers to review on-boarding procedures and ensure that polices and other contracts are properly memorialized.

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