CAUTION: There must be some quite legitimate reason for having a non-compete agreement for it to be enforceable.

 

EXAMPLE I: In one court decision, a dance studio attempted to enforce a non-compete agreement against a dance instructor who sought new employment at another dance studio. The court described the fact situation somewhat colorfully as follows:

"When the defendant, Clifford Witter, a dance instructor, waltzed out of the employment of the plaintiff, the Arthur Murray Dance Studios of Cleveland, Inc. into the employment of the Fred Astaire Dancing Studio, the plaintiff waltzed Witter into court …At the time Witter took his contentious step, Arthur Murray had a string attached to him — a certain contract prohibiting Witter, after working for Arthur Murray no more, from working for a competitor… Now Arthur Murray wants the court to pull that string and yank Witter out of Fred Astaire’s pedagogical pavilion."

 

The court held that certain dance teaching techniques did not qualify as a trade secret. The court stated that you can’t tell someone in hushed tones that you are giving the person secret information, and then simply recite the alphabet and expect it to be treated as proprietary. The non-compete agreement was not enforced by the court.

"The average, individual employee has little but his labor to sell or to use to make a living. He is often in urgent need for selling it and in no position to object to boiler plate restrictive covenants placed before him to sign. To him, the right to work and support his family is the most important right he possesses. His individual bargaining power is seldom equal to that of his employer. Moreover, an employee is ordinarily not on the same plane as the seller of an established business. He is more apt than the seller to be coerced into an oppressive arrangement. Under pressure of need and with little opportunity for choice, he is more likely than the seller to make a rash improvident promise that, for the sake of present gain, he may tend to impair his power to earn a living, impoverish him, render him a public charge or deprive the community of his skill and training."

EXAMPLE 2: Dowling was employed by Weed Eater, Inc., as vice president of manufacturing, and while so employed, he designed and organized an assembly line for the production of a string line trimmer. He had access to all trade secret and confidential information including new product plans, market forecasts, testing methods and results, market strategy, sale prices, performance specifications for components, and the confidential list of component vendors. He, like all employees, was required to sign nondisclosure agreements, which were one aspect of the company’s tight security system.

By his contract with Weed Eater, Dowling agreed that he would not directly or indirectly disclose to any third party any secret or confidential information regarding his employer’s business. Further, the agreement provided that for a period of one year following termination, he would not directly or indirectly engage in employment in activities competitive with his previous employer.

Dowling resigned and went to work for Hawaiian Motor Company, where his employment would place him in control of the assembly line to manufacture a similar product. The court upheld the restriction, and the following language is of interest:

"Dowling has been employed by Hawaiian Motor Company to supervise the production of a device which it formerly purchased from Weed Eater. He set up the assembly line by which the product was produced by Weed Eater. Even in the best of good faith, Dowling can hardly prevent his knowledge of his former employer’s confidential methods from showing up in his work. The only effective relief for Weed Eater is to restrain Dowling from working for Hawaiian Motor Company in any capacity related to the manufacture by Hawaiian Motor Company of a flexible line trimming device."

EXAMPLE 3: This situation involves the famous "CHICKEN", whose performance at baseball games are cherished by millions of fans. The court introduced the fact situation and the issues as follows:
"Viewed in its most obvious aspect, this controversy about a chicken suit poses the simple issue whether a local radio station may prevent its ex-employee mascot from wearing a chicken suit. Silly though the issues appear at first glance, the underlying principles are serious. We deal with a conflict between an employer’s asserted contract rights and the fundamental rights of an employee to earn a living, even in possible violation of the employer’s bargain with him.

 

Giannoulas had signed an agreement with KGB. The court summarizes the pertinent portions of the agreement as follows:

"The employment contract between KGB and Giannoulas does not expressly give KGB the right to prevent Giannoulas from performing. The most pertinent part of the agreement provides: "For a period of five years after termination of this agreement, employee agrees not to act as a mascot of any radio station other than KGB, Inc., in the San Diego market."

"KGB relies specifically on two other contractual provisions. The l978 contract provides: "Employee agrees and acknowledges that the costume, concept, and the KGB Chicken are the exclusive property of employer, and the KGB Chicken is a registered tradename and a valid copyright of employer….."

"These contractual provisions do not, however, create a contractual monopoly of all appearances by Giannoulas in any chicken costume."

In an earlier trial court level decision, KGB was granted a preliminary injunction which prohibited Giannoulas from appearing in a chicken costume "substantially similar" to the KGB Chicken costume which was registered as a service mark, and other restrictions. Giannoulas appealed. The court regarded the equities of the situation in the following language:

"Public policy disfavors injunctions restraining the right to pursue a calling. On the national scene, the weight of authority shows great reluctance to issue such restraints unless the former employer can show irreparable injury."

With regard to KGB’s assertion regarding unfair competition, the court found that:

"Giannoulas’ performances in a chicken costume are neither competitive nor unfair because he does not sport the KGB logos or otherwise imply he represented KGB."

The court also considered whether there was a misappropriation by Giannoulas of KGB’s labor. The court discounted this with the following language.

"As a writer for the San Francisco Chronicle expressed it: ‘He was suspended Monday, and KGB is looking for a new man behind the outfit.’

Which is about as hopeless as having an understudy step in for Lawrence Olivier.

‘The Chicken suit itself is amusing, but Giannoulas’ artistry is what makes it work. He’s a dancer, a showman, and an athlete, and his timing is flawless. When the Padres return home May 3, there’s a pretty good chance he’ll be there. A replacement? Forget it.’

‘Or, in Giannoulas’ words: My ‘act’ was developed through five hard years of conscious effort in front of mirrors and working out techniques and style at my home. ….reactions developed for performances averaging 70 hours per week. To me, the costume is skin which I bring alive when I enter.’

"We deal not with a stereotyped character such as The Lone Ranger or Yogi Bear, but with a clown in a chicken suit."

KGB had registered the figure of the KGB Chicken as a service mark both with the state of California and with the U.S. Patent & Trademark Office. Nonetheless, the court dismissed the claim for trademark infringement with the following language:

"To exploit a service mark means essentially to engage in some act of unfair competition: to use a confusingly similar mark, to palm off goods or services, to pirate the fruit of another’s industry. We have already discussed why the evidence does not show inequitable piracy of the fruits of KGB’s labor."

The Appeals Court concluded that the injunction was too broad and permitted only the prohibitions against appearance in the "defined KGB Chicken" costume.

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Transmitting Confidential Suggestions

 

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Unsolicited Suggestions from Third Parties
As a normal business practice, a person or business should not accept unsolicited suggestions or ideas from third parties on a confidential basis.

EXAMPLE: You have a business and receive a letter that begins as follows:

"I have been using your product for several years, and I have a new idea to improve it…" Either expressly stated or implied, there is the message that if the idea is adopted, compensation is expected. You don’t want to offend the customer, and you want to extend the courtesy of at least appearing to take an interest in the suggestion. You may decide to send a letter thanking the person for the suggestion, possibly even saying something complimentary about it, but stating politely that at the present time it would be difficult to incorporate this improvement in the product line or state some other reason for not accepting the suggestion.

ANALYSIS: This is a situation where what appears to be the proper and more courteous course of action is loaded with legal problems. It often happens that the same idea or similar ideas have been considered by your company off and on for a number of years, and you have received the same suggestion time after time. Finally, the marketing conditions are right and an idea of this type is adopted. Some person who previously submitted the idea now demands compensation for use of the idea, and you may have a very difficult time proving that it was adopted from a source independent of that person’s suggestion. It is amazing how often a person with an idea has lofty notions about its value and originality, and is almost counting on luxurious retirement as soon as the idea is accepted.

PRACTICAL ADVICE: You should adopt a procedure where, before such material is accepted or reviewed, the submitter signs a simple form agreeing that the material is received on a non-confidential basis and stating that the submitter agrees to rely only on his patent rights or copyright for compensation. Most major corporations have had this policy for years, and a reply to the submitter can be courteous without creating hard feelings.

Confidentiality Agreements
In spite of the fact that as a standard policy you receive suggestion from third parties only on a non-confidential basis, there are numerous business situations where it is necessary to exchange proprietary information on a confidential basis. For example, a subcontractor may submit a proposed design for a manufacturer’s consideration, and this would normally be transmitted as confidential material. A typical agreement by which the material could be submitted and received would contain the following provisions:

• the materials submitted as confidential would be clearly identified and desirably incorporated in written material or drawings;
• neither of the parties are, by this submission of the material, bound to enter into any future agreement regarding the material;
• the material submitted will be accepted on a confidential basis, and the receiving party agrees not to use the material or disclose it to others without the written permission of the submitter;
• the obligations of confidentiality will not extend to any material which is already known to the receiving party, which is subsequently submitted to the receiving party by another who is not confidentially bound to the submitter, or which is legitimately obtained from some other source (e.g. the technical literature),
• the obligation of the confidentiality would cease at such time as the material is legitimately rendered non-proprietary (e.g. by publication in an issued patent);
• the term of the agreement should be limited to a reasonable time period;
• the receiving party is not entitled to attempt to make a hindsight reconstruction of the proprietary material in an attempt to render it non-proprietary

CAUTION: The degree of novelty required for information to have trade secret status is generally not as stringent as the standards for patentability.

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Possible Violation of Trade Secret Rights
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Obtaining a Trade Secret by Proper Means
This would include such things as the following:

• independently developing the material by your own work;
• reverse engineering another’s product (e.g. by buying the product of another on the open market and examining it to determine what might be considered confidential information - even destructive testing or chemical analysis would be permissible;
• observing the item in public use or on public display;
• obtaining the trade secret from the published literature.

Improperly Obtaining a Trade Secret
This would include such things as theft, bribery, misrepresentation, breach or inducement of another to commit a breach of a duty to maintain secrecy, espionage through electronic or other means, etc. It is sometimes difficult to know when one is crossing the line as to what would be proper means, as illustrated by the following:

EXAMPLE I: DuPont was erecting a manufacturing plant to implement a chemical process. It would have been possible for a competitor, by examining the lay-out of the manufacturing plant, to ascertain certain aspects of the manufacturing operation which DuPont regarded as a trade secret. DuPont took the normal precautions of fencing in the premises, etc. However, it was noticed on a particular day that an airplane was circling about the partially completed plant, and subsequent investigation disclosed that photographs of the plant were being made from the airplane.
ANALYSIS: It was held by the court that this was improper means to obtain DuPont’s secret process. The court said "..perhaps ordinary fences and roofs must be built to shut out incursive eyes, but we need not require the discoverer of a trade secret to guard against the unanticipated, the undetectable, or the unpreventable methods of espionage now available….To require DuPont to put a roof over the unfinished plant would impose an enormous expense to prevent nothing more than a school boy’s trick… Reasonable precaution… may be required but an impenetrable fortress is an unreasonable requirement…"

EXAMPLE 2: Robert Elnicky had been constructing and operating puppets for use in the entertainment industry for l5 years. He finally conceived of constructing "Rodney," a wireless robot that was remotely controlled by an FM radio signal. Rodney was slightly smaller than a life-size adult and sat on a stool or step ladder. He held a guitar which he appeared to pluck in synchronization with prerecorded music, and his lips moved when he spoke, creating a very life-like appearance. Rodney sported auburn hair and muttonchop whiskers. When Rodney appeared at trade shows, Elnicky concealed himself in the wings so that the audience could not see him, and Elnicky operated the control panel containing "joy sticks" which controlled the motions of Rodney’s head and body.

Elnicky made an agreement with Spotlight Presents, Inc. which would represent Rodney as a booking agent in the industrial show market. Spotlight had continually asked Elnicky to produce a duplicate "Rodney" which Spotlight could keep in its New York office or show room as a promotional device. However, Elnicky did not do so. In l979, a Spotlight representative met James Marquis who was manager of a business which produced animated figures and entertainment devices. The Spotlight representative told Marquis that he was interested in having a wireless animated robot built and gave Marquis videotapes of Rodney’s performance on a Dick Clark television show. The Spotlight representative further indicated that he wanted the robot to have the characteristics of Rodney.

Spotlight booked Rodney at a fair which was produced by Marquis Amusements, a firm in which James Marquis’s cousin was a partner. James Marquis picked up Elnicky in New York and drove him to the fair, but Marquis never told Elnicky that he had spoken with a Spotlight representative about building a robot, nor that he was engaged in the business of producing animated characters and puppets. The court stated that:

"Although the job at Sikorsky was represented to Elnicky as a routine, bona fide booking of Rodney by Spotlight to perform for a customer, it was in fact a fraud and a set-up to give James Marquis access to Rodney in aid of his agreement … to copy plaintiff’s robot."

At the fair, James Marquis and his cousin observed while Elnicky assembled Rodney in a trailer before the scheduled performance. Elnicky was then asked by "someone" to observe the performance site and to leave Rodney in the trailer. Elnicky expressed apprehension about leaving Rodney unattended, but was convinced to so do against his judgment. Later, when Elnicky took Rodney to the performance site Rodney was found to be inoperable. In order to repair Rodney, Elnicky had to remove part of Rodney’s clothing and the internal aspects of Rodney’s construction were observed by James Marquis at that time. Shortly after this, Marquis produced the robot "Walter Ego" for Spotlight.

The court found that Spotlight had misappropriated Elnicky’s trade secret and stated specifically that "it constituted the use of improper and commercially unethical means to acquire the needed information." Also, the court dismissed the argument that there was no wrongful appropriation since use of lawful means "could have" produced the same information.

The Ex-Employee Problem
Be cautious where you are hiring someone for a particular job where he (or she) might be put in a position where he could be using trade secret or proprietary information of his former employer. It is not enough simply to turn your back on the situation and naively claim that you had no idea that this new employee would be misappropriating trade secrets of his former employer. On the contrary, determine what sort of activities or occasions might precipitate improper use or disclosure of the trade secrets of the former employer and adopt proper limitations and procedures to avoid the same.

EXAMPLE: Carter had hired a chemical consulting firm, Foster D. Snell, Inc., to develop an aerosol shaving creme ultimately marketed as "Rise." A Snell employee, one Norman Fine, worked on this project and helped see it through to success. Fine, bound contractually to preserve the confidence of the trade secrets involved in the development of Rise, went to work for Colgate which had theretofore been unsuccessful in the development of a competing product. Fine, using his knowledge of the Rise program, helped Colgate produce its "Rapid-Shave No. l."
Carter sued Colgate for misappropriation of the Rise trade secrets, an issue in the case being whether or not Colgate had noticed Fine was using Carter’s trade secrets. The court found that Carter had met its burden on the "notice" issue, and continued with the following rationale:

"True, there is no evidence that Colgate induced Fine to come to them. But it is not necessary to, nor do we find that Colgate’s employment of Fine was originally arranged for the specific purpose of having him divulge confidential information about the ‘Rise’ patent that he had acquired at Snell’s. The basis of our decision that Colgate’s action was wrongful is that Colgate knew, or must have known by the exercise of fair business principles, that the precise character of Fine’s work with Snell was, in all likelihood, covered by he agreement which Fine had with Snell not to divulge trade secrets, and that therefore, Colgate was obligated to do more that it did towards ascertaining the extent to which Fine was, in fact, restricted in what he might disclose to Colgate. That it was wrong for Colgate not to go further than it did in this respect is confirmed by the very status of Fine when he came to Colgate. At that time Fine was a joint inventor and patentee of ‘Rise." In other words, Fine was willing to be, and was knowingly placed by Colgate in work that was in direct competition with the work in which Fine had shared at Snell’s resulting ultimately in his own patent. The very fact that Fine would do this should, per se, have raised in the minds of the representatives of Colgate, who arranged the employment of Fine, a feeling that he was entering upon a rather strange employment under the circumstances. It therefore, was not enough for Colgate to say that they would see that fine lived up to the limitations imposed by his contract with Snell. The weight of the credible evidence discloses that Colgate was far from being sufficiently avid to ascertain what those limitations really were, and to have Fine live up to them."