Tuesday, June 18, 2024 Jun 18, 2024
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The scenario was all too familiar: three officers of VEI, a high-tech engineering company in North Dallas, suddenly quit to form a similar engineering firm. VEI sued, claiming the employees stole its ideas. After a vicious court hearing, the two parties came to a private, undisclosed settlement in which they, in part, agreed to share profits. “It was your typical trade secrets fight.” recalls Jerry Selinger, one of the attorneys involved in the case. “It was like trying to make two people who hate each other stay married.”

In fact, such lawsuits are on the rise, highlighting a murky and costly area of the law-one that represents a classic dilemma in American business. What claim does an employee have on information acquired in one corporate environment, once he has moved to a new job? A company, of course, has the right to protect proprietary research and development. But over-regulation of trade secrets can hinder innovation by discouraging employees from sharing accomplishments or launching new R&D programs of their own.

Sharing ideas has worked. The founders of a company called Intel came together when neither could persuade their employers to invest in technology that would put thousands of transistors on a single computer chip. The upstart Intel created the high-density memory chip, dramatically altering the state of transistor technology.

Still, companies are moving more aggressively toward keeping information private. “Today, there’s less reluctance for one company to sue another over trade secrets,” says Phill Smith, a leading Dallas trade secrets lawyer. “It used to be that two CEOs would get on the phone and figure it out. Now they go to court.”

IBM often brings suits against ex-employees who start new companies, at one point filing suit against eight former employees in a two-month span. Dallas-based Electronic Data Systems also regularly pursues those ex-workers it believes are trying to compele with the company. EDS has a standard clause its employees sign in which they vow not to work for a firm that competes with EDS for three years after they leave the company. EDS’s general counsel, Claude Chap-peiear, says the company goes so far as to ask that its ex-employees not even put themselves in another position where they might be asked to use things learned at EDS.

But that brings up an even more vexing question. If an employee, on his own initiative, and sometimes even over the opposition of his employer, creates a technological advance, does he “own” the breakthrough, or does it belong to the company? Most high-tech companies require employees to sign that right over to the company when they sign on with the firm. Where the issue is fuzzy, the courts have generally ruled in favor of the employer.

For instance, when a geologist employed by Chevron Oil Company came up with a plan that would detect oil in a certain geological rock formation, Chevron management showed little interest. The geologist resigned, took out oil leases in the proper geological areas, and prepared to drill. Chevron sued, and the court shut down the geologist’s operation, claiming that his theory was Chevron’s trade secret.

When three employees left the ELCO Chemical Corporation in West Texas, which specializes in the manufacture of fertilizer, and came to Dallas in order to manufacture their own sulfur fertilizer product, ELCO sued, claiming the employees had signed contracts promising they would not reveal trade secrets. The ex-employees argued that they had developed the product themselves in a garage in their spare time, and that the information they used in creating the new fertilizer could have been obtained from trade manuals and other sources. The court ruled against the employees, claiming that what they had learned while employed by ELCO belonged to ELCO, and whereas their knowledge could have been obtained from other sources, in the court’s opinion, it wasn’t.

“In the earlier days of the high-tech industry,’1 says lawyer Mickey Hubbard, “the technology was developing so fast that executives said to hell with trade secrets. because they knew the technology would all be changed in a year any way. But when times get bad, people tend to get more particular about that sort of thing.”

That trend is evident in areas beyond the high-tech field. When Stephen Garrison, the top Dallas recruiter for Heidrick and Struggles, a nationwide executive search firm, quit to open a Dallas office for one of Heidrick and Struggles’ biggest competitors, taking with him several associates and even the receptionist, Heidrick and Struggles sued, claiming that Garrison had walked out with confidential client lists and business plans. His lawyers argued that a client list is in the public domain, as close as any Yellow Pages. The parties agreed to an undisclosed settlement, but Garrison was allowed to stay in business.

When companies do go after alleged trade secret thieves, they are often disappointed in the results. It is difficult to find the evidence to convict another company of theft. Cases drag on for years, legal fees mount, and eventually the trade secret a company is fighting to protect becomes outdated. “They become wars of attrition,’” says Dallas attorney Lawrence McNamara. “The company wants to make sure it gets its trade secret back and receives some sort of financial settlement. But it almost never wants to waste the time of going through a trial.”

Well, almost never. When National Data Communications Inc., an electronics information company, sued EDS and a Catholic hospital in St. Louis for allegedly teaming up and stealing trade secrets and infringing on a patent, EDS fought back and forced a trial. The jury ruled in favor of EDS, and the court ordered National Data Communications to pay more than $200,000 in legal fees and expenses. “It was a rare twist to events,” admits Chappelear, “but we enjoyed it.”