HP v. Hurd as Complex, Despite NYT Nocera’s Op-Piece
posted by Lawrence Cunningham
Conventional talk says it’s impossible for HP to enjoin Mark Hurd, its ousted CEO, from misappropriating trade secrets, threatened by his employment with arch-competitor Oracle. People like Joe Nocera of the New York Times take the suit as further evidence of incompetence at HP’s board. The conventional talk is wrong—it’s a closer case than reported, contributes nothing to evaluating HP’s competence, and makes one wonder why a reporter at the New York Times offers opinions in the paper’s news pages.
Nocera writes that California law “frowns on” covenants not to compete, noting how “over the years,” its law has become settled that they are invalid. Nocera doesn’t note that the statute driving this policy dates to at least 1872 and California is unusual among states in its hostility to the clauses. But HP and Hurd didn’t sign any covenant not to compete, so that’s not an issue in the case.
What HP is asserting is a right under the confidentiality agreement it and Hurd did sign, and another California statute, of more modern vintage, that prohibits misappropriating trade secrets. The two statutes can be in tension, banning both non-competes and misappropriation, but not inevitably. A covenant is void per se, even when signed by someone incapable of misappropriation; misappropriation can be committed, even by a person signing no agreement at all—whether an invalid non-compete or a confidentiality agreement.
The tension is stark when competing work and appropriating trade secrets go hand-in-hand—as they may for Hurd working at Oracle while possessing HP trade secrets. When the statutory policies are in tension, the result is parsing facts. The per se bans on non-competes and misappropriation yield to analysis, akin to the rule-of-reason in antitrust law and balancing of contending equities when evaluating extraordinary remedies like injunctions.
The easiest case to resolve despite these tensions is where an employee hasn’t signed any agreement—no covenant not to compete and no commitment to confidentiality. Absent such a confounding agreement, under California law, the balancing may weigh against an injunction. Skeptical judges may readily see a misappropriation cliam as an attempt to generate a de facto covenant not to compete or confidentiality agreement, when no actual commitment of either sort exists.
The harder case—which is the Hurd-HP case—arises when (a) the parties didn’t enter into a per se invalid non-compete, (b) the parties did enter into a valid confidentiality agreement, and (c) credible grounds appear that the former employee is poised to misappropriate trade secrets unless enjoined.
Indeed the California Supreme Court has at least twice harmonized the two statutes in those terms: covenants not to compete are invalid unless necessary to protect trade secrets. That harmonization supports the kind of balancing that most courts in the country apply to covenants not to compete: promoting optimal investment in intellectual property by robust delineation and protection of property rights.
Under trade secret misappropriation statutes, the next issue is what burden employers bear to warrant injunctive relief. Again, Nocera’s piece commits a common error. He writes: “The concept of ‘inevitable disclosure’ of trade secrets by such an employee—which has been upheld elsewhere—is a nonstarter in California.” He adds: HP didn’t assert that doctrine in its lawsuit, instead asserting “threatened misappropriation.” Nocera then opines: “But it’s the same thing, and it is likely to have the same result.”
It’s not the same thing. Courts nationally are divided on this fundamental question of what standard employers must meet. HP, like all employers, argue for the low bar, that threatened misappropriation is enough; Hurd, like all employees, will argue for the high bar, that inevitable disclosure must be shown. Far from being “the same thing,” as Nocera opines, case outcomes turn on the distinction.
Nocera’s piece appears less intended to report news than to embarrass HP’s board, portraying it as bungling its departure negotiations and lawsuit against Hurd. Nocera writes: “High-ranking executives, including C.E.O.’s, leave all the time. When is the last time you read about a case like this one—where a top executive walks across the street and joins a direct competitor a month later? It almost never happens.” (Emphasis added.)
My answer: on August 7, 2010, in the same newspaper Nocera writes for. That story, by William Neuman, reported how Bimbo Bakeries, maker of Thomas’ English Muffins, enjoined a high-ranking executive from working for arch-rival Hostess. As with HP-Hurd, the two hadn’t signed any covenant not to compete, so there was no question about that in the case; they had signed a confidentiality agreement; and the baker showed that the employee’s proposed job at Hostess would inevitably result in disclosing the baker’s trade secrets. The Third Circuit’s opinion reviews some of the many cases where this happens, including those where the distinction between threatened misappropriation and inevitable disclosure is decisive.
California law is unusual in its hostility to covenants not to compete and its decisional law may carry that over to confidentiality agreements and statutory bans on misappropriation of trade secrets. But Nocera and others are wrong to make the case seem simple and free from doubt. It’s certainly wrong to take this episode as pile-on evidence of ineptitude at HP’s board. It makes me share the rising concern about the New York Times having its reporters turn clandestinely into opinion writers. As presented, Nocera’s story masquerades as news—but it’s really a misleading piece of opinion writing.