Last week, the Senate Judiciary Committee tabled consideration of the Patent Transparency and Improvements Act bill, the Senate version of the House of Representatives’ Innovation Act bill passed six months ago. Committee chairman Senator Patrick Leahy stated that removal of the bill was due to lack of support for a comprehensive deal, and the failure of legislators and special interest groups on both sides to come to agreement. Sen. Leahy also criticized the House bill for going beyond the scope of addressing patent trolls and including provisions that the senator believed would negatively impact legitimate patent holders. Sen. Leahy stated that the Patent Transparency and Improvements Act could come back up for consideration later in the year if the various interested parties could come up with a more targeted bill that focused solely on the issue of patent trolls. However, the Senate is also considering other, more targeted legislation to address patent trolls. One of the more notable bills is one introduced in the Commerce Subcommittee on Consumer Protection by Senator Claire McCaskill. Sen. McCaskill’s bill would require creation of a registry of demand letters that law firms send to alleged infringers on behalf on behalf of their clients (the idea, presumably, is to allow recipients to search the registry to see if the law firm represents non-practicing entities, so that the recipient knows if they are dealing with a patent troll or a practicing entity with a potentially legitimate claim). Another bill, introduced in the House, would require patent infringement demand letters to include certain information that would permit recipient to further investigate the claim against them.
Last week, the Supreme Court issued its opinion in Petrella v. Metro-Goldwyn-Mayer, Inc. (MGM), in a majority opinion held that the doctrine of laches could not operate to bar a claim for copyright infringement that occurred within the Copyright Act’s statute of limitation of three years. As a bit of legal background, the doctrine of laches is an equitable defense, in which a party argues that the opposing party has made an unreasonable delay in pursuing its right or claim in a way that prejudiced the party raising the laches defense — as a result of the delay, things have changed to such extent that it would not longer be just to grant the opposing party’s claim, and should therefore be barred. Laches, being an equitable defense, is typically only raised against claims for equitable relief (such as an injunction), as opposed to claims for legal relief (such as money damages). In 1967, Frank Petrella, author of the screenplay on which the movie Raging Bull was based, assigned the screenplay to a production company that ultimately assigned the motion picture rights to MGM. Under copyright law, pre-1978 works had a copyright term of 28 years that could be renewed up to 67 years. Furthermore, upon death of the author, renewal rights would revert to his or her heirs. Frank Petrella died in 1981, causing renewal rights in the screenplay to revert to his sole heir, Paula Petrella, regardless of various assignments of the screenplay. Paula Petrella did renew the copyright in 1991, and became the sole owner of the copyright at that point. In 2009, Paula Petrella brought suit against MGM for copyright infringement based on MGM’s continued exploitation of the movie based on her father’s work. As the statute of limitations for copyright infringement is three years, Petrella only sought damages for the three years prior to her suit, as well as injunctive relief to prevent future use of the work. The district court and Ninth Circuit dismissed the claims on the basis of the doctrine of laches, despite her action not being barred by the statute of limitations, given that Petrella waited nearly 30 years after Frank Petrella’s death and 20 years after renewal of the copyright to bring suit. The Supreme Court overturned the district court’s and Ninth Circuit’s rulings, holding that laches cannot bar legal relief where Congress has enacted a statute of limitations, noting that laches is primarily an equitable defense against claims in equity for which there is no time limitation. However, the Court did leave the door open just a crack when it further held that laches might be applicable in copyright infringement claims for equitable relief where “the consequences of a delay in commencing suit may be of sufficient magnitude to warrant, at the very outset of the litigation, curtailment of the relief equitably awardable.” The lesson for entrepreneurs to take away from Petrella is that just because a copyright holder hasn’t decided to defend its copyright (even for a period of decades) doesn’t mean that they won’t or can’t sue for damages, even if you have already invested time and resources in reliance on that non-action. (Of course, if a copyright holder does some affirmative action to cause you to rely on the holder’s failure to bring suit, you may be entitled to use the separate defense of estoppel). So if you want to use copyrighted material, always obtain the copyright holder’s permission, even if others have been infringing on the work with no sign of protest for years.
A recent blog post argued that Governor Deval Patrick’s proposal to eliminate non-competes will not have the positive impact on the Massachusetts economy promised by the bill’s name, “An Act to Promote Growth and Opportunity”, and in fact may end up having a negative impact on the Commonwealth. The article points out that non-compete agreements are only enforceable in Massachusetts where they are necessary to protect the employer’s confidential information, trade secrets, or goodwill — non-competes that solely seek to prevent employees from becoming competition are not enforceable under Massachusetts law. The article compares this with California law, famous for refusing to enforce agreements “by which anyone is restraining from engaging in a lawful profession, trade, or business”. However, California law does enforce agreements intended to restrict employees from utilizing their employer’s confidential information or trade secrets in competition with the employer. Therefore, the article concludes, the only primary distinction between California and Massachusetts law with respect to non-competes is that Massachusetts also enforces non-compete agreements that seek to restrain a competing employee’s use of his or her former employer’s goodwill. However, I believe that this is an important distinction. Whereas California does restrict employee’s use of confidential information or trade secrets, this is perhaps more appropriately considered protection of intellectual property. What non-compete agreements primarily seek to do is to restrict employees from leaving with client relationships they have cultivated in the course of their employment and with the resources of the company — goodwill. The article cites two studies that refute the popular notion that California’s prohibition on non-competes was responsible for the growth of Silicon Valley or that there was some correlation between the prohibition and the success of the California technology industry, one even going so far as to conclude that California’s prohibition on non-competes actually hinders biotech R&D. However, in my experience I’ve met potential entrepreneurs here in Massachusetts who have been close to dissuaded from launching their own venture because they were subject to non-compete agreements, and did not want to risk either professional relationships with their employers, or subject themselves to possible legal action. The elimination of non-compete agreements will hopefully remove that hurdle for some future startup founders — perhaps not many, but hopefully enough to generate enough innovation to outweigh any possible negative effect on Massachusetts businesses.
Trade secrets have two origins under Massachusetts law — the court-developed, common law definition, and the legislatively-passed statutory definition. Under common law, a trade secret is a secret that is used in an owner’s business which gives the business an advantage or opportunity for advantage over competitors who do not have the secret. The statutory definition of a trade secret is “anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement.” When courts have to determine whether something constitutes a “trade secret”, they conduct a fact-based inquiry, looking at factors such as (1) whether the information is known outside the business, (2) the extent to which employees and others involved in the business known the information, (3) measures taken by the employer to protect secrecy of the information, (4) value of the information to business or its competitors, (5) amount of resources expended in developing the information, and (6) ease with which information can be acquired or duplicated by others. Trade secret protection only applies where the secret is “misappropriated” or taken without authorization. It does not prohibit others from independently developing or deriving the information. However, in order to even have the protection of trade secret law, businesses must take reasonable steps to meet the third factor above, measures to protect the secrecy of the information. What is “reasonable” depends on the nature of the information and how the company conducts its business. Measures that companies typically take include requiring employees to sign non-disclosure agreements and agree to confidentiality policies that prohibit activity such as removing files containing trade secrets from the office or transferring electronic files to personal computers and devices. Companies should also take measures to secure documents containing trade secrets — locking up physical files, and password- or firewall-securing electronic files. When a company moves past the “everybody doing everything” phase and employees start working within defined roles, companies should also begin adopting a “need to know” policy for trade secrets, restricting access for those who don’t need to know and (where feasible) monitoring the access of those who do. Most companies run into issues of losing trade secret protection in the courts when they fail to take any measures to protect their secrets. When your company develops information worth keeping secret, it becomes worth it to take measures to protect those secrets.
In order to protect its clients from being poached by departing employees, companies frequently require those employees to sign non-solicitation agreements, which prohibit employees, after they leave the company, from soliciting away the company’s clients. Traditionally, the employee would have had to make an affirmative effort to solicit a company’s clients by contacting them directly. But in the age of social media, a new wave of cases have popped up alleging violation of non-solicitation agreements by simple public announcements of the employee’s new venture, employer, and/or position, including through a harmless update of one’s employment status on social media sites such as Facebook or LinkedIn. Last year, Massachusetts courts considered the issue of whether a status update on LinkedIn constituted a violation of a non-solicitation agreement. In KNF&T Inc. v. Muller, KNF&T alleged its former employee, Charlotte Muller, violated her non-solicitation agreement by updating her employment on her LinkedIn, which sent a notification to all of her contact, including Ms. Muller’s former clients at KNF&T. Although the court resolved the case on the grounds that Ms. Muller’s new position was in a different industry from KNF&T, it seemed that one of the central issues was that the LinkedIn update was sent to the former employer’s clients. The trend among courts resolving this issue appears to be that public announcements of a new venture or new employment, including status updates on social media, do not violate non-solicitation agreements as long as they are not sent to protected clients, whether directly addressed to them or as part of a general message on a social network. If you are starting a venture in the same industry as your employer and you are restricted by a non-solicitation agreement, you should first read the agreement to see what types of activity it prohibits. And when you announce your new venture, it may be a wise move to ensure that announcement is not directed at protected clients of your former employer by removing them from your social media notifications.