FALL 2008

Trade Secrets

 

Course No. 9200-704 (and 804)-801

ID No. 16545

MW 3:00 - 4:30 p.m.
Room L-134
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
dratler@uakron.edu

Trade Secrets, Fall 2008

FINAL EXAMINATION

Instructions

1.  E-mail at-home examination.  This is an e-mail, at-home examination.  Subject to the limitations stated below, you are free to take it at any time and place of your choosing.

2.  Limitations.  Your completion of this examination is subject to the following limitations:
3.  Materials.  Because this is an at-home exam, you may use any written materials that you have on hand, provided they are: (1) published or (2) prepared by you.  You may also use your computer to browse the Web, including the material posted for this course on the Law School’s Website.  However, the questions have been designed so that the following materials should be sufficient: (1) the casebook (if any), supplement (if any), and Website for this class (including any materials from it that you have downloaded, printed out and annotated), (2) any statutory supplement that you have used for this class (including your own, but no one else’s, annotations); and (3) an outline that you have prepared.  I encourage you to make your outline short, both so it will be usable and so you will have an “overview” of the course.

4.  Strategy for Answering the Questions.  
5.  Call of the Question.  BE SURE TO READ THE CALL OF EACH QUESTION CAREFULLY AND TO ANSWER ONLY THE QUESTION(S) ASKED.

6.  Submitting your Answers.  Detailed instructions for submitting your answers appear at the end of the examination.  Please follow them carefully.

Good luck!

Question 1
(Ninety Minutes)


A

Darlene and David were friends and classmates at an engineering college. Both earned degrees in computer science.  Due to the poor economy, neither could find a job doing what they both preferred: work as computer systems analysts.  After six months of searching, Darlene got a job with Palace Diagnostics ("PD"), a medical-testing franchise with over 1,700 local laboratories nationwide.  David still had found no job, but Darlene promised to help him get one at PD after her probation period ended.

PD's management had great expertise in medicine and diagnotic testing but little knowledge of computers or computer systems.  Its former head of computer operations had died recently at the age of 70.  PD hired Darlene right out of school in the hope of saving money on her salary and on any cost savings that her work might provide.  PD's management wanted "the most modern and efficient technology" but had no idea what that was.  Darlene had asked for the authority to hire one or more assistants, but PD's managers had said only, "We'll see."  


B

When Darlene first arrived in her predecessor's office, she found everything in disarray.  Her predecessor had been sick for years before he died, and his work was poorly documented and disorganized.  His office—now Darlene's—was a mess.  It took Darlene a seven-day week just to discover what kind of computer systems PD had.  

When she found out, Darlene was appalled.   PD's computer systems were obsolete.  Each local franchise had an old-fashioned minicomputer with several attached terminals, and parts and service for this hardware were becoming more expensive and difficult to find.  None of the computers had a graphical user interface (such as Windows), and none connected to the Internet.  They communicated with each other, and with the "main" computer at corporate headquarters, through manually placed telephone calls and low-speed telephone modems.  The "main" computer was also a minicomputer of the same brand. There was not a single modern personal computer in PD's entire operation.


C

With management's approval, Darlene worked every day for several weeks to prepare a plan to replace PD's aging computer systems with modern PCs and Internet communication.  She worked hard to make the plan as inexpensive and efficient as possible. Her final plan proposed to replace the entire computer system, for all 1,700-plus locations, for less than $1 million.

At first, PD's management was reluctant to spend the money in a down economy.  But Darlene convinced them of the merits of her plan.  Maintenance of the old computers, she pointed out, was costing PD over $200,000 per year.  In comparison, bulk high-speed Internet fees and maintenance for the new PCs would cost less than $50,000 per year, so PD could recover the new system's cost in less than seven years.  In addition, the new system would be much more flexible, easier to use and maintain, and better for PD's patients.  After much discussion and debate, PD's managers and board of directors approved Darlene's plan.

A few days after the approval, PD's inside general counsel visited Darlene.  He told her that management was concerned about the expense of the new systems and had approved the plan only on the condition that "everything you do belongs to us."  Accordingly, he asked Darlene to sign a five-page agreement, which she did.

The agreement had four parts.  First, Darlene acknowledged a confidential relationship with PD regarding all of her work. Second, she agreed not to disclose to anyone, without PD's prior written permission, "anything relating to" her work with PD, anything she might invent or create, or "any aspect of" PD's business.  There was no time limit on these obligations.  Third, Darlene agreed to disclose to PD, and to help PD patent or "otherwise protect," any inventions she might make, and any software she might prepare, while in PD's employ and for six months thereafter. Fourth and finally, Darlene agreed not to solicit any customers of PD, and not to compete with PD in any way, anywhere in the United States, for two years after leaving PD's employ for any reason.


D

Darlene immediately began work to implement her plan.  She soon encountered an unanticipated difficulty: patient privacy.  Customs in the laboratory industry, as well as federal and state law, require patient records of medical testing laboratories to be keep confidential.  PD's general counsel told Darlene that PD wanted "especially strong" protection of privacy for two reasons.  First, PD wanted to keep its medical-laboratory competitors out of its data files, which would soon be accessible (with proper authentication) over the Internet.  Second, PD wanted to attract business by advertising itself as having the best patient privacy in the industry.  So he told Darlene, "Don't settle for the industry standard, even if it costs a little more."

After some research, Darlene soon found that standard encryption techniques used for data transfer over the Internet were practically unbreakable.  Even military and intelligence services sometimes used them.  Darlene tried to convince management to use these standard (and inexpensive) techniques, but management insisted on "something special."

Seeing her chance, Darlene asked if she could hire David to assist her.  She argued that David had written a senior thesis on encryption and Internet privacy and would be perfect for this project.  Management agreed.  The general counsel, who was leaving town for several weeks to supervise the acquisition of a small laboratory chain, left Darlene with a copy of the agreement she had signed and asked Darlene to have David sign it on his first day.  In the crush of business, Darelene forgot, and David never signed the agreement.


E

After David arrived, Darlene put him to work on the privacy problem.  She spent most of her own time supervising purchasing and installation of the new equipment and software, all of which (except her own and David's softwares) were commercial vendors' standard products.  She also helped solve the inevitable problems and train PD's personnel in using the new systems.  The latter task required a lot of travel.

In her "spare" time, Darlene wrote the software and designed the pages for the Website that would reside on PD's central server at its headquarters and on every PC in every local PD franchise.  With the aid of the Internet and standard Web browsers (like Microsoft's Internet Explorer), this software would allow headquarters and every local PD franchise (with proper authentication) to use Darlene's Website to input and display patient data, accounting and medical records, and to communicate among doctors, hospitals, other laboratories, local branches of PD, and PD's headquarters.

In writing the Website software, Darlene used standard programming languages and textbook techniques.  She designed the Website's appearance and internal operation to match PD's particular ways of doing business.  PD's management and medical personnel reviewed her work on many occasions and often required her to make changes for medical, legal, or practical reasons.  Darlene always did what they asked promptly and effectively, earning herself high marks from everyone with whom she worked.  When Darlene finalized her work product, PD's top management spent several days reviewing it and asked for a few additional changes.  Darlene made them.  Then PD's general counsel asked for a complete copy of the source code for her software and registered the copyright in it in PD's name.

As for David, he worked mostly on his own.  In an old but still useful military report, he had discovered how to make variations in standard encryption protocols that would make the encryption almost impossible to break.  He had found the report, which had been declassified, on an obscure Website that was difficult to locate, even with modern search engines.  It took him several days of effort to find it.  The report did not provide any particular technique.  Rather, it described generally, in the abstract, how to make a range of variations in encryption techniques that would achieve the desired result.  David chose one of the possible variations (one that seemed most efficient to him), programmed it, tested the program, and incorporated it into Darlene's Website design.

Because David arrived on the scene late, he finished his work last.  During the three months in which Darelene had been testing her Websites at various locations, there had been no encryption on the central server or on any PC.  In theory, any Internet user, anywhere in the world, could access Darlene's Web pages and see what any internal user inside PD could see.

In practice, anyone outside PD would have to know that the Website existed and know its Web address in order to access its pages.  There was, however, a chance the someone could stumble on the Websites accidentally.  It would be harder to access Darlene's programming, which did not appear on the face of any Website, but a determined and skilled hacker who found a PD site would have had little trouble breaking in.

Only when the Websites had been installed and tested did Darelene include encryption and password protection on the central server and all of PD's local-office PCs.  Once that had been done, PD's general counsel circulated a memo to all PD personnel, identifying the new computer system, its hardware, software and Website design, as confidential and trade-secret information belonging to PD.  He circulated that memo at the same time as he applied to register the copyrights in the software and Websites that Darlene had written.


F

After that, it took only a few months to finish installing the system, with Darlene's software and Websites, and David's encryption software, on every PC in every franchised PD location, and in headquarters.  The system worked well, came in under budget, and met all its financial goals.

PD's management was ecstatic about the system and happy with Darlene and David.  But the two soon realized that, with their big project now completed, there was not much left for them to do at a medical-laboratory company.  Their work dried up and became routine.  So they started saving their money and discussed leaving PD to set up their own business.  They wanted to begin a new firm to provide software and computer services to companies in the health-care industry, including software like what they had developed at PD.  After several additional months at PD, they did just that.


G

David and Darlene got off to a shaky start, but soon their business began to grow.  They now have six regular clients, including a small, regional diagnostic laboratory chain.

There is only one problem: PD has sued Darlene, David and their company for a whole host of offenses, including copyright infringement, misappropriation of trade secrets, and unfair competition. The complaint claims trade secrets in: (1) Web-based computer systems for medical laboratory chains generally, (2) various encryption techniques to ensure patient privacy, and (3) Darlene's Websites for handling medical-laboratory data, including her page design.

You have been hired as special counsel to analyze the trade-secret claims only.  Please write a memo analyzing whether and how each of the three defendants (Darlene, David and their company) might be liable for trade-secret misappropriation.  In that memo, discuss: (1) what part(s) or aspects(s), if any, of the three categories of trade secrets named in the complaint might be protectable and might belong to PD, (2) whether each defendant might be liable for misappropriation, (3) what PD's remedies might be, and (4) the lawsuit's likely practical effect on the defendants.  Be sure to consider all reasonable defenses and traverses.  Also, try to recommend ways in which the defendants could decrease their exposure and continue their business with reduced legal liability.  Do not discuss copyright or contract claims directly, but do discuss any effect of copyright on the trade-secret claims and whether the relevant provisions of Darlene's agreement are generally enforceable.


Question 2
(Sixty Minutes)

A


Assume that Darlene, David, and their company (from Question 1) are not liable for misappropriating any trade secret of PD's.  They are now about to hire the first of many new employees, most of whom (other than secretarial and clerical help) will be computer programmers, Website designers, or both.

Write a memo describing and explaining everything they should do to increase the chances of being able to establish trade-secret protection for their and their employees' work product, including Darlene's software and Websites, David's encryption technology and the computer programs to implement it.  For each of these things, estimate honestly the chance of trade-secret protection being available as a legal manner and its practical utility, if any.  Try to write the memo in simple, nonlegal prose that Darlene and David (who have no legal training) could appreciate, and keep in mind the probable expense, inconvenience and practicality of your suggestions for a small startup company.


B

Five biotechnology experts have hired you to represent the small, research "boutique" that they are forming.  All worked for the same multinational pharmaceutical firm, where they collaborated among themselves and with many other inside and outside scientists in cutting-edge research.  Now they all have left that firm, with its blessing and investment, to pursue promising new technology that the firm chose not to pursue on its own.

Your five clients are brilliant people but untutored in the law, business, and the exigencies of the marketplace.  For all their professsional careers so far, they have worked with other scientists much like them, in close collaboration and with few restrictions.  They understand the concept of patents: already they have filed several patent applications on inventions that will serve as the foundation for their new company's work.  But they know nothing of trade secrets and are uncomfortable with the idea of anyone "owning" ideas except through patents.

Write a memo explaining to them why they should learn and care about trade secrets and what valid trade secrets could do to promote their new firm's success in both competition and revenue.  Do not repeat your advice to Darlene, David & Co. in part A, except as incidentally necessary to explain what practical benefits trade-secret protection might provide the new research boutique.


Question 3
(Thirty Minutes)


Write an essay analyzing and/or criticizing this passage.  Be sure to address all aspects of it, including: (1) its underlying assumptions (including the law’s past, present, and likely future effect on employees, their work and their thinking); and (2) its implicit judgments on what is good policy and what is practicable.  Be sure to explain in detail why you agree or disagree with the recommendation that Congress abolish the law of trade secrets.  If you agree in part, specify what parts and why.  Your grade will depend not upon your point of view (or upon whether you agree with the passage), but upon how carefully and specifically you support and document your analysis, with reference to relevant statutes, cases and constitutional material that we have studied and the underlying policies that they reveal.  The more specific and focused your analysis, the better your grade will be.

END OF EXAMINATION

INSTRUCTIONS FOR SUBMITTING YOUR ANSWERS APPEAR BELOW



INSTRUCTIONS FOR SUBMITTING YOUR ANSWERS

Please take all of the following steps in submitting your answers, before the deadline for submission:

1.  Include honor-code statement.  Make sure that your honor-code statement appears at the end of your answer file.  (Your examination number and e-mail header will constitute your signature under Ohio’s Uniform Electronic Transactions Act and your agreement to conduct this “transaction” by electronic means.)

2.  Include your examination ID number.  Type your examination ID number at the end of your answer file and double-check it.  To avoid accidental breach of anonymity, make sure that your answer file contains no other identifying information.

3.  Spell-check and finalize.  Spell-check your answer file and make any necessary changes.  Check the total number of words and modify as necessary.

4.  Save your answer file with the anonymous ID.  Save your answer file on your hard drive, with your honor-code statement and examination ID number at the end of the file.  When you save your file, use the file name “2008 Trade Secrets Law Exam” and no other.  (If you use another file name, your anonymity may be compromised.)

5.  Save your file in Rich Text Format (.rtf).  Some word-processing formats have compatibility problems, so please save your answer file in Rich Text Format.  Use the “Save As” feature of your Word Processor; then click on the double arrow to the right of the “File Type” field in the “Save As” dialogue box and select “Rich Text Format (RTF).”  Be sure to verify that this option appears in the “File Type” field before you click the “Save” button.  Then check to see that a file with the correct name and an “.rtf” file extension appears in your file folder.  (You may have to click on “View” : “Details” to see the file extension.)

6.  Attach your answer file to an e-mail message.  Send your answer file, in RTF format, as an e-mail attachment to your message, not as part of the message itself.  The “Subject” line for your e-mail message should be “2008 Trade Secrets Exam,” and the text of the message should read “Attached are my answers.”  Please double-check that your answers appear as an attached file, not embedded in your e-mail message.

(I will use your e-mail cover messages only to check that everyone has submitted answers.  I will not grade any exam until an assistant has “anonymized” the answers by separating the attached files from the e-mail messages and sending the attachments to me with no identifying information other than the examination ID number included in each file at the end.)

7.  Submit your answers by e-mail.  Send your cover message, with your answer file attached, to all of the following addresses:

(If you have not already prepared an address list in response to the test message, please cut and paste each address from this list into your e-mail program’s “address” or “TO” field to avoid typing errors; then double-check all addresses, delimiters, and punctuation.)

8.  Print and retain a paper copy of your answer file.  Immediately after sending your e-mail message, print out a copy of your answers and staple the pages together.  Then sign and date your answers and record the exact time of your printout on the title page.  (If there is an e-mail mixup, this paper copy will serve to demonstrate what you wrote and when, in accordance with the honor system.)


HAVE A GOOD WINTER BREAK!