Intellectual Property (Law 430) Final Exam

Exam #: 77927

QUESTION 1

Word Count: 1,731

A. RCK Group’s IP Legal Risks

RCK Group appears to have a number of intellectual-property related legal risks operating this web site, including violation of trade secret, copyright infringement and possibly trademark infringement.

1. Trade Secret Analysis

A cause of action for trade secret requires:

a. The Existence of a Trade Secret

· Not General Knowledge: Most, if not all, of the memos on the site are there specifically because the information they contain is not generally known. In addition, several of the memos include disclaimer text specifically noting the fact that the information contained within is confidential.

· Reasonable Effort to Maintain Secrecy: A memo, by its very nature, implies communication. It’s likely that many of the companies used email for the memos, which, it could be argued, is a highly distributable medium. However, there is likely a presumption on the part of the memo-writers that the recipients, who are internal employees, would keep the contents of the memo in confidence, regardless of the medium the message was received in. In addition, several of the memos included disclaimer or warning text advising the reader that the information is confidential and the use or distribution of the information enclosed is in violation of confidentiality agreements with the company. Whether this is a “reasonable effort” to maintain secrecy is a highly fact-based question and one that will likely turn on the disposition of the judge hearing the case.

· Not Publicly Disclosed. It’s clear that the memos in this case were not publicly disclosed by the companies, or by the memo-writers, but much more likely by disgruntled employees who were the recipients of the memos. Some of the information in the memos, like the Kmart memo disclosing the termination of several employees, was most likely was publicly disclosed at some point, but it’s clear from the text of the memos “we’d like you to know first,” etc, that at the time the memo was written it was not publicly disclosed information.

I question whether the information in these memos derive independent economic value by virtue of them not being known. Several of the memos, especially the eBay memos, noted that leaked confidential information could negatively impact the company by creating uncertainty in the minds of the press and investors. It could be argued that there would be a negative economic impact by the disclosure of the information, which could bring it into the realm of independent economic value (impact?) and therefore trade secret protection.

Trade secret litigation being highly fact- and court-specific, for the purposes of this analysis I’m going to assume that the factors weigh in favor of the third-party companies and find that these memos constitute trade secrets in most cases.

b. Acquired by Improper Means

The second element in a cause of action for trade secret is that the information was acquired by improper means, which according to the statute includes misrepresentation or a breach of duty to maintain secrecy.[1]

These memos, which are intended for an internal audience (employees) can likely only be leaked to a web site like InternalMemos.com from a recipient of the memo. Most companies either have employment contracts with their employees or company policies specifying the need for employees to keep secret confidential information they receive within the course of business at the employer. An employee posting these memos to InternalMemos.com is likely in breach of a duty to maintain secrecy, and thus meets the test of “improper means.”

Intent is also usually an issue with this prong, and since the employee has to publish the information on the InternalMemos.com site, intent can be assumed.

c. Misappropriation

The third and final element to a cause of action for trade secret is that the secret is misappropriated, which according to the statute requires that the third party who acquires the secret knows or has reason to know the trade secret was acquired by improper means.[2]

RCK Group is running a web site called InternalMemos.com, again with the idea that they are publishing memos that are typically secreted within an organization, and confidential to that organization. They brag of being the “World’s Largest Collection of Internal Communication.” Their form to submit new memos exhorts the submitter to NOT include their name if they don’t want it published, because the submission will be published for the world to see. It’s clear on the facts (I would think in any court) that RCK Group has “reason to know” that the trade secret was acquired by improper means.

While I think there would be some debate in a court whether or not the information in the memos constitute trade secrets, primarily because it’s questionable what the reasonable efforts were to maintain secrecy, a sympathetic judge and jury could find that that a plaintiff would meet all the causes of action to show misappropriation of trade secrets by RCK Group.

2. Copyright Infringement Analysis

These memos appear to generally be copyrightable subject matter. While many of the memos are primarily fact-based in that they are communicating important events and information to employees of a company, there appears to be enough “of their own” (Bell) put into them to move the needle of originality. These are not just a recitation of facts á la Feist – the way the facts are expressed appear to be completely original. There is a minimum of creativity required to be eligible for copyright protection and while the memos wouldn’t be considered “creative” or artistic works, artistic value is not required for copyright protection.

The memos were fixed as soon as they were written, likely on computer, and saved to the computer’s ROM. It’s well established that works created on a computer are considered fixed in a tangible medium, which only requires that the medium is sufficiently permanent to permit it to be communicated for more than a transitory period.[3]

As to ownership of the copyright, the companies that are generally the subject of these memos would be owners, if we assume that the people writing these memos were works created by an employee within the scope of employment[4], which I think is safe to assume given the nature of the memos.

RCK appears to have infringed on the copyright owner’s right to reproduction and distribution at a minimum, most likely as a contributory and/or vicarious infringer. It’s not likely they would be found to be a direct infringer, as they were not the party that actually copied the memo to their server, the employee did. The copying was wrongful in that it appears that generally the memos were copied in their entirety, with only personally identifiable information (in some cases) being redacted out of the original.

The test for contributory infringement is in the common law, and a contributory infringer is one who, with knowledge of infringing activity, induces, causes or materially contributes to the infringing conduct of another. In this case, RCK Group has a link right at the top of their web site to “Submit a Memo,” encouraging disgruntled employees and others with access to copyrighted information to submit the information to them anonymously. They provide a forum for the reproduction, distribution and dissemination of the copyrighted material.

As to vicarious infringement, RCK Group both has the right and ability to supervise the infringing activity – they could shut down the site, or only publishing memos with the owner’s permission (an unlikely option, natch) – as well as a direct financial interest in the activity in that they collect subscription fees for user access to what appear to be the “juiciest” memos.

In either case, RCK Group could argue fair use as a defense to infringement, arguing their use is for criticism or comment.

· Purpose and Character of the Use: definitely falls toward the commercial side of the equation, as they are obtaining subscription revenues for access to a substantial portion of the memos. In addition, the memos do not appear to be “transformative” as it appears they are published verbatim. This weighs against fair use, and RCK likely loses this factor.

· Nature of the Copyrighted Work: These memos are unpublished in the sense that they were only created for internal use, not public use, and that factor would weigh against fair use. On the other hand, the memos are primarily fact-based, so that would weigh for fair use. On balance, however, since the works are generally considered private, I would weigh more against fair use for this element.

· Amount and Substantiality: It appears on the surface that these memos are at least 95-100% reproduced, with the only information being redacted being personally identifiable information. Weighs against fair use and against RCK.

· Effect on the Market: As far as I’m aware, there is no market for internal company memos, although using the circular reasoning applied by many of the courts to this issue, the fact that the infringer is making money on the memos implies there is a market. A weak point I think for the copyright owners, but one I think RCK would lose anyway because the courts would want them to, and because the other three factors tend to fall against RCK as well.

In summary, I believe that at a minimum RCK Group is a contributory and vicarious copyright infringer, and would not likely prevail on a fair use defense. However, it’s not likely the copyright owners would have registered their internal memos with the copyright office within the three months of publication, as required, and if they didn’t they would only be able to obtain actual damages from RCK Group.

3. Trademark Infringement

There could be an argument of trademark dilution by a number of the companies listed on the site that would have famous marks, using the “tarnishment” theory of dilution.

B. RCK Group’s IP Assets

It doesn’t appear that RCK Group has much by way of IP assets. They would not have a copyright in compilation, because it does not appear that there is any selection, coordination or arrangement of the memos to constitute an original work of authorship. They could try to obtain copyright in a collective work, but again it would be hard to find any original work of authorship in their gathering of the memos.

C. Investment Opportunity

I wouldn’t invest in the company. I think the risks of IP liability far outweigh the potential benefits – they’re a lawsuit waiting to happen.

(Eric: FWIW, I would have liked to have had maybe another 300-500 words to go further into the trademark infringement analysis and the analysis of copyright in a collective work. This was a VERY meaty question to treat in only 1800 words!).

QUESTION 2

Word count: 804

The biggest advantage to a patent for Epitime’s payment-determination formula is the monopoly they would have on that formula – the ability to prevent others from making, using or selling that idea. They view this formula as a competitive advantage worthy of protection, and for good reason since it saves them millions of dollars per year. They are also aware that competitors are beating down a similar path, and I can see why the patent is an appealing option for them. If their competitors develop formulas that are too similar to what Epitime has patented, Epitime can sue them for infringement and prevent them from using the formula, or extract a royalty from any competitor that wants to use it, generating even more revenue for the company. A patent is presumptively valid, which would put the burden on the competitor to show that it isn’t valid, and that is generally a tough burden to meet.

That being said, there are some downsides to applying for a patent for their formula. Patent applications that will be subject to international patent protection are published within 18 months after filing, and at a minimum, the issued patent is published, which would give competitors the ability to then try to “design around” Epitime’s solution, possibly using that knowledge to develop a formula that is even more effective then Epitime’s, thus killing Epitime’s competitive edge. The patent monopoly is only a 20-year monopoly from the date of application, which in the case of computer code such as this is probably irrelevant, because it’s likely to be outmoded long before the 20-year expiration. In addition, Epitime is already working on substantial modifications to the formula – once the idea is substantially changed, only the original patented subject matter is covered by the patent – they could in effect modify themselves out of effective patent protection. The patent application and prosecution process is costly and time consuming as well.

Finally, I don’t believe that Epitime’s payment-determination formula would actually receive patent protection, because it would be considered either an abstract idea (mathematical formula) or a business method, and therefore not patentable subject matter.

Assuming they could get past the patentable subject matter hurdle, they would likely qualify for patentability on the other factors:

· Utility, which must be specific, credible and substantial. The formula has utility – it’s been in use for some time and has a specific use – to determine compensation for submitted articles. It’s credible – it actually works and has been working for some time. It’s substantial, in that it already is saving Epitime millions of dollars a year.

· Novelty: There isn’t enough information to know whether or not the formula is known or used by others, or if it’s been patented or described in a printed publication, although we can assume not, since competitors have been trying to do the same thing and have not been as successful at it as Epitime has been.

· Nonobviousness: There’s a bit of a horse race here, as competitors are trying to find the same solution as Epitime for generating an automated compensation mechanism. Not knowing the sate of the prior art, it’s hard to analyze this prong to determine if it would have been obvious at the time of invention to a person of ordinary skill in the art, although the secondary considerations most certainly seem to point to nonobviousness. There is definite commercial success with the idea – it’s made Epitime competitive and saved them millions of dollars per year. There is long felt need in that they and others have been working on this formula for some time. There is the failure of others, in the sense Epitime has that their competitors have not been able to capitalize on the cost savings from preventing exploitation as well as they have.

· Enablement: Finally, Epitime would have to provide a written description that would provide the best mode of performing the invention, and would enable one skilled in the art to practice the invention. This element ensures the patentee’s quid pro quo of providing the knowledge of the invention to the world.

Recommendation: My recommendation to Epitime would be to not file for a patent and instead protect the formula as a trade secret. I don’t believe they would obtain the patent in the first place because there is some debate over whether a formula could be patentable subject matter. In addition, the fact that they are constantly revising the formula to beat the new exploitation of the systems tells me that by the time their patent would actually get issued the formula itself could be radically different than what’s protected. Currently, the formula has not been publicly disclosed, and if they put procedures in place to ensure reasonable secrecy, they would be better served protecting the formula as a trade secret.

QUESTION 3

Word count: 609

First off, Suzie would not be directly or indirectly soliciting or inducing a Doubleshaft customer to terminate or change its relationship with the company. Pine Noodles, a customer of Doubleshaft, is coming to that conclusion all on its own in its decision to do its own advertisement sales.

Courts are all over the map as to how to decide cases on employee agreements and non-compete clauses. Generally, employees have a right to use their general knowledge, skills and experience, even if the employer helped them gain it. There is no question that Suzie is in the position she is in because of her work with Pine Noodles as a representative for Doubleshaft.

Courts have generally used a reasonableness standard in analyzing these cases. The agreements are frequently construed strictly against the employer and for the public policy of allowing employees freedom of movement in their careers. Generally, the more overbearing the agreement, the more likely the court will find it void.

The provision in Suzie’s contract against solicitation of customers may be construed as too broad – it does not specify in what capacity employee may work or not work (i.e. working for other companies okay, just not competitors – this appears to be a prohibition against change in any relationship). It also implies actions that are really not in her control. How could Doubleshaft prove that a particular customer changed its relationship with the company because of something Suzie did?

Presumably, Suzie isn’t taking any trade secrets or confidential information. I am assuming that Pine Noodles knows whom the advertisers are who advertise in their magazine. By the very nature of publication in a magazine, any subscriber or reader in that magazine becomes aware of who the advertisers are, so the “customer”, i.e. advertiser, information that Suzie has is really in general knowledge and as such not protectable as a trade secret. Some courts have limited enforcement of non-compete agreements to situations where a trade secret is likely to be used or disclosed if an employee is allowed to compete. That does not appear to be the case here.

In Wisconsin, a non-compete clause will be enforceable if it’s reasonable, and conversely if it’s too aggressive it will be invalidated.

If we analyze the facts of this question using Virginia’s test for reasonableness:

1. From the standpoint of the employer is the restraint reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest? I would say in this case, probably not reasonable in that it seems particularly broad in its “change their relationship with the Company” language. Find for Suzie.

2. From the standpoint of the employee is the restraint reasonable in the sense it is not unduly harsh and oppressive in curtailing legitimate efforts to earn a livelihood? I would say it is not reasonable, in that it effectively puts the onus on her to ensure that the Company’s customers don’t do anything different in their relationship with Doubleshaft. That’s a pretty harsh standard. Find for Suzie.

3. Is the restraint reasonable from the standpoint of sound public policy? Again, since I don’t think the clause is reasonable (and in the end, this is really a judgment call by the courts anyway), I think that it could be found to be unduly burdensome and against public policy of allowing employees freedom of movement and career development.

Recommendation: I think Pine Noodles and Suzie have a strong argument that the employee agreement is unreasonable and overly aggressive, and that in the end Suzie is not appropriating any of Doubleshaft’s trade secrets, and so I would recommend that they hire Suzie.