The Business Counselor Blog™

US Patent Law Changes Finally Approved

This issue of Business Counselor Update describes changes that have been made over the last quarter in the Westlaw database Business Transactions Solutions (BTS).  Access to further information requires a Westlaw subscription, which can be obtained by using the contact and ordering information below.  The most notable development has been the passage of sweeping changes to the US patent laws after years of debate and controversy.  Business counselors should review the new rules carefully in order to inform and advise their clients.

New SEC Rules on Shareholder Compensation Votes & Progress on US Patent Law Reforms

This month’s Business Counselor Update highlights the adoption of final rules by the Securities and Exchange Commission implementing required shareholder votes on executive compensation and golden parachute compensation and the latest developments in the ongoing efforts to reform the US patent laws.

Identifying Trade Secrets & The Special Case of Customer Lists

Trade secret protection has been made available to a wide array of items and proper design of a trade secret protection program begins with identifying trade secrets that are kept and used within the company.  Once the universe of trade secrets has been defined the company can determine the most appropriate types of security procedures.  This post includes a report that describes the process of identifying trade secrets in general as well as particular issues that may arise with a particularly important and sensitive item--customer lists!

Consulting Agreements for University Researchers

Some of the most talented researchers in the world maintain their "day jobs" at public and private universities.  Businesses looking to tap into this resource will often approach university scientists and engineers with requests for consulting services in those areas of their expertise that overlap with the needs of the for-profit entity.  The terms of such an arrangement, which must be approved by the university, will be set out in a customized form of consulting agreement.  This week I am providing an annotated consulting agreement for a university researcher that describes some of the issues that can arise.

Trademark License Agreement

A manufacturer may often enter a new market by contracting with a partner that will produce the products in accordance with the manufacturer's specifications and then promote and sell the finished products in the market.  The operative agreement for such a relationship is often a trademark license agreement pursuant to which the manufacturer licenses its trademarks to the licensee for exploitation in a specific territory and the licensee agrees to use the trademarks in a manner that preserves the quality of the licensed products and remit royalties to the manufacturer based on sales of the licensed products.  A comprehensive form of trademark license agreement is attached.

Electronic Mail Policies

This week I'm passing along an example of an electronic mail policy.  These policies govern the use of electronic mail (e-mail) service provided by companies to their employees.  It is essential for a company to have a clear e-mail policy that defines proper use and misuse of corporate e-mail services and informs all employees about their legal responsibilities with respect to sending and retaining e-mail messages.

Recent Developments in Software Use and Licensing

This week I'm providing a report on two important developments in the area of software use and licensing--open source software and the recently approved ALI Principles of the Law of Software Contracts.

Foreign Regulation of Inbound Technology Transfer Agreements

Cross-border technology licensing agreements have become an important, often essential, element of the overall business strategy of any firm that seeks to expand its operations globally. In general, a cross-border technology license provides the framework under which an owner of intellectual property rights (or specialized knowledge or expertise that meets the applicable definition of a trade secret) can transfer certain legal rights relating thereto to a business partner in a foreign country while still retaining title and control of such technology. As is the case with purely domestic licenses the owner of the technology—the licensor—will seek to retain control over the licensed subject matter through careful definition of the scope of the licensing include permits uses, territorial restrictions and limits on the terms of the license. Compensation from the licensee, generally in the form of royalties, is also an important component of any cross-border technology license agreement. Additional provisions will be included depending on the type of licensed subject matter with distinctions being drawn between licenses of registered or statutory intellectual property rights (i.e., patents or trademarks) and licenses of "know-how" in connection with a process—such as manufacturing--which may include training and other services from the licensor in order to ensure that the licensee understands and absorbs the proprietary information. Governments around the world has sought to impose restrictions on inbound technology transfers agreements for a variety of reasons. This week we provide you with a report that includes an overview of technology transfer regulations and specific summaries of applicable laws in China, India and Mexico.

California's Trademark Registration Law

Doing business in California?  Don't forget opportunities to protect your valuable brand through registration of trademarks under California's own trademark law.

California Affirms Narrow Enforceability of Noncompetition Agreements

The California Supreme Court has affirmed that noncompetition agreements, even if written narrowly enough not to deprive persons of their right to pursue their profession, are invalid under California law unless they fall within one of the few statutory exceptions.  See Edwards v. Arthur Andersen LLP, 189 P.3d 285 (Cal. 2008).

Raymond Edwards II (“Edward”) was a CPA of Arthur Andersen LLP (“Andersen”). When he was hired by Andersen, he signed a noncompetition agreement which prohibited him from working far or soliciting certain Andersen clients for limited periods following his termination. In June 2002, Andersen went out of business and announced that HSBC USA, Inc. (“HSBC”) would acquire a part of Andersen’s business, including Edwards’ section. HSBC offered Edwards employment on condition that he sign a “Termination of Non-compete Agreement” (“TONC”). The TONC required Edwards to, among others, (1) voluntarily resign from Andersen, and (2) release Andersen from “any and all” claims, including claims that in any way arise from or out of, are based upon or relate to Edwards’ employment by, association with or compensation from Andersen. In exchange, Andersen would agree to accept Edwards’s resignation, agree to Edwards’ employment by HSBC, and release Edwards from the noncompetition agreement.

Edwards signed the HSBC offer letter, but refused to sign the TONC because he was afraid that he would lose his right to request Andersen to indemnify his cost that may arise from the government investigation and civil lawsuits against him in connection with Andersen’s involvement in the Enron scandal. Andersen terminated Edwards’ employment and withheld severance benefits. HSBC withdrew its job offer to Edwards.

Edwards sued Andersen and HSBC for intentional interference with prospective economic advantage under the California statute. Edwards alleged that the noncompetition agreement violated California Business and Professions Code § 16600’s prohibition on restraining a lawful profession, trade, or business, and it constitutes one of the elements of the cause of action, i.e., a wrongful and intentional act by the defendant, designed to disrupt the relationship. In addition, Edwards alleged that the TONC was designed to have Edwards waive his indemnity right protected by California Labor Code Section 2804 making all contracts that waive an employee’s right to indemnification invalid, and thus unlawful. The California Court of Appeals agreed with Edwards’ view regarding the both allegations.

The Supreme Court of California agreed with Edwards’ first allegation only. Business and Professions Code § 16600 prohibits noncompetition agreements except for those in the sale or dissolution of corporations, partnerships, and limited liability corporations. The noncompetition agreement in this case did not fall within this exception. Andersen argued that the Ninth Circuit once ruled that another exception is available when a noncompetition agreement is drafted narrowly enough not to deprive the employee’s right to pursue his or her profession, and this case would be covered under this exception. However, the Court held that the Ninth Circuit misunderstood California law and California's strong policy in favor of open competition and employee mobility, and thus did not constitute a precedence. For Edwards’ second allegation, the Court interpreted the TONC narrowly so that it would not violate Section 2804. Under the Court’s interpretation, the waiver required TONC would not encompass Edwards’ right to request indemnity against Andersen, and thus not unlawful.

As a conclusion, the Court held that Andersen’s noncompetition agreement was unlawful and invalid, but the TONC was not unlawful and thus would not support Edwards’ tort claim.

This material will appear in Alan Gutterman’s publication entitled “California Business Transactions” and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.  Alan Gutterman is the Founder/Principal of Gutterman Law & Business (www.alangutterman.com), which publishes the Emerging Companies Blog and the Business Counselor Blog, and a Partner of The General Counsel LLC (www.thegeneralcounsel.net).