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October 31, 2003

Alone, Unarmed (maybe), and Uninsured

Here's a story about a software vendor that found out -- in probably the worst possible way -- that its general-liability insurance policy did not have the specific coverage that was probably the most crucial for the vendor's software business. Not a good day for the vendor's risk-management people.

Background

The software vendor was a company called Professional Data Services (PDS). Its software was used to help manage medical clinics.

The customer apparently was an opthamology practice or maybe an optometry shop, Heart of America Eye Care, P.A. I'll just call it "the eye clinic."

The software license agreement dated back to 1995. It was a pretty vanilla agreement, judging from the court's sketchy description of it. The agreement gave the eye clinic a license to use several of the vendor's software programs, and required the vendor to investigate and correct problems with the software.

The Vendor-Customer Dispute

At some point the eye clinic had problems with the software. In April 2002 -- some seven years after it first acquired the software -- the eye clinic sued the vendor, PDS. The eye clinic claimed:

  • that PDS failed to provide the required training, customer service, investigation, and correction of software problems;
  • that PDS improperly maintained the software;
  • that the software was not fit for the purposes for which it was intended [Editorial comment: Most software license agreements expressly disclaim any warranty of fitness for a particular purpose; perhaps this agreement didn't do so];
  • that the software did not satisfy the medical accounting needs of the eye clinic [Editorial comment: Many software license agreements expressly disavow any commitment to satisfy the customer's particular needs]; and
  • that PDS misrepresented the quality of service and support it would provide to the eye clinic. [Editorial comment: Many software license agreements contain an "integration" clause that says, among other things, that neither party is relying on any representation of the other except as expressly set forth in the agreement. It sounds like this agreement didn't say that.]

The Missing Insurance Coverage

The vendor, PDS, apparently figured that its insurance carrier would pay the attorneys' fees for defending against the eye clinic lawsuit. It no doubt was also counting on the insurance to cover any damage award that the eye clinic might receive (up to the policy limits, of course).

The insurance carrier thought otherwise. It filed its own, separate lawsuit against the vendor (and the customer too), seeking a judicial declaration that there was no coverage and no duty to defend.

Right you are, the court said. The applicable coverage in the insurance policy was for "property damage." That phrase was defined in the policy as (i) physical injury to tangible property or (ii) loss of use of tangible property that is not physically injured. Loss of use of a software package and corruption of intangible data doesn't count, at least not when the computer itself isn't damaged or rendered useless. The court cited other recent judicial holdings to the same effect.

So, the software vendor is now facing, uninsured:

  • the expense of defending against the customer's lawsuit; and
  • if it loses, the expense of paying any resulting damage award.

The customer didn't necessarily come out ahead here either, because without insurance coverage, the vendor may not have the assets to pay a damage award.

(Cincinnati Insurance Co. v. Professional Data Services, Inc., No. 01-2610-CM, U.S. District Court, District of Kansas, July 18, 2003)

Possible Lessons

If you're a software vendor:

  • Check your insurance policies to make sure you have coverage for information and network technology errors and omissions -- a general-liability policy may not cut it.
  • Take a look at the warranty disclaimers in your standard license agreements.
  • Remember that disputes can arise even with long-time customers.

October 31, 2003 in Embarrassments / Bad Career Moves, Finances, Litigation, Sales | Permalink | Comments (0) | TrackBack

October 29, 2003

A Fable

From a CLE [continuing legal education] presentation I did a while back:

Once upon a time there were two companies. The companies had to negotiate a contract. The companies were represented by smart, experienced executives. The executives understood the business. The executives understood each other.

The executives hit it off on a personal level. The executives played golf. The executives supped. The executives sipped. Things looked good.

The executives were under pressure to get the deal done. They worked out a one-page term sheet. The deal was going great!

The executives didn't want to waste time on picky contract details. They were developing such a good working relationship. Surely they'd be able to work out any problems later on. Surely the term sheet was all the contract they would ever need.

They signed the term sheet. They crossed the street to dinner. They were hit by a truck. They were hospitalized for months.

Their successors were idiots. Their successors hated each other. Their successors had such fun dealing with the “picky details” that the executives had left out of the contract.

October 29, 2003 | Permalink | Comments (0) | TrackBack

October 28, 2003

Victoria's Secret Exposes Too Much
(It's Not What You Think)

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No, it's not what you think. Victoria's Secret had computer security problems that allowed customers to browse through other customers' on-line orders. (Insert your choice of joke here.) That attracted the attention of NY attorney general Elliot Spitzer. When the dust settled, the Victoria's Secret parent company agreed to give refunds or credits to customers in New York and to pay the state of New York a $50,000 fine. See the AP story.

POSSIBLE LESSON: This is yet another example of how companies doing business on the Internet may have to contend with multiple legal authorities. Some other examples:

  • Earlier this month, Google was ordered to pay a French company 75,000 euros in damages for allowing paid advertisements to be linked to the French company's trademark in search terms; see the Reuters story.
  • Last December, an Australian court ruled that a local business executive could bring suit -- in Australia -- against Dow Jones for allegedly libelous statements posted on a U.S. Web site. See this BBC analysis.
  • In November 2000, another French judge ordered Yahoo! to block French access to Nazi-memorabilia sites; see this BBC story.

October 28, 2003 in Litigation, Marketing | Permalink | Comments (0) | TrackBack

October 15, 2003

Advertising Heartburn

Sometimes it seems there’s no shortage of object lessons about the troubles that over-enthusiastic advertising can cause. Procter & Gamble (P&G;) ran ads for a new heartburn product, Prilosec OTC. The ad copy read, "One pill. 24 Hours. Zero Heartburn" The ad copy apparently gave Johnson & Johnson heartburn of a different sort – it filed suit against P&G.;

In response to J&J;’s motion for a preliminary injunction, a federal judge in New York found that P&G; had engaged in false advertising. The judge prohibited P&G; from continuing its ad campaign pending a full trial. (Johnson & Johnson-Merck Consumer Pharmaceuticals Co. v. The Procter & Gamble Company, No. 03 Civ.7042(JES) (S.D.N.Y. Sept. 25, 2003).)

If the parties don't settle before trial, P&G; may find itself staring down the barrel of a big damages award for corrective advertising, under precedent such as one of my favorite case stories, that of U-Haul v. Jartran.

Literally False Claims

First let's take a quick look at the law of false advertising from 10,000 feet. It's actually pretty straightforward -- as Judge Sprizzo noted in the J&J; v. P&G; case, “To prevail on a false advertising claim, a plaintiff must establish that defendant's advertisements are either (1) literally false or (2) although literally true, likely to deceive or confuse consumers.”

Judge Sprizzo zeroed in on the first prong of this test, i.e., whether the P & G ads were literally false. That seemed to be a no-brainer, at least to the judge:

[T][he claim advanced by P & G's advertising--essentially, that 24 hours heartburn relief can be achieved with one pill of Prilosec OTC--is literally false. "One pill. 24 Hours. Zero Heartburn" simply does not equal "One pill. Wait 5 hours. Only then Zero Heartburn for the next 24 hours."
(Emphasis added.)

Coming Soon: J&J;’s Quest for a Damage Award?

P&G;’s legal troubles almost surely aren’t over. It likely will have to face J&J;’s claim for sizeable monetary damages. On that subject, I used to like to tell clients the story of the U-Haul v. Jartran case from the 1980s. Jartran was found liable for false advertising that compared its rental trucks and trailers to those of U-Haul. In the wake of the ad campaign, Jartran's sales had boomed, and U-Haul's sales had slumped. The court awarded damages to U-Haul in the amount of $40 million, representing:

  • the $6 million cost of Jartran’s ad campaign, on the theory that Jartran must have derived at least that much benefit from its ad campaign; plus
  • the $13.5 million cost of U-Haul’s corrective-advertising campaign; plus
  • another $20 million (in effect doubling the award) as a kind of punitive damages permitted by the Lanham Act in exceptional circumstances. The increase in damages presumably was motivated by what the trial court described as Jartran's “deliberately false comparative [advertising] claims.”
The $40 million damage award was upheld by the appellate court. U-Haul Intern., Inc. v. Jartran, Inc., 793 F.2d 1034 (9th Cir. 1986).

Possible Lessons

It doesn't take a rocket scientist to figure out the lessons here:

  • Be careful about the factual statements and implications that you put in your advertisements and other marketing materials.
  • Be even more careful if you're going to run ads comparing your products or services -- even implicitly -- with those of a competitor.

October 15, 2003 in Communications, Embarrassments / Bad Career Moves, Marketing | Permalink | Comments (0) | TrackBack

October 14, 2003

Mother Always Said, Don't Brag

The exuberance and assertiveness of marketing people can make enormous contributions to a company. They can also put the company in a deep hole. Here's an example of the latter: Some not-atypical, faintly boastful language in a company's press releases language, of a kind your marketing people might well have used themselves, kept the company mired in a securities class-action lawsuit, when the lawsuit might otherwise have been dismissed.

A Sad but Familiar Tale

Log On America (LOA) was a Rhode Island-based Internet access provider for residential and commercial customers. From 1992 to early 1999, LOA grew into a company with nine full-time employees and revenues of just under $760,000, but it never once turned a profit.

Despite this decidedly less-than-stellar track record, LOA decided to go public. In April 1999 it went out at $10, the price spiked to $37 on the first day of trading, and closed at $35 per share. LOA went on a buying spree, using its capital and its publicly-traded "currency" (shares) to acquire various New England internet service providers, growing its customer base from 1,000 to over 30,000.

The Fateful Press Releases

During those exhilerating days, LOA issued press releases and interviews that would come back to haunt them in the subsequent securities class-action lawsuit. The company said, for example, that:

  • LOA was the "premier provider of high-speed DSL services in the Northeast corridor";
  • LOA was "a Northeast Regional [CLEC] and Information Internet Service Provider (IISP) providing local dial-tone, in- state toll, long distance, high speed Internet access and cable programming solutions . . . to residential and commercial customers through the Northeast";
  • LOA was "one of New England's leading providers of bundled communications services";
  • LOA was "in a dominant position in the market for integrated data and voice services" and "a dominant super regional communications player."
(Emphasis added.)

The Lawsuit

In an all-too-familiar story, LOA's rapid post-IPO expansion resulted in exploding net losses, which in turn caused the stock price to drop. And then, in early 2000, the tech bubble burst. LOA's stock dropped even more, down to a low of $0.10 per share. NASDAQ eventually delisted the stock.

As night follows day, the securities class-action lawyers found their way to LOA. They filed the usual lawsuit accusing LOA's CEO and CFO of securities fraud, alleging that those two officers had engaged in "a massive fraudulent scheme to deceive investors into thinking [LOA] was a successful 'dominant' telecommunications company, when in actuality it was not."

The LOA officers did they usual thing: they filed a motion to dismiss the lawsuit. The judge granted some portions of their motion, but also kept other, significant portions of the lawsuit alive. Why? Because, the judge concluded, some of the statements in LOA's press releases and interviews might well have been material misstatements:

The representation that LOA was the "premier provider of high-speed DSL services in the Northeast corridor," as it was described in a May 17, 1999 press release, is much more than mere puffery: it is a statement of LOA's present status and capabilities, and connotes that LOA is comparatively superior to all other high-speed DSL service providers in the Northeast corridor.

Likewise, the statements that LOA's transaction with Nortel would "help further solidify [LOA's] dominant position in the market for integrated data and voice services," and that LOA's "proven early market entry strategy is positioning it as a dominant super regional communications player," are both actionable: they clearly imply a comparison to competitors and suggest that activities undertaken by LOA as of December 17, 1999 or February 10, 2000 had made or were making it "dominant" over all other competitors in its field.

The same is true for the statement that, by October 28, 1999, LOA had become "one of New England's leading providers of bundled communications services." Assuming that the substance of the statement is untrue (as Plaintiffs have alleged, and as Defendants have conceded for purposes of this motion), this statement is material, as it connotes superiority over the vast majority of other bundled communications services providers.

(Paragraphing supplied.)

Moreover, LOA apparently was never able to offer cable services, even though they had described themselves as a cable-programming provider.

(Scritchfield v. Paolo, 274 F. Supp. 2d 163 (D.R.I. 2003).)

Some Possible Lessons

  • Think carefully before using superlatives like "premier provider" and "dominant player" to describe your business. The judge and jury might view such statements as non-actionable puffery, or they might regard them as false statements. (Indeed, the Scritchfield judge said that the mere fact that the defendants made a puffery argument was a concession that the statements were not true.)

    I'm not a marketing guy. But my personal belief is that superlative language of this kind seldom does you much good in the marketplace. I think customers and investors tend to discount such language. It therefore provides you with little or no benefit, while still increasing your potential vulnerability to a securities class-action lawsuit. Talk about the worst of both worlds.

  • There's another reason that using pharases like "dominant player" is a bad idea. Someday you may want to acquire, or be acquired by, another company. You might have to do a Hart-Scott-Rodino antitrust filing to get government approval for the acquisition. That filing may have to contain your press releases. You really don't want the government's antitrust reviewer to see your own press releases describing you as the "dominant player" in any particular market or submarket -- at the very least, it likely would complicate the approval process.

Thanks to Securities Litigation Watch for the pointer to this story.

October 14, 2003 in Communications, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (2) | TrackBack

October 13, 2003

How Much Would Actual Subscriptions Have Cost?

MSNBC reported last week that money-management firm Legg Mason was hit with a $20 million jury verdict for copyright infringement, for internally distributing a stock-market newsletter when they had only paid for a single subscription. Thanks to TechLawAdvisor for the tip.

October 13, 2003 in Embarrassments / Bad Career Moves, IT Management, Intellectual Property | Permalink | Comments (0) | TrackBack

October 12, 2003

P---d Off

Natural Biologics LLC really knows how to p--s off a federal judge (bad pun intended). Earlier this month, the judge seriously hammered Natural Biologics for misappropriating trade secrets relating to the processing of horse urine. She hit Natural Biologics even harder than usual, essentially putting them out of the business – and for somewhat unusual reasons.

Concealing Evidence, Giving False Testimony

Natural Biologics was -- note the past tense -- in the business of making a generic version of Premarin, a hormone replacement therapy drug of Wyeth (formerly American Home Products Corporation). Both drugs are made using estrogens extracted from pregnant mare urine.

Federal Judge Joan Ericksen found that Natural Biologics knowingly misappropriated Wyeth's trade-secret information about its estrogen-extraction process by getting the information from a former Wyeth employee. She also found that the former Wyeth employee knew he had no right to provide the information to Natural Biologics.

As if that weren't enough, the judge found that the president of Natural Biologics destroyed documents, concealed other evidence, and gave false testimony in deposition and at trial (!). He did so, she said, in an effort to conceal the misappropriation.

The Hammer Drops

If you're found liable for misappropriation of a trade secret, normally you'll be enjoined from continuing to use the secret and ordered to pay damages. Even so, you'll usually be allowed to stay in business, as long as you don't use the secret in doing so.

But it's never a good idea to let a judge think that you've destroyed evidence or given false testimony. This principle was driven home for Natural Biologics when the judge concluded that:

Because Natural Biologics attempted to conceal its misappropriation of the Brandon Process by destroying evidence, giving false testimony, and improperly redacting evidence, the Court concludes that Natural Biologics cannot be trusted to avoid using the misappropriated process and cannot be trusted to obey an Order that permits them to exercise any discretion..

Consequently, the judge did not merely enjoin Natural Biologics from using the misappropriate trade secrets. She went even further – she ordered them, among other things:

  • to stop “producing, manufacturing, selling, offering for sale, distributing, importing or exporting any material or product consisting in whole or in part of estrogens from urine”;
  • to destroy all of its documents concerning its estrogen-extraction processes; and
  • to destroy "any material or product consisting in whole or in part of estrogens from urine resulting from any Natural Biologics Process."

In effect, the judge put Natural Biologics out of the generic-Premarin business entirely. And it sounds like conceivably the president of Natural Biologics may be facing still more legal troubles of his own. (Wyeth v. Natural Biologics, Inc., No. 98-2469 (D.Minn. 10/02/2003), available at CourtWeb)

Possible Lessons

1. Be careful in talking to a competitor's former employees. It won't look good if it even appears that you were trying to learn about the competitor's trade secrets.

2. In litigation, don't play hide the ball. If the judge or jury concludes that you were trying to conceal evidence, or that you otherwise can't be trusted, you're likely to be in big trouble. (This is a variation of the aphorism that the cover-up is often worse than the crime, a lesson that Arthur Andersen, Richard Nixon, and a host of others have learned the hard way.)

3. Never, ever, give false testimony in a court proceeding. If the judge or jury decide you're a liar, it may well be game over.

October 12, 2003 in Intellectual Property, Litigation, R&D; | Permalink | Comments (0) | TrackBack

October 11, 2003

Bye-Bye, Carolina; Hello, California

Late last month, a North Carolina customer of Oracle Corporation found itself involuntarily headed for California to pursue its lawsuit against Oracle. This came to pass because the customer -- probably without even knowing it -- agreed to a forum-selection clause when it bought its Oracle software license.

The Forum Selection Clause

The customer apparently signed an order form which stated that its terms were governed by the Oracle License and Services Agreement. That agreement contained a fairly typical choice-of-law and forum-selection clause:

This agreement is governed by the substantive and procedural laws of California and [ACC] and Oracle agree to submit to the exclusive jurisdiction of, and venue in, the courts in California in any dispute relating to this agreement.

The customer, unhappy about something (the court's opinion doesn't say what exactly), sued Oracle in North Carolina despite the forum-selection clause.

The Court's Analysis

The forum-selection clause didn't automatically mean that the case would be transferred to California. The judge still had to go through a detailed, 11-factor analysis to determine whether the interests of justice and the convenience of the parties would be best served by transferring the case or by keeping it in North Carolina.

In the end, the judge concluded that the case should be transferred. He quoted a prior case that said that "once a mandatory choice of forum clause is deemed valid, the burden shifts to the plaintiff to demonstrate exceptional facts explaining why he should be relieved from his contractual duty."

The customer now faces the increased expense and inconvenience of having to litigate its case across the continent from where it originally hoped. That likely will give Oracle some bargaining leverage.

(AC Controls Co. Inc. v. Pomeroy Computer Resources, Inc., No. 3:03CV302 (W.D.N.C. 09/29/2003))

Possible Lessons

1. Read all contracts before you sign them.

2. Know that, if your contract contains a forum-selection clause, you may well have to live with litigating your case in a courtroom far, far away.

October 11, 2003 in Contracts, Litigation, Purchasing, Sales | Permalink | Comments (0) | TrackBack

Dinosaur Bones

Frank Quattrone’s trial for obstruction of justice continues; see this story from the AP. On Thursday, Quattrone took the witness stand in his own defense. Quattrone’s lawyer, John Keker, asked him about an unrelated investor lawsuit against his former firm, Morgan Stanley. Quattrone had been a witness in that lawsuit. According to the WSJ, Quattrone commented, “I was amazed how the plaintiff’s lawyer would take extraneous documents and twist and turn them to make it sound like something bad.” (Wall Street Journal, Oct. 10, 2003, at C1, C10 cols. 2-3.)

Quattrone's comment reminded me of how, in a former life, I sometimes used to explain trials to clients. Think of a trial lawyer as a paleontologist, working with a pile of dinosaur bones (documents, witness testimony) to convince a jury that the dinosaur looked like this. The paleontologist describes her vision of the dinosaur, and tries to show the jury how the bones fit together in a way that matches her vision. Perhaps the bones don’t fit together perfectly, however. Perhaps some bones are missing. Of course, there’s an opposing paleontologist in the courtroom, twisting and turning the bones in a different way in support of his own vision.

The jurors typically knew little or nothing about dinosaurs before the trial, and of course they don't get to see the dinosaur in real life. They still have to decide what the beast really looked like. Their decision can change -- or end -- lives, reputations, and bank balances.

October 11, 2003 in Communications, Litigation | Permalink | Comments (4) | TrackBack

October 09, 2003

Backdated Sales Contracts Resurface Years Later

The CFO of software giant Computer Associates was forced to resign, along with two other senior financial executives of the company -- and who knows what else now lies in store for those folks -- because several years ago the company "held the books open" to recognize revenue for sales contracts signed after the quarter had ended.

According to CA's press release of yesterday, in the fiscal year ended March 31, 2000, the company took sales into revenue in Quarter X even though the contracts weren't signed until after the end of the quarter. See also these stories from Reuters, the AP, and Dow Jones.

(Continued below)

CA stressed that the sales in question were legitimate and that the cash had been collected; the issue was one of the timing of revenue recognition. The Audit Committee was still looking into whether the company's financial results would need to be restated. In the above-cited news stories, outside observers speculated that the company was attempting to position itself to minimize the SEC penalties that were likely to be imposed.

These revenue-recognition problems came to light during an Audit Committee inquiry triggered by a joint investigation by the U.S. Attorney's office and the SEC. It just goes to show that past sins can come to light years after the fact, possibly as a domino effect of unrelated events.

A May 2001 column, The Fraud Beat, by Joseph T. Wells, in the Journal of Accountancy, has a readable explanation of this so-called "cut-off fraud" and how it can be detected. The column recounts a couple of interesting war stories, including one about a Boca Raton company that programmed its time clocks to stop advancing at 11:45 a.m. on the last day of the quarter. The company would continue making shipments -- with the paperwork time-stamped by a stopped clock -- until sales targets had been met, at which point the time clocks would be restarted.

As I observed in a previous post, backdating a contract can be perfectly legal in some circumstances, but -- as illustrated here -- not when it comes to recognizing sales revenue.

It remains to be seen what else will happen to the three former CA financial executives. It can't be a good thing for their peace of mind that the Justice Department and SEC are already involved.

October 9, 2003 in Accounting, Contracts, Embarrassments / Bad Career Moves, Finances, Sales, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

October 08, 2003

What Did Quattrone Know, and When Did He Know It?

The Frank Quattrone trial proceeds -- see this Dow Jones story, or this search in the Yahoo news files. As has been widely reported, Quattrone received a "let's clean up those files" email and forwarded it to his group at Credit Suisse First Boston. He had recently been told by a CSFB in-house lawyer that the SEC was doing an investigation into some CSFB-related matters. It's in dispute whether he was told enough to make him realize that his own group should suspend any cleaning out of their files.

The jury will have to decide -- more than 3-1/2 years after the fact -- whether Quattrone had the intent to obstruct justice when he forwarded the clean-up email to his group. Even if Quattrone is acquitted, his life and career have suffered major disruption, all because of an email.

(Continued below)

Basic Documentation-Retention Rules

The basic legal principle is simple, at least in theory: Don't destroy documents that might be relevant to impending legal action, at least not without consulting counsel.

But, you ask, when is legal action impending enough to trigger this principle? It depends. As the Quattrone case illustrates, if any legal action is impending, and you destroy documents, then the government might suddenly get very interested in you. If the jury gets the wrong impression, you could find yourself taking an extended sabbatical from your life as you know it.

Possible Lessons

If in any doubt whether you should destroy particular documents, you likely will sleep better if you consult counsel first. The mere fact that you consulted counsel, standing alone, could later help you refute any allegation of criminal intent.

You might want to get written confirmation of what counsel says, even something as simple as an email exchange. That's a little bit of extra work, but it's worth it. Months or years later, you, or your counsel, may not remember what transpired. Moreover, it's widely believed that juries tend to give credence to contemporaneous written documents, possibly more so than to after-the-fact witness testimony.

October 8, 2003 in Communications, Criminal Penalties, Record-keeping, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

October 01, 2003

Will Your PPT Slides' Footer Help Lose a Lawsuit Too?

Last week a court poured out * Storage Technology's corporate-raiding lawsuit against Cisco. One of the nails in the coffin was the way that Storage Tech had protected -- or more accurately, failed to protect -- the alleged trade secrets that Cisco had supposedly misappropriated. While that alone didn't lose the case for Storage Tech, it didn't help, and it likely has triggered some internal recriminations at Storage Tech.

* When a lawsuit is "poured out," it generally means the lawsuit was dismissed, in this case, by the granting of summary judgment.

Here's the story:

The Lawsuit

The parties to the lawsuit are well-known players in the tech sector. Storage Technology makes various disk- and tape storage devices, as well as equipment for storage networking and management. Cisco is "the worldwide leader in networking for the Internet," according to its Web site. In late 1999 and into 2000, several of Storage Tech's employees left to join NuSpeed, Inc., a start-up company that opened in January 2000. In September 2000, Cisco bought out NuSpeed for some $450 million in Cisco stock.

(Wait a minute -- in September 2000, long after the tech bubble had burst, the NuSpeed guys got $450 million in stock for their nine-month old company? Wow. Don't be too envious, though. As this chart shows, Cisco's stock price joined the plunge in the months following the acquisition. Depending on how long the lock-up was for -- I couldn't seem to find the acquisition agreement in Cisco's SEC filings -- the NuSpeed people probably didn't net nearly as much as they had hoped.)

Anyway, Storage Tech sued Cisco shortly after the acquisition closed. The gravamen of the lawsuit was that Cisco allegedly had interfered with the noncompete, nonsolicitation, and nondisclosure provisions in the employment contracts of the former Storage employees who had gone to NuSpeed. Three years later (viz., last week), the judge granted summary judgment for Cisco on all counts, largely because Storage Tech had failed to come forward with evidence of actual damages.

Storage Tech's Secrecy Problems

At one point, the judge zeroed in on Storage Tech's supposedly-cavalier treatment of what it was claiming to be trade-secret information:

As to the requirement of reasonable efforts to maintain the secrecy of the information, the [Minnesota Uniform Trade Secrets Act] requires neither the maintenance of absolute confidentiality nor the implementation of specific measures to maintain the secrecy of a trade secret. A plaintiff asserting a misappropriation claim must demonstrate that it undertook some effort to keep the information secret.

Here, Storage used general employee-confidentiality agreements, but such agreements are insufficient to satisfy the statutory requirement. [Editorial comment: That doesn't seem like a correct statement of the law, but maybe the judge was making a specific statement about these particular circumstances.]

Given its rejection early in the product development process, very little information about the SAN Appliance exists. What little information does exist was not the subject of reasonable efforts to maintain its secrecy. For example,

  • the author of the slide presentation did not mark it as confidential because he did not believe the design of the SAN Appliance was confidential, proprietary, or a trade secret. None of the limited documentation of the SAN Appliance was marked confidential.
  • Nor did Storage secure the documentation related to the SAN Appliance. Storage admits that it found the documentation on back-up disks left behind by departing employees. [Editorial comment: It's hard to see how this one example weighs against secrecy.]
  • Moreover, upon the resignation of the slide presentation's author, Storage did not inform him of the secrecy of the SAN Appliance. [Editorial comment: This doesn't sound right at all. It doesn't seem reasonable to expect that an employer, in every exit interview, must go through and list every trade secret that the departing employee is expected to keep secret. But again, maybe the judge was referring to the specific facts and circumstances of this case.]

In short, viewed in the light most favorable to Storage, the record reveals that Storage did not subject information about the SAN Appliance to reasonable efforts to maintain its secrecy.

(Emphasis, paragraphing, and bullets added, citations omitted.)

As you can tell from the editorial comments above, I think the judge probably goofed here. It could be that the judge didn't have sufficient evidence presented about Storage Tech's security system. From the discussion in the judge's opinion, it seems to me that if Storage Tech had the usual corporate security systems in place -- locks on the doors, passwords to access the network, etc. -- the judge should have let the secrecy claim go to the jury. But then I have yet to be appointed and confirmed as a federal judge, so my opinion counts for exactly zero.

The overall tone of the opinion suggests that the judge didn't think much of Storage Tech's trade-secret claim concerning a product proposal that it apparently had never even tried to develop. In all likelihood, he was going to pour out Storage Tech in any case.

Possible Lessons

There are several lessons to be had in this case, but here's a big one: Make an effort to label your confidential documents as "Confidential" or "Proprietary." If you don't, a judge might later use that as an excuse to deny your claim that the documents contain trade secrets -- if you didn't treat the documents like trade secrets, why should the court?

(On the other hand, don't go overboard with your confidentiality stamp -- the credibility of your secrecy assertions may well be diluted if you unthinkingly label the menu in the company cafeteria as confidential.)

October 1, 2003 in Embarrassments / Bad Career Moves, Intellectual Property, Marketing, R&D;, Record-keeping | Permalink | Comments (1) | TrackBack