As high-tech companies battle for an edge in an increasingly competitive marketplace and a fluid economy leads to more job mobility, companies are worrying more than ever about who owns the ideas and information in an employe's head.
Companies are drawing up "employe confidentiality agreements" binding workers not to divulge trade secrets or compete with the company for a period of time after leaving, limiting access to computer data banks and splitting up formulas to chemical processes.
Despite such safeguards, lawsuits against former employes are on the rise for transgressions as diverse as using a former employer's customer list, raiding an employer's research and development department to lure away the best workers or breaking the terms of a noncompetition agreement, according to lawyers and industry specialists. Firms are on guard against even their own customers, with some "rigging" electronic equipment to monitor whether customers who lease it take it apart to learn how to duplicate it.
In the Washington area, increasing numbers of employers are even more concerned because of government contracts that sometimes require a firm to work hand in hand with a competitor under conditions that may allow the competitor's employes to appropriate information.
"You worry a lot," said Earle Williams, president of BDM International Inc., a professional services firm that does most of its work for the U.S. military. "If the stuff gets sucked up by osmosis and appears in a different form, you know what happened, but you can't do anything about it."
BDM draws up agreements with competitors stipulating that no trade secrets will be violated by either side. But even so, proprietary information has been misappropriated, according to Williams.
Williams said competitors are contacted when a trade secret allegedly has been violated, but responses vary. "On one occasion the company said, 'You're right,' and took action with the employes. Another company said, 'Tough,' and that's what it was -- tough."
"Washington is an area where people are very much concerned with preserving trade secrets," said Harvey Pitt, a lawyer with Fried, Frank, Harris, Shriver & Kampelman, a Washington law firm. "You have a lot of companies that have a very heavy governmental connection, and that poses concerns on the part of companies."
"High-tech companies are more frequently bringing trade secret actions than at any time in the past," said Roger M. Milgrim, author of the book, "Trade Secrets" and a New York lawyer. "The reliance that the business community places on trade secrets is increasing, and the other forms of intellectual property protection are sometimes unwieldy to use."
Patents, for example, cannot be obtained for computer software because it is a compilation of mathematical formulas, said Milgrim. "You can't patent the things that don't meet standards of invention," he said. "That's one of the dilemmas of new technologies."
The label "trade secret" covers more bases by designating as proprietary information the whole process by which a product is manufactured. The violation of a trade secret also can carry grave consequences.
"Intellectual property may be property and you can violate criminal laws by stealing that property," said Jack Bain, an attorney with the Phoenix law firm Brown & Bain. Employers whose trade secrets have been violated can sue not only the departing employe but also the competitor who employed him, and monetary damages can be stiff if the case is decided in the first employer's favor.
But no amount of paper contracts or metal locks can completely keep employes from using information for the benefit of the competition if they wish. Nor can a company always ensure that another company will honor trade secret agreements when a former employe offers one to the competition.
To further complicate things, there are no assurances as to who will win a lawsuit. Just as employes can betray their firms, employers can be unreasonable in what they ask employes to sign. "It's a real gray area," said attorney Pitt. "It's an area where careful presentation and good lawyering carry the day."
The situation is further muddied by laws that vary given the nature of the case. There are no federal laws, for example, governing breaches of noncompetition agreements, and some states, such as Michigan, California, and Florida, generally will not uphold the agreements. A Virginia employer who charges an ex-employe with breaking a noncompetition agreement may be out of luck if the employe has moved to Silicon Valley.
Companies also have to worry about "brain drains and brain raids," said Pitt. A brain drain is a wholesale hiring away of a department, while raids are more selective. "There are companies who raid people because they will steal information for them," Pitt said.
Virtually all high-tech companies require employes to sign confidentiality agreements. "Agreements not to use an employer's trade secrets are almost universal," said Bain. The major portion of the agreement consists of an employe's promise not to divulge any proprietary information or trade secrets with which he will come in contact while employed.
Another clause in the contract, most often included for high-level management employes, is an agreement that the employe will not compete directly with the company for a period (usually up to a year) after leaving the company. Noncompetition agreements must be reasonable in terms of duration, territory and defined competitive activity, lawyers say.
Valuable employes usually get "golden handcuff" treatment that includes stock options in the company and other perks, lawyers and industry sources say. In some instances, an employe who has temporarily taken a lower-paying job with a new company because of a noncompetition agreement may be paid the difference between the two salaries by his former employer as the price for staying out of competition.
Many contracts require new employes who come to the company to list all ideas and patents the employe considers to be his or hers before employment commences. Thereafter, all ideas belong to the company -- even if the employe thinks of something in the shower at home. "The question is, when did you conceive it? And the answer is, if you conceived it when you worked for us, it's ours," said BDM's Williams.
To eliminate all ambiguity, one local defense contractor that develops super-secret bomber technology for the government defines the workweek as around the clock, seven days a week. "We have a definition of a standard work week -- 0001 seconds after midnight Sunday night and that goes through midnight Sunday night," said a company official, who requested that neither he nor the firm be identified.
Some companies may ask employes to clear ideas the employe wants to develop outside the company, and the company might try to retain the right to develop the idea.
Many companies require all employes, even clerical workers, to sign the contracts. "Even a typist may type something we consider hot potatoes and take it home to her boyfriend," the defense contractor said.
Despite attempts to draw the lines, defining what belongs to a company and what belongs to an employe remains a morass of confusion. Sometimes start-up companies are slapped with lawsuits as a way to slow the competition or simply as malicious prosecution, lawyers say.
"When you are starting up a new company you know you are going to get hit," said Washington lawyer Richard Stern, who represented a small, high-tech Fairfax firm called Datametrix Systems Corp. in a case. "It's almost like your initiation into the business is getting a summons for a violation of a covenant not to compete or a trade secret."
In Datametrix's case, resolved a few years ago, both the firm and a new employe were sued by Racal-Milgo Inc., a Miami data communications hardware manufacturer, on charges that a former employe stole a computer program. "We got sued, he got sued, I got sued, the company got sued," said John Kelly, president of the firm, which does performance evaluations of large-scale computer systems and teaches courses in how to program and operate them. "It was a surprise, a total surprise."
The experience made Kelly "keenly aware of the whole process and of how even a seemingly innocent act can result in grave consequences," he said. "I absolutely ask my employes to sign agreements and think it's important." Kelly said often what constitutes a trade secret is not explained to employes. "A piece of paper is thrown in front of them, and they don't understand it. They think they can just pick up and take their manuals and ideas with them, but the company wants to retain as much of the knowledge and expertise the employe has accumulated."
Now, Kelly is suing another employe for breach of a noncompetition agreement. The employe, who left the firm, took away clients after Datametrix promoted the employe's manuals and course materials, Kelly charged.
Donald Udel, the employe who left Racal-Milgo for Datametrix and is now working for still another firm, recommends that all employes document ideas and activities and consult lawyers about what belongs to whom and about contracts they are asked to sign.
As a general rule of thumb, lawyers advise employes not to work on the development of the same product at a competitor's business that they worked on for a former employer. Employes leaving a company also are counseled to be direct with employers and discuss their plans in order to avoid later problems.
Companies that lure employes away can be charged with interference in a competitor's business, lawyers say. Rules on employes who want to leave a company en masse to start their own venture, however, are a gray area. "It can be done in an illegal manner" or it can be done right, said Roger Borovoy, vice president of Sevin Rosen Management Co., a venture capital management company. Borovoy has been involved in such moves.
If an employe wants to leave his employer to go into the same business, he should not talk to customers before leaving or start recruiting employes from that company, Borovoy said. Nor should the employe take any documents, such as customer lists, with him.
Lawyers also recommend a lengthy list of procedures for high-tech employers to follow. "One does have to worry who one allows into the inner sanctum," said Pitt. Limiting employes' access to sensitive information and hiring investigators to check credit ratings, personal backgrounds and involvement in other companies is not unusual, lawyers say. Drawing up a code of ethics and holding exit interviews in which employes are reminded of obligations also are valuable.
Genex Corp., a Rockville biotechnology firm that makes the amino acid that goes into aspartame sweetener, among other products, restricts access to formulas for sensitive processes. "We make the effort to minimize the dissemination of that type of technology to the minimal amount of people that need to know it to get the job done," said Lawrence Flynn, chief patent and trademark counsel for Genex.
Password codes are built into software programs at Planning Research Corp., a McLean professional services company developing computer systems and software for the government and other clients, said Peter Johnsen, associate general counsel with PRC.
At Fairchild Industries Inc., patent counsel Michael York said proprietary electronic equipment may be rigged before being leased to industrial customers. Electronic components have been encapsulated in plastic or had hairpins inserted into them before being put inside their housings, for example. "We can tell by virtue of turning a screw if it's been tampered with," said York. "We've also put a thin lead sheet around components so you could not X-ray it," he added.
But the bottom line is trust between employers and employes and the good faith on which many companies, even ones handling the most sensitive government information, operate. Companies and employes generally know what's right and what's wrong. "Basically, it is 'how does it smell?' " said Susan Nycam, a lawyer and partner in charge of high technology at Gaston Snow & Ely Bartlett, a law firm with offices in Palo Alto, Calif. "If it stinks ethically, there is a strong possibility it stinks legally as well."