Monday, November 23, 2009

Trade Secrets and Confidential Information Revisited

by John L. Watkins

We have addressed the importance of trade secrets and confidential information previously on this blog and in our series of podcasts. We have discussed huge jury verdicts that have recently come down against companies found to have violated the trade secret rights of others. We have also discussed how some prosecutors are now taking an interest in criminal prosecutions of trade secret violations under federal law. However, it should be noted that a California jury just acquitted two defendants who had been criminally charged with economic espionage.

Although the foregoing should have been enough to get anyone’s attention, the news just keeps coming. According to recent reports, a Chinese company just agreed to a $200 million settlement of a trade secret case in California. Associated Press has reported that a former Home Depot manager has been criminally accused of passing trade secret information. These issues are extremely serious and should be considered carefully by any company large or small.

To reiterate some of the key points: Each company should have practices in place to protect its own confidential information and to assure the confidentiality of the confidential information of others that it has agreed to keep secret. Potential legal protections should include: (1) Non-disclosure agreements (“NDAs”) with employees. These NDAs should cover the company’s information. In addition, if the employee will be handling confidential information of others, the NDA should cover that as well; (2) NDAs with consultants or outsourced resources; (3) NDAs with actual or potential suppliers; (4) NDAs with actual or potential customers; (5) NDAs with actual or potential investors; and (6) NDAs with potential business “partners.” Depending on a company’s business, there may be other parties who should be subject to an NDA. It is also a good idea to have company policies stressing the need to protect the company’s own confidential information and trade secrets, and the confidential information and trade secrets of others.

Having an NDA program in place, however, is probably not enough. A company should take other common-sense steps to avoid legal entanglements. These steps should probably include: (1) stressing periodically to employees the need to maintain confidentiality; (2) advising employees that particular information is sensitive; (3) making sure that only employees or others with a true need to know have access to confidential or trade secret information; (4) keeping hard copy confidential or trade secret information under lock and key; (5) password-protecting or otherwise restricting access to electronically stored information; (6) restricting copying of sensitive information; and (7) restricting or monitoring use of portable storage media such as thumb drives and portable hard drives. There may well be other steps that a company should take depending on the circumstances.

The one thing a company should not do is assume that it will avoid issues regarding confidential information and trade secrets. Burying one’s head in the sand may work for an ostrich, but it will not work for businesses in today’s complex and litigious world.

Saturday, November 7, 2009

Why Dispute Resolution Provisions Matter

By John L. Watkins

Commercial contracts of all types, ranging from sales agreements to merger agreements often contain "dispute resolution" provisions. These provisions typically govern what happens if there is a claim or dispute arising out of or relating to the agreement. In essence, the dispute resolution clause is a contractual agreement as to how the parties are going to resolve any differences that may arise.

Having litigated commercial contracts of different types for many years, one observation is that parties often do not pay enough attention to these provisions at the time the contract is drafted. At the time the contract is drafted, the parties are often focused on price and other key business terms. In addition, at the time a transaction is coming together, both sides are typically looking forward to a mutually beneficial relationship. In short, at the time a contract is finalized and signed, neither party tends to believe anything will go wrong. As a result, the dispute resolution provision, if it is considered at all, is often left to the last round of discussions.

Dispute resolution provisions often address two potentially important points: (1) Where a claim or dispute will be decided, and (2) how the dispute will be decided. Both issues require careful consideration.

Where the Dispute Will Be Decided. Dispute resolution provisions often have forum selection clauses, which are also known as choice of venue provisions. These provisions specify which court or courts will decide the dispute, and often provide that the court or courts in a particular jurisdiction will exclusively decide the dispute. Although there are sometimes exceptions, the courts have generally enforced these provisions.

It is easy to see why the choice of venue is important. To use an analogy to sports, the forum selection clause may mandate that the dispute must be decided (literally) in the other party's home court. Of course, it may still be possible to win in the other party's jurisdiction, but the fight will almost always be more difficult and more expensive. If the other party is, for example, a large employer in the other jurisdiction, it may be difficult to pick an impartial jury. It will also be necessary, at the least, to hire counsel in the jurisdiction to work with the company's usual counsel. This adds a layer of expense.

How the Dispute Will Be Decided. Dispute resolution provisions may also contain provisions requiring that the dispute be decided by binding arbitration, instead of in the court system. In arbitration, the case most often is decided either by a single arbitrator or a panel of three arbitrators. Arbitrators most typically are lawyers with some experience in the substantive area or non-lawyer industry experts.

Many companies, particularly international companies, prefer arbitration over litigation. There are pros and cons to arbitration, and whether arbitration is right for a particular party requires consideration of the particular circumstances. If parties to a commercial contract agree to arbitration, the agreement is typically enforceable. In addition, and although there are exceptions, it is extremely difficult to appeal an award entered in arbitration through the court system.

If arbitration is chosen, the dispute resolution provision may also address important topics such as how the arbitrators are to be selected, and where the arbitration is to be held. The dispute resolution provision may mandate that a particular organization, such as the American Arbitration Association ("AAA") or the International Chamber of Commerce ("ICC") administer the arbitration. The AAA, ICC and other organizations also have rules that will often be specified to govern the arbitration. The choice of an administering organization can be important. The use of an administering organization adds a layer of expense in the form of various fees. In addition, the parties must pay the arbitrators' fees, which can be quite expensive.

Conclusion. The purpose of this post is not to argue for a particular type of dispute resolution provision, but rather to point out the need for parties to consider them carefully before signing a contract. In most instances, the dispute resolution provisions will never come into play. When there is a dispute, however, they become extremely important.