FALL 2010

Trade Secrets

 

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

ID No. 85737 & 85736

Time:  W 6:30 - 9:30 p.m.
Room:  W-215
Professor Jay Dratler, Jr.
Room Across from 231D (IP Alcove)
Home: 330-835-4537
Copyright © 2000, 2002, 2003, 2006, 2008, 2010   Jay Dratler, Jr.   For permission, see CMI.

Trade Secrets, Fall 2010

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

Pewlett-Hackard Company (we'll call it "P") was an icon of Silicon Valley.  Started by two young men in a garage in San Jose, California, it had first produced test equipment for the expanding electronics industry.  Then it had become a leader in almost every revolution in modern electronics: hand-held calculators, minicomputers, personal computers, software for personal computers (including operating systems), printers for personal computers, and photo-ready printers.  In particular, P was a pioneer in inventing and developing ink-jet printers, which soon became the preferred computers for consumers and small businesses by virtue of their lower cost and no warm-up time, as compared to laser printers.

P was famous for its "open campus" and relaxed approach to work.  Located on rolling hills in San Jose, California, its headquarters consisted of low-slung buildings spaced around open grassy knolls, with plenty of pavilions and picnic tables where employees could eat.  There were no fences around these areas, but P had several upscale "cafeterias" on its grounds and inside its buildings, with gourmet chefs serving excellent ethnic food of all kinds.  In good weather—which was most of the time in California—employees would gather for long lunches of sushi or tandoori to discuss the latest scientific discoveries and new ideas for products.  It was a very creative place.

But by early 2008, P had entered an industrial cul-de-sac.  The products that accounted for most of its revenue were personal computers and printers.  Intel Corporation had secured a monopoly on the microprocessor chips that made them run, and Microsoft had secured a monopoly on their operating systems.  As a result, the hardware itself became a "commodity" item, in which new ideas didn't matter much.  What mattered most was price.  Manufacturing moved offshore to Asia, and P rapidly began to lose market share to competitors.

At just about this time, the economic collapse of 2008 hit.  Businesses, which accounted for the majority of P's sales, virtually shut down their buying.  Consumers did, too.  Sales plummeted, and P began laying off engineers, programmers and technicians for the first time since its work in that legendary garage so many years ago.  It's future looked bleak, and its stock fell along with its employment.  


B

P's Board of Directors reacted to these reversals as boards often do.  It fired the CEO and hired a new one, a man named Duncan Durd, whom we'll call "D."

D had once been a computer hardware engineer, many years ago.  But he had a head for numbers and good instincts for how new science and technology makes new products possible.  So he had rapidly risen in success and management in Silicon Valley, where he had managed and often initiated such products as networked printers, printer sharing, and "smart" cellphones.  He seemed to be one of those rare people who inspires creativity among subordinates and co-workers and is able to get senior management and investors to buy into risky new ideas.

When D became CEO of P, it was on life support.  Financial analysts had begun talking about possible bankruptcy.  But D took the bull by the horns.  He took standard cost-cutting measures, including seeking cheap offshore suppliers for materials and components, bargaining with suppliers to cut costs, moving some production offshore, and continuing the layoffs that his predecessor had started (although earning goodwill from employees by basing layoffs on merit more than seniority).  D took all these measures with special alacrity and intelligence, finding the right suppliers, driving just the right bargains, and moving just the right amount of manufacturing overseas, without losing any of P's most valuable and creative employees.

D also had stunning ideas for new products.  He conceived and pushed the idea of designing new printers to network seamlessly with mobile devices like smart cell phones and so-called "tablet" computers, including Apple's iconic iPad. With these new printers, users could print such things as airline boarding passes and their spreadsheets easily by wireless connections with their mobile devices.  Other printer companies had similar ideas, but P executed them better.  It designed and manufactured special hardware chips to control the networking process for printers, and those chips made the process faster and simpler for users, and the printers cheaper, than competitors' products.  As a result of these developments, P's sales increased rapidly as the economy began to recover from the 2008 collapse.  By late 2009, the layoffs had stopped, P was hiring again, and profits started pouring in.

D had had enough training to as an engineer to understand, at least generally, how these new products were designed and built.  But his major contribution was in business, not technology.  He seemed to have superb instincts for getting the right product, with the right promotion, to market at the right time.  He personally supervised the development (at the management level), pricing, marketing and promotion of all P's new products, including the many variations of networked printers and P's own tablet computers and e-readers.  He also supervised the transition of P's machines from operating systems proprietary to (and often monopolized by) competitors to "open software" that P and its customers could modify and customize at will.  Competitors were doing many of these same things, but P, under D's guidance and leadership, did them eaerlier, faster, and better.  D was personally involved in most of this strategic planning, which the Board and key employees treated as highly confidential.


C

When D had signed on as CEO of P, both sides had had some bargaining leverage.  D had a good reputation as a leader, and P was on the ropes financially.  But no one else was hiring anyone, let alone changing CEOs, and there were no other opportunities for D to lead a major Silicon-Valley company, which he had never done before.  So both sides had some leverage in the negotiations for D's employment.

D handled his own negotiations without a lawyer.  He adopted a simple strategy: he conceded most legal points and, confident in his abilities, went for economic benefit.  P's stock was low at the time. So D secured an agreement to receive stock options that, if all went well, would give him 5% of the outstanding common stock of the company and a small fortune.  He also secured a multimillion dollar salary which was high even for Silicon Valley and especially for that time.

In exchange for these attractive economic benefits, D had agreed to almost whatever legal terms P's lawyers had demanded.  He signed a stiff nondisclosure agreement, with the usual exceptions for information that is or becomes publicly known, secrets developed independently by third parties and disclosed without their fault, and information that D brought to P when he signed on.  D also agreed to assign to P any ideas he conceived during employment and for six months afterward, including all patent rights.  Finally, D agreed not to solicit business from P's customers and suppliers, and generally not to compete with P, anywhere in California, on any "high-technology products," for three years after leaving P.



D

D thought of himself most of all as a creative business person.  He believed that P's chief competitive advantage was the creativity of its people, including himself.  So he encouraged an open environment in which creative technical and business discussions could occur spontaneously.  He encouraged employees to socialize after working hours, in private parties, restaurants and bars, and to carry their creative discussions into their socializing.  He also urged employees to take long lunches together on P's pleasant rolling-hills campus, and he made sure there were no fences around or within those hills.

However, P's Board of Directors and legal staff insisted on some efforts to keep trade secrets.  All employees had to show ID to gain access to P's buildings and cafeterias, although they didn't have to wear their badges while at work.  All technical employees and every manager had to sign a nondisclosure agreement, and key technical employees had to sign noncompetition agreements much like D's.  Every six months, P's lawyers sent e-mails to all of P's employees cautioning them against revealing P's proprietary technical information and business plans to outsiders, and listing generally, without disclosing specifics, the programs and plans that were most sensitive.  When any technical employee or business manager left P's employ for any reason, P would hold an "exit interview," in which a lawyer would remind the departing employee of his or her agreements and obligations.

D was the type of person who generally like to keep important information in his head.  He had an encyclopedic knowledge of P's technology, business strategies, and business plans. Often he amazed his subordinates with his "total recall" of facts and details about the business.  But D had found by hard experience that most of his employees lacked his total recall.  He soon discovered that the best way to refresh their memories was to resend them e-mails that he and they had exchanged.  D liked to send these "refresher e-mails" late at night, while he worked at home.  So he arranged to have all his voluminous e-mail traffic stored (and regularly updated) on the hard drive for his home computer and on two mobile devices in his possession, one owned by P and the other by D personally.

E

P's new products, and especially the plans for their introduction and promotion, took the industry by storm.  P's reputation as a leading firm in Silicon Valley had never been so good since P had started to get trapped in the "commodity" business over a decade before.

 He was rumored to have had several affairs with subordinates and co-workers, and several female employees had come to the Board, in private, with charges of sexual harrassment.  So far the newpapers had gotten no wind of these charges, and no one had yet filed a formal complaint, which of course would become public knowledge.  Fearful of what might happen to P's reputation and its ability to attract new talent, the Board fired D as CEO, based on these rumors and charges, effective in two months.   In an attempt to avoid messy publicity and litigation, the Board offered to let D keep his stock options and continue to receive his high salary through the end of the year.

D was furious at the rebuff.  He thought the Board ungrateful in the extreme.  While still negotiating a possible exit with the Board, and while still acting as P's CEO, he approached a rising competitor of P, Dorkle Corporation, for employement as its CEO.

 It had grown rapidly both by internal creativity and successive acquisitions of smaller competitors.  Now Dorkle was moving into the hardware business, developing specialized chips to install in various printers and mobile devices.  At the moment, Dorkle competed directly with P only with a specialized line of chips used to network printers wirelessly to mobile devices.  But industry analysts and the financial press all speculated that Dorkle would soon become one of P's strongest and most successful competitors.  Some even speculated that one of the two firms might seek to acquire the other within the next two years.


F

P's Board has approached you for legal advice on a possible pre-emptive lawsuit against D and Dorkle.  The Board is afraid that D will dislose to Dorkle, and use to compete with P, all the technological secrets and secret business plans and strategies that P has at this time.  It also is concerned that Dorkle, with D at its helm, will copy P's new "style" of competition, with aggressive development, introduction and promotion of just the right new products at just the right cost.  P's lawyers, in particular, are eager to stop D from working for Dorkle before he even begins.

P's Board and lawyers know about the e-mail arrangements that D has made.  They believe that all the details of P's business strategies and plans, as well as many of P's technological developments, are discussed in the e-mails on D's home hard drive and mobile devices.  Also, they report that D has told several employees that he "misplaced" one of his two mobile devices (the one owned by P) and doesn't know where it is.

Write a memo analyzing P's chance for success in litigation against D and Dorkle.  Be sure to cover both trade-secret actions and related contract actions, insofar as discussed in this course and the facts permit.  Discuss all reasonably possible claims and defenses on these facts, and the likelly outcome of a lawsuit, including the remedies (if any) that P might expect.  Be sure to consider all of the nonjudicial points that figure in trade-secret litigation.  At the end of your analysis, estimate the chances of P getting a temporary restraining order against D's working for Dorkle, and explain your estimate.  Conclude your memo with a recommendation of the best course of action for P and its Board to take.


G

In a separate short paragraph, pretend that you represent D.  Recommend and explain anything he might do that might materially improve his position in the litigation.




Question 2
(Sixty Minutes)

A


Abby Able is a software engineer and business consultant.  She has a degree in computer science from M.I.T. and an M.B.A. from Harvard.  She spent fourteen years working for business-software companies as a programmer and product manager.  Then she began her present career as a business consultant to independent software developers and vendors, especially those that develop "open source" software or customize it for particular businesses or customers.  She is a very bright woman who knows little or nothing about law.

Now Abby wants to start her own business-consulting firm.  At first she expects to work alone, by telecommunicating from home and traveling only when personal contact with clients is absolutely necessary.  Later, she expects to hire employees, who will also work primarily by telecommunication from their homes.  Among other things, she hopes in this way to allow herself and her employees to raise families more easily while engaging in interesting and remunerative work.

As a software developer, Abby has heard about trade secrets and copyright.  But she is hazy about what they are and the differences between them.

Write Abby a memo explaining trade secrecy and how it differs from copyright and telling her what she should and shouldn't do in her business to maximize the chances of trade-secret protection for the software that she and her employees may develop and the business strategies they may recommend to clients.  Try to be as specific as possible in your recommendations and give Abby a range of precautions to choose from, depending on cost, complexity and effort.  Explain the reasons for your recommendations, but keep those explanations short.  Also, try to keep your language as simple, clear, and free from unnecessary legal jargon as possible.  Note the possible effect of working with open-source software on your advice, but keep that discussion general.  Do not go into the details of the open-source movement or the General Public License that implements it.


B

Abby thinks that her business might develop new product ideas for software.  She has heard a little about patents on software and business methods and has retained licensed patent counsel to advise her on that aspect of her business.  But she doesn't understand how patents, copyights and trade secrets might work together to protect different aspects of software and business strategies.

Abby doesn't expect to go into the business of developing or marketing software herself.  Instead, she wants to license, to others for royalties, intellectual property in software and business methods that she and her employees may develop.  In particular, she thinks she will try to maintain IP ownership herself and license the software and business ideas to the clients for whom she develops them.

Write Abby a short memo on the salient differences between patents, copyrights and trade secrets, with emphasis on software and business ideas.  Describe and explain any pitfalls or difficulties in maintaining and licensing these three different forms of IP protection at the same time.  Be sure your memo contains specific recommendations on how: (1) Abby can maintain IP ownership of what she wants to own, including things developed by herself and her employees for clients, and (2) Abby can receive the maximum financial benefit from that ownership.



Question 3
(Thirty Minutes)


Write an essay analyzing and/or criticizing this passage.  Be sure to address all aspects of it, such as: (1) its underlying assumptions (including the law’s and current trends’ past, present, and likely future effects); 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 passage’s gloomy prognostication.   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 the relevant statutes, cases and constitutional material that we have studied and the trends in business and practice and 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 “2010 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 “2010 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 .

(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!