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Trade Secrets: The Basics

7/30/2011

Many machinery and equipment company executives think of intellectual property as patents, copyrights, and trademarks. Patents, copyrights and trademarks represent important assets and most companies with significant portfolios devote substantial resources to their management.

There is another important type of intellectual property: trade secrets. Unlike patents, copyrights and trademarks, trade secrets are not protected by government filings, but by maintaining secrecy.

A trade secret can be almost anything that a company uses to obtain a competitive advantage that has value from staying confidential. Secret formulas, manufacturing processes, customer lists, supplier lists, business plans and financial information may, depending upon the circumstances, qualify as trade secrets. This list, however, is hardly exhaustive.

In order to qualify for legal protection as a trade secret, information generally has to have actual or potential economic value and has to be confidential. In addition, it has to be subject to reasonable efforts to maintain confidentiality.

Trade secret protection is an attractive for a number of reasons, including that it does not involve governmental filings, which can be expensive. In addition, trade secret status can be maintained for a long period of time (essentially, as long as confidentiality is maintained).

If information qualifies for trade secret protection, most states have statutes that provide broad remedies against misappropriation or misuse of trade secrets, including injunctions (which might include orders prohibiting use of the information or requiring the information to be returned), monetary damages, and sometimes punitive damages and attorney's fee awards.

Trade secret cases often involve very large stakes. Multi-million dollar verdicts are not uncommon.

Trade secret cases frequently involve former employees who had access to the information. Because most information is electronically stored, information may be misappropriated using portable hard drives (which hold huge amounts of information) or thumb drives. With these devices, it is often possible for a former employee to walk out the door with all of the company's information in a pocket or purse. Other trade secret cases may involve suppliers or business partners who had access to the information for a particular project.

Many trade secret cases boil down to the issue of whether the plaintiff (the trade secret owner) used reasonable efforts to keep the information secret. This inquiry will often involve issues such as whether access to the information was restricted and whether those having access have signed non-disclosure or confidentiality agreements (often called "NDAs"). This issue, however, will depend on the particular facts of the case.

Machinery and equipment suppliers relying on trade secret protection should make sure they have a well-developed plan in place to protect the information, which should include the use of appropriately drafted NDAs. It is also a good idea to consult with counsel about other steps that might be taken to protect the information.

It is also important to have procedures in place to make sure that new employees do not bring trade secrets from their former employer with them. This can be accomplished by appropriate hiring procedures and employment agreements. Employment issues vary from state to state, so it is important to consult with an attorney in your jurisdiction.

Why Dispute Resolution Provisions Matter

7/23/2011

At the time of a machinery sale, everyone tends to be happy. The manufacturer is pleased to have sold another unit. After all, sales are the lifeblood of any business. The buyer is also pleased with its decision, looking forward to using the machinery for many years to produce more of its own products, perhaps introduce new product lines, and to achieve efficiencies and cost savings. What could go wrong?

Most of the time, nothing does go wrong, and both parties enjoy a productive relationship. At the same time, having litigated for over 25 years, I can assure you that sometimes things do go wrong notwithstanding the good faith efforts of both parties. When things go wrong, claims may follow.

Many sales 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 sale. Often, perhaps because of the good feelings that permeate a pending sale, the parties may overlook dispute resolution in finalizing the contract. Other times, as a final concession in the bargaining, they will accept the dispute resolution provisions proposed by the other side.

Ignoring dispute resolution provisions can be a costly mistake. In essence, the dispute resolution clause is a contractual agreement as to how the parties are going to resolve any claims and disputes that may arise. 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 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 chosen 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 business requires consideration of the particular circumstances.

If the parties do agree to arbitration, the agreement will usually be enforced. 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 (see discussion above). 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.

For many years, proponents of arbitration have argued that it is, without exception, "better, faster and cheaper" than the court system. My personal view on this is simple: One size does not fit all. Arbitration may be the right choice for many clients and circumstances. The reason for choosing arbitration, in my view, is not because it is necessarily faster and cheaper (in fact, in some instances, it may be more expensive), but because of the ability to select arbitrators with some background and expertise in the area of the dispute.

For other clients, arbitration may not be the right choice. It really depends on the particular circumstances.

Other Possible Dispute Resolution Provisions. Dispute resolution clauses may contain other provisions. For example, they may require negotiation between senior executives of the companies or mediation (a non-binding dispute resolution process) before proceeding to arbitration, or, if there is no mandatory arbitration provision, to the courts.

Dispute resolution provisions may also limit the discovery process, or information exchanging process, in arbitration or the courts. Many believe that discovery is the most expensive part of the litigation or arbitration process. (Traditionally, less discovery was permitted in arbitration, but, at least in the U.S., there seems to be a trend toward allowing more discovery unless the parties agree otherwise).

Conclusion. The purpose of this post is not to advocate particular dispute resolution provisions, but to serve as a reminder that they are very important, and deserve as much attention as other key contractual provisions in negotiating a contract.

Machinery Companies: Want to Save on Legal Fees? Read This

7/16/2011

If you want to save money on legal fees, here are the best tips I can give you:

Use a business lawyer, not an accountant or Internet service, to set up your business.
Instead of going it on your own or misusing a form, use a business lawyer to draft your sales contracts or terms and conditions in a manner consistent with the business risks your company is willing to accept.
If you believe that a dispute is developing. call a lawyer before the lawsuit is filed.

With respect to effective legal representation, earlier is almost always better and cheaper. A properly established business can limit risk, as can a well written contract. Many disputes can be diffused or resolved relatively cheaply if dealt with before the lawsuit stage.

Unfortunately, machinery and equipment companies, perhaps more than other companies, often call after a problem develops. Why? One word: Engineers.

Machinery and equipment companies are typically run by engineers. Engineers are wonderful people: They design and build real things -- things that benefit all of us. They understand difficult subjects, such as math and science. They often have soaring imaginations, allowing them to build things the rest of us cannot even imagine.

All the qualities that make engineers such engaging and important people tend to make them, as a group, challenging to represent. Being talented and intelligent, they tend to overestimate their ability to deal with legal issues on their own and often try to represent themselves, which can be damaging. They also may call later than the optimal time. Further, engineers tend to deal with issues that are black and white, while legal issues are every shade of gray. This means that the "intuitive" answer to a legal issue for an engineer may be incorrect.

So there you go, guys. If you want to save money on legal fees, call early. If you can!

Overview of German Machinery and Equipment Industry

7/14/2011

Germany is a world leader in the machinery and equipment industry. This brochure provides an interesting overview of this sector of German industry.

U.S. Supreme Court Decisions Limit Jursidiction for Suits Against Foreign Suppliers

7/12/2011

On June 27, 2011, the United States Supreme Court issued two decisions that limit the ability of U.S. courts to assert jurisdiction against foreign manufacturers if their contacts with the state in which suit is brought are limited. Although these cases involve the highly mind-numbing procedural area of personal jurisdiction (probably my least favorite subject as first year law student many years ago), they are very important, so please bear with me through the discussion!

In Goodyear Dunlop Tires Operations, S.A. v. Brown, the Supreme Court unanimously agreed that the North Carolina courts improperly asserted jurisdiction over foreign subsidiaries of a U.S. corporation. The claim was based on an accident in which two 13-year old boys from North Carolina were killed in an accident outside of Paris, France, allegedly due to a defective tire manufactured in Turkey by a foreign subsidiary of Goodyear Tire and Rubber Company, an Ohio corporation.

The subsidiaries did not do business in North Carolina and the tires in question were not actively marketed in North Carolina, although a relatively small number of tires found their way to North Carolina through special orders.

As a general rule of federal due process (Constitutional protection), the Supreme Court requires that a defendant have sufficient "minimum contacts" with the forum state (the state where suit is brought) to comport with "traditional notions of fair play and substantial justice." More recent Supreme Court decisions have led to the recognizing the concepts of "general jurisdiction" and "specific jurisdiction."

For general jurisdiction, the company's contacts with the forum must be so "continuous and systematic" that the company is effectively at home in the forum. If general jurisdiction is established, the company is potentially subject to a suit on any matter in the forum.

For specific jurisdiction, the jurisdictional facts must relate to the issues con connected with the controversy. For example, the fact that an accident occurred in the forum would be relevant to -- although not determinative -- regarding the exercise of specific jurisdiction.

In Goodyear, the North Carolina courts recognized that specific jurisdiction did not exist because the accident was unrelated to North Carolina and the tires were manufactured abroad. Nevertheless, the North Carolina Courts exercised general jurisdiction over the case, finding the fact that the subsidiaries put other tires in the "stream of commerce" that reached North Carolina and without any limitation on the tires being sold in North Carolina.

It did not take the Supreme Court long to reject this reasoning. In an opinion written by Justice Ginsburg (a member of the liberal wing of the Court), the Court explained that the "stream of commerce" analysis is generally relevant only to the exercise of specific jurisdiction, such as when a manufacturer places products in the stream of commerce that result in an accident occurring the the forum. Merely placing products in the stream of commerce, however, does not establish the continuous and systematic contacts necessary to establish general jurisdiction. Thus, the Court reversed the North Carolina court's exercise of jurisdiction.

In J. McIntyre Machinery, Ltd. v. Nicastro, the Court found that the New Jersey courts improperly exercised jurisdiction over an English machinery supplier of shears used in the scrap metal industry. The plaintiff sustained severe injuries while using a machine manufactured by the supplier. The accident occurred in New Jersey.

In a fractured opinion (with four Justices in the plurality opinion, two concurring, and three dissenting), the Court ruled that the New Jersey courts lacked jurisdiction to hear the matter. In this case, the Court was dealing with whether the New Jersey courts could assert specific jurisdiction over the case.

The supplier did not target New Jersey for sales. The supplier had an independent U.S. distributor, but its goal was to sell in the U.S. generally, not New Jersey in particular. The supplier also attended trade shows in the U.S., but not in New Jersey. There was evidence suggesting (although it appeared disputed) that as many as four of the supplier's machines were located in New Jersey.

The plurality found that the transmission of goods into a jurisdiction permits the exercise of jurisdiction only where the defendant is said to have targeted, or purposefully availed itself of, the forum. The mere fact that the defendant is aware that its product may enter a state is not enough.

The concurring Justices agreed with the result, but cautioned against making general rules based on the limited facts of the case. The concurring opinion specifically noted that the case did not involve modern sales methods, such as Internet sales.

The results in Goodyear and McIntyre clearly change the landscape of the exercise of personal jurisdiction. They make it more difficult for U.S. plaintiffs to sue international suppliers in the U.S.

The result in Goodyear is not surprising. It will limit the ability of plaintiffs to bring suit in the U.S. for accidents and injuries that occurred elsewhere unless the defendant meets the somewhat demanding standards for establishing general jurisdiction.

The result in McIntyre was, at least to me, surprising and is not what I would have predicted before the opinion was released. It had previously become almost conventional wisdom that if a manufacturer placed products in the stream of commerce and that product caused injury in a state, a court would probably find a way (as the New Jersey courts did here) to subject the manufacturer to suit in the state where the injury occurred.

McIntyre changes the landscape and will provide many international suppliers with arguments for avoiding suit in particular states, or perhaps even in the U.S. generally. For domestic suppliers, McIntyre will provide arguments for avoiding suit in states in which they have only attenuated business connections.

The precise effect of McIntyre, however, remains to be seen. Because there is no majority opinion, its influence remains to be seen. It does seem, however, that six of the nine Justices have agreed that merely placing a product in the stream of commerce with knowledge that it might reach a forum, and without more, is not enough to meet the "minimum contact" requirements to establish specific jurisdiction.

How much more is required to establish specific jurisdiction will undoubtedly be hotly contested for many years to come.

German Machinery Sales Up

7/11/2011

VDMA, the Germany Machinery Manufacturers' Association, is reporting that April sales increased 21 percent compared to a year ago. This is further confirmation of the surging German economy, although concerns over the PIIGS and the failure to address the U.S. deficit remain. Click here for more information.

Welcome to the Machinery Law Blog!

7/10/2011

Machinery and equipment suppliers manufacture the machines that other manufacturers use to manufacture their products. Suppliers are a reliable source of innovation, permitting their customers to manufacture their products using fewer raw materials and energy while minimizing environmental impact.

I have had the privilege of representing machinery and equipment suppliers for many years. Suppliers face unique, although frequently recurring, legal issues. This blog will share the knowledge some of the knowledge accumulated as a result of this experience. Of course, each legal situation is unique and the law varies from jurisdiction to jurisdiction. Please consult this blog frequently for ideas, but be sure to consult qualified counsel for your particular situation.

It is usually a good idea to start at the beginning. For this reason, I suggest that you consult my article that recently appeared in the May edition of Equipment Leasing Newsletter. It can be accessed through my firm's website by clicking here. (Note that you will have to click through again to access the article).

The Machinery Law Blog