Oklahoma Bar Journal
Mind Over Matter: Exploring the Fault Line Between Restraint of Trade and Protecting a Competitive Advantage
By Mbilike M. Mwafulirwa and Melissa A. East
This article explores an important question for businesses. Suppose a business hires an engineer – i.e., a thought leader in an emerging industry – to develop a certain product or process. In fact, the business only developed its product or process because it employed the engineer. But assume also that the engineer decides to join a competitor, and they take their technical know-how with them and confidential documents about the product or process. That information, the engineer claims, was drawn entirely from their technical know-how, which they brought with them.
That, in turn, leads to the question that is the subject of this article – when exceptionally knowledgeable individuals perform creative work for companies in an industry, what right do they have to take those ideas with them? Simply, do employers own the knowledge in their workers’ heads? Oklahoma is an employment at-will state. That matters because in this state, an employee has rights to exploit their expertise and knowledge in the market. But the law also protects an employer’s right to protect its proprietary information and legitimate competitive advantages.
Thus, the question presented applies to different industries where creative work is done (which should be several businesses). What follows in this article is an analysis that attempts to tackle the question presented head-on, while also outlining the governing legal principles.
ANALYTICAL FRAMEWORK FOR THE PROBLEM OF THE CREATIVES – THE PUBLIC AND PRIVATE DICHOTOMY
When a business makes a useful discovery or a creative expression, it can deal with that information in one of two ways. The business can publicly share the intimate details of its discovery or creative expression with us – We the People – through either the patent or copyright registration systems. In exchange for that disclosure, the government gives the inventor or the author (as the case may be) a limited monopoly to enjoy the fruits of its innovation.1 Trademark law, on the other hand, which protects words or phrases that identify the source of goods or services,2 gives the owner a perpetual monopoly.3 A business can also decide to keep the intimate details of its discovery or creative expression private.4 In doing so, the business, in effect, relies on trade secrets, noncompete concepts and varied other state statutory and common law theories to protect its competitive advantage.5
Ownership Interest in Publicly Registered Intellectual Property Developed During Employment
For those who make useful and innovative contributions, America’s copyright and patent laws give them a temporary government monopoly,6 but trademark law affords trademark owners a perpetual monopoly.7 Either route, the trade-off is the same: (potentially) anyone can learn from the creative work and improve upon it to create a unique competitive advantage for themselves.8 And in the employee/employer context, this dynamic presents difficult questions. Copyright laws, for example, apply the “work for hire” rule. Under that rule, an employer has copyrights over any creative work an employee generates within the course and scope of their employment unless a written agreement provides to the contrary.9 Trademarks generally don’t pose the same ownership dilemmas; ownership rights accrue to those who use the mark in commerce in priority over others.10 In other words, use rather than creation determines trademark ownership.11
Not so with patent law. The default rule is that inventors own their inventions.12 Unless an agreement with the employer displaces the default rule, the worker owns what they invented.13 Two exceptions bear on this rule. The first is called the “hired to invent” rule. Under that rule, if an employee was hired to invent a specific thing or solve a specific problem, the employee may have to assign their rights to the employer.14 The rule is anchored in implied contract concepts and requires a fact-sensitive inquiry into the employment relationship.15 The second exception to the default rule is called the “shop right.” Under that rule, an employer may acquire a limited license to use the employee’s invention if it was invented using, for example, the employer’s resources and on its time.16 The fact-sensitive nature of the analysis in this area will almost always invite litigation.
Eliminating Doubt and Future Headaches: Intellectual Property Assignment Rights Agreements in the Employer-Employee Context
Intellectual property rights assignment agreements resolve many problems in this area. State contract law generally governs the rights and obligations of the parties.17 Intellectual property agreements generally take three primary forms: 1) complete assignment of all rights to another for a sum certain or as a gift; 2) assignment of all rights to another for a limited period or geographical area; and 3) limited, nonexclusive rights to exercise the owner’s intellectual property rights for a period.18 If all state law contract prerequisites are satisfied, courts will enforce those agreements.19
But even if there is a valid assignment agreement, the penultimate question is usually the same: whether, as written, the agreement succeeded in conveying intellectual property rights. Thus, for example, it is settled that when an agreement states the employee “agree[s] to assign,”20 or executes this “agreement to assign”21 or agrees that intellectual property “will be assigned,” the agreement does not create a present interest.22 Instead, a separate agreement is needed to complete the transfer of rights to the employer.23 But if the transfer language states that the employee “agrees to and does hereby grant and assign” or “I will assign and do hereby assign,” those words are enough to complete the transfer of rights.24 All this matters because, as shown below, the question of ownership of valuable information (and even the right to possess) is central to the applicability of most misuse or misappropriation tort claims.
THE OTHER SIDE OF THE COIN – WHEN A BUSINESS DECIDES TO KEEP THE INTIMATE DETAILS OF ITS DISCOVERIES PRIVATE
Overview of Trade Secret Law Considerations
When an employer in Oklahoma decides to keep the intimate details of an intellectual property discovery private, both statutory and common law protections come into play.
Defend Trade Secrets Act 2016. Effective May 11, 2016, the Defend Trade Secrets Act 2016 (the DTSA) added a federal dimension to trade secret protection. Historically an exclusive area of state statutory and common law, the DTSA created a federal cause of action for “any misappropriation of a trade secret, (as defined in [the DTSA]) ... which ... occurs on or after the date of the enactment of [the] Act.”25 To assert a DTSA claim, the complaint must generally allege the plaintiff: 1) possessed secret information that relates to a product or service used or intended for use in interstate commerce; 2) the defendant used, disclosed or acquired for use that information without the plaintiff’s consent; and 3) the defendant acquired the information or disclosed it by improper means.26
If there is any doubt about ownership rights in intellectual property between employer and employee, this is a fertile area for a trade secret misappropriation lawsuit. The DTSA creates a cause of action for the “owner of a trade secret.”27 That is why courts closely monitor trade secret claims. The DTSA defines a trade secret as all forms of financial, technical, economic and engineering information.28 Even with such a broad definition, federal courts require “sufficient particularity to separate [the trade secret] from matters of general knowledge in the trade or of special persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.”29
In fact, “[a]lleging mere possession of trade secrets is not enough” to state a DTSA misappropriation claim.30 Neither is simply alleging, without more, that a former employee has quit and is working for a competitor performing their old job.31 Instead, the DTSA and federal cases require there to be the acquisition of a trade secret belonging to another by a person who knows or should know it was acquired through improper means or without the owner’s consent.32 “Improper means,” the statute defines as, “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage.”33 While the DTSA requires the owner of protected information to reasonably secure it, the law does not require absolute secrecy.34 Most courts have found the requirement satisfied when a business has, for example, confidentiality policies and internal data control measures.35 In most cases, this is a fact question for the fact-finder.36
Oklahoma Uniform Trade Secrets Act: The state analog to the DTSA. In 1986, Oklahoma adopted the Uniform Trade Secrets Act (UTSA).37 Although the UTSA’s definitions for trade secret and misappropriation “are nearly identical to the DTSA,” a plaintiff must also allege “use” and “detriment.”38 A misappropriation claim under the UTSA has three elements. A plaintiff must show: 1) the existence of a trade secret; 2) misappropriation of the secret by another; and 3) use of the secret to the intellectual property owner’s detriment.39 The UTSA entails a fact-intensive inquiry, and the plaintiff has the burden of proving the existence of a trade secret.40 Parties should track measures taken by an employer to guard the secrecy of the alleged trade secret, as Oklahoma courts tend to focus on that factor.41 Under the UTSA, “use” exists when a product or process is substantially derived from the trade secret, even if it is with independent improvements or modifications.42 Detriment means adverse consequences for the trade secret user.43
Under the UTSA, ownership is not the dispositive consideration; rather, the right to possess or use the information is.44 Thus, owners, licensees and all others with the right to possess or use the information could perhaps assert UTSA trade secret rights. That especially matters in an employer/employee setting because while an employee may initially own an invention or an idea, when they share it with their employer that might affect their rights. The Oklahoma Supreme Court, recognizing this possibility, has come down in favor of a multi-factor balancing test.45
The employee’s rights are on their strongest footing when they are both the inventor and developer, and the source information is drawn from their knowledge and skill. If the employee developed the subject matter of the claimed trade secret, through their own initiative, based on their own skill and experience, a duty not to disclose the trade secret may arise because the employee would have an interest in the subject matter equal to or better than that of their employer.46 But if the employee learns of the coveted information in the course and scope of their employment, the stronger the employer’s rights.47 Thus, the issue becomes one of a balancing act, and the analysis hinges on the equities of the given set of circumstances out of which the trade secret arose.48 Ultimately, the question becomes how closely tied the development is to the highly developed skill and knowledge of the innovator, and if the development emerged with no secret being divulged by the employer, the more likely a court will find no trade secret.49
HOW UNFAIR COMPETITION LAWS CAN AFFECT THE EMPLOYER-EMPLOYEE DYNAMIC WHEN CREATIVE INFORMATION IS INVOLVED
Oklahoma Noncompete and Nonsolicitation Law
A typical fact-pattern in the world of creatives sees a creative person develop a product or service and then depart to join a competitor. And as so often is the case, the employee has a noncompete or nonsolicitation agreement to contend with. Typical agreements: 1) preclude an employee from taking any job in any capacity with a competitor or within the industry; 2) impose timeless and geographical-less limitations; and 3) prevent the employee from soliciting all persons including (work colleagues) from previous employer.
Noncompete agreements. Restrictive covenants against trade, competition and the ability to practice a profession are void unless they hew closely to the requirements of Oklahoma law.50 Consider first noncompete clauses that prohibit an employee from taking any job in any capacity with a competitor. Applying and clarifying longstanding precedent, the Oklahoma Court of Appeals has held that a noncompete is void when it prevents employees from taking jobs with competitors in any capacity at all.51 Second, noncompetes that encompass large geographical areas and provide no temporal limits are also problematic. Oklahoma courts have stricken noncompetes that impose countywide bans,52 or those whose reach exceeds 100 miles from where the employee was employed.53 Likewise, courts have stricken noncompetes longer than two years54 and those that have sought to prevent “competition from an employee who has not gained some competitive advantage or opportunity from the employment ”55
Thus, it matters where the employee gained their expertise and experience. If the employee brought the expertise and knowledge with them to the job, like our industry leader in our hypothetical, a noncompete that restricts their use of that knowledge is perhaps unlawful. But if they gained the expertise and experience “directly from the employment with employer,” then it may be a reasonable subject for noncompetes.56 To this perhaps also adds any specific discoveries that an employee might make in the course and scope of their employment; that is arguably information that comes directly from the employment.57 Putative litigants in this area should brace themselves for context-specific analyses that consider several factors, including the terms of the noncompete agreement and the foundation of the expertise and knowledge the employer seeks to restrict.
Nonsolicitation agreements. Oklahoma law also restricts unreasonable nonsolicitation agreements. Nonsolicitation provisions that “go beyond a prohibition on active solicitation and thus prevent fair competition have been declared void.”58 Newer cases have clarified that the law only permits restrictions on solicitation of established customers. Established customers are “those businesses and customers wherein a relationship was ongoing and anticipated to continue into the future.”59 What about nonsolicitation of former colleagues? The Oklahoma Supreme Court has weighed in. The court invalidated a nonsolicitation clause that completely prevented former employees from engaging with a competitor, even those who sought employment from a competitor of their own accord.60
Computer Fraud and Abuse Act
Through the Computer Fraud and Abuse Act (CFAA), Congress sought to curb and punish abuses of computers. The act creates criminal offenses for conduct like hacking into computers, stealing information and damaging a “protected computer,” among others.61 A protected computer is one that is used either in interstate or foreign commerce or communications.62 To complement the criminal laws, Congress also created a civil action under which a party that has suffered harm listed in the statute can recover compensatory damages or injunctive or other equitable relief.63
In the employment context, employers typically sue employees for appropriation of proprietary information or the destruction of a computer that causes loss. They do so mostly based on theories of unauthorized or excess use or destruction of data.64 The employer typically authorizes the employee to access its computers, but what triggers liability is when the employee accesses the information in violation of their duty of loyalty.65 This could be by the employee emailing themselves the information to use for purposes adverse to their employer or for personal gain.66 The definition of “economic damages” or “loss” under the CFAA is broad. The definition encompasses loss of business, the cost of repairs to computer systems and taking protective measures.67
Varied Oklahoma Common Law Considerations
The Legislature in Oklahoma has declared that, unless abrogated, the common law remains a vital part of this state’s law. The bar is already familiar with most of these common law theories that only deserve honorable mentions – breach of contracts, tortious interference with business relations or prospects, conversion, civil conspiracy, aiding and abetting and perhaps breach of fiduciary duty.68 We say perhaps because courts continue to struggle with this question: At what point does an employee-at-will stop innocently preparing to depart their employment to breaching fiduciary duties they might owe their employer? For employees without noncompetes, the law permits them to take preparatory steps for competition with their employers, but employees must tread lightly when doing so.69
The law, however, frowns upon an employee’s wrongful acts when preparing to leave.70 But what is wrongful? An employee leaving after lining their pockets with the employer’s trade secrets, existing client lists or sabotaging the employer’s information systems all qualify.71 Then there is everything else. There are “no ironclad rules as to the type of conduct which is permissible ... since the spectrum of activities in this regard is as broad as the ingenuity of man itself.”72 Even so, courts have laid down some bright markers. If the allegation is misappropriation, the subject information must first be “exclusive or proprietary” to the employer. So, if the information can be acquired from another source, that undermines the claim.73 Second, the employer cannot prevail if the conduct did not deprive it of objective, tangible business opportunities. A mere hope that “business relationships would continue” or the “possibility [of] future economic benefit[s]” is insufficient.74
In this age of the creatives, the line between catering to a rational self-interest and engaging in unfair competition is a fine one. Today’s market places a high premium on talent and creativity, so firms feel inclined to take strong measures to protect their talent and maintain their competitive advantage. Caught in the middle is the law, trying to strike a balance between these competing concerns. This article, we hope, shows (in several ways) how challenging that task is.
ABOUT THE AUTHORS
Mbilike M. Mwafulirwa is an attorney at Brewster & DeAngelis in Tulsa. His practice focuses on complex litigation, civil rights and appellate law. He is a 2012 graduate of the TU College of Law.
Melissa East is a partner at McDaniel Acord & Lytle PLLC in Tulsa. Her practice focuses on general civil litigation including the areas of construction law, personal injury law, environmental and toxic tort law, commercial business litigation and family law. She is a 2007 graduate of the TU College of Law.
- See Russo v. Ballard Med. Prod., 550 F.3d 1004, 1011-1013 (10th Cir. 2008) (Gorsuch, J.) (discussing that innovators can choose to share publicly their discoveries or keep them private); Am. Steel Foundries v. Robertson, 262 U.S. 209, 215 (1923) (patent monopoly); United States v. Paramount Pics., 334 U.S. 131, 158 (1948) (copyright monopoly).
- See Robert A. Gorman, Copyright Law 7 (2d ed. Fed. Jud. Cntr. 2006).
- Apple, Inc. v. Samsung Elect., Inc., 786 F.3d 983, 991 (Fed. Cir. 2015), rev’d and remanded on other grounds, 137 S.Ct. 429 (2016) (“Trademark law allows for a perpetual monopoly ...”) (emphasis added).
- We do not mean to suggest that trademarks and copyrights only exist after registration. Trademarks, for example, can exist even without federal registration. Matal v. Tam, 137 S.Ct. 1744, 1751-1753 (2017). But the point is that registration affords the owner important rights, like public notice of ownership. Id. This is also true, to a limited extent, with copyrights. See 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright §8C.02 (Matthew Bender, ed., 2016) (“In general, the rights under common law copyright rights are at least co-extensive with the rights commanded under the Copyright Act.”). This is mainly for sound recordings before Feb. 15, 1972. See 17 U.S.C. §301(c). But or all other copyrights federal copyright law controls. See 17 U.S.C. §301(a).
- See generally Russo, 550 F.3d at 1011-1013.
- See Am. Steel, 262 U.S. at 215 (patent); Paramount Pics., 334 U.S. at 158 (copyright).
- Apple, 786 F.3d at 991 (trademark).
- See, e.g., Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 575 (1994); see also, e.g., Leatherman Tool Grp. v. Cooper Ind., Inc., 199 F.3d 1009, 1011-1012 (9th Cir. 1999); State Indus. Inc. v. A.O. Smith Corp., 751 F.2d 1226, 1235–36 (Fed.Cir.1985)( “[D]esigning new and possibly better or cheaper functional equivalents [of a competitor’s product] is the stuff of which competition is made.”); see also Russo, 550 F.3d at 1012.
- See 17 U.S.C. §201(b); Comm. for Creative Non-Violence v. Reid, 490 U.S. 730, 737-738 (1989); see also Georgia v. Pub. Res. Org., 140 S.Ct. 1498, 1508 (2020). But when the author is an independent contractor, and the work was performed at the insistence and expense of the hirer, the presumption of ownership lies in favor of the hirer. See Playboy Ent., Inc. v. Dumas, 53 F.3d 549, 554 (2d Cir. 1995).
- See Sengoku Works Ltd. v. RMC Int’l, Ltd., 96 F.3d 1217, 1219 (9th Cir.1996) (“It is axiomatic in trademark law that the standard test of ownership is priority of use. To acquire ownership of a trademark it is not enough to have invented the mark first or even to have registered it first; the party claiming ownership must have been the first to actually use the mark in the sale of goods or services.”), cert. denied, 521 U.S. 1103 (1997).
- Banks v. Unisys Corp., 228 F.3d 1357, 1359 (Fed. Cir. 2000).
- Gellman v. Telular Corp., 449 Fed. App’x 941, 945 (Fed. Cir. 2011) (the hired-to-invent “doctrine is expressly equitable, and creates only an obligation for the employee to assign to his employer”).
- Id; see also Banks, 228 F.3d at 1359.
- See Melin v. United States, 478 F.2d 1210, 1213 (Fed. Cir. 1973) (citing Gill v. United States, 160 U.S. 426, 433-434 (1809)).
- See, e.g., Jim Arnold Corp v. Hydrotech Sys., 109 F.3d 1567, 1572 (Fed. Cir. 1997) (“[T]he question of who owns the patent rights and on what terms typically is a question exclusively for state courts.”).
- See, e.g., Herbert F. Schwartz, Patent Law & Practice 34 (2d ed. Fed. Jud. Cntr. 1995).
- See generally id.
- IpVenture, Inc. v. Prostar Comp., Inc., 503 F.3d 1324, 1327 (Fed. Cir. 2007).
- See generally id.
- Arachnid, Inc. v. Merit Indust., Inc., 939 F.2d 574, 1580-1581 (Fed. Cir. 1991).
- See IpVenture, F.3d at 1327.
- Gellman, 449 Fed. App’x at 944 (citations omitted).
- Camick v. Holladay, 758 Fed. App’x 640, 644 (10th Cir. 2018) (quoting DTSA, 130 Stat. at 381-82).
- Video Gam. Tech., Inc. v. Castle Hill Stud., LLC, 2018 WL 3437083, at *4 (N.D. Okla. Jul. 17, 2018).
- 18 U.S.C. §1836(b)(1) (emphasis added).
- Id. §1839(3).
- Vendavo, Inc. v. Price f(x)G, 2018 WL 1456697, at *4 (N.D. Cal. Mar. 23, 2018) (emphasis added).
- Pellerin v. Honeywell Int’l, 877 F. Supp. 2d 983, 989 (S.D. Cal. 2012) (citations omitted).
- 18 U.S.C. §§1839(5)(A)-(B).
- 18 U.S.C. §1839(6).
- Blue Star Land Servs., LLC v. Coleman, 2017 WL 6210901, at *5 (W.D. Okla. Dec. 8, 2017).
- Select Energ. Servs., Inc. v. Mammoth En. Servs., 2019 WL 1434586, at *6 (W.D. Okla. Mar. 29, 2019).
- Id. at *5.
- 78 O.S. §§85-94.
- Blue Star, 2017 WL 6210901, at *7.
- MTG Guarnieri, 2010 OK CIV APP 71, ¶12, 239 P.3d at 209.
- Id. ¶13.
- See, e.g. ProLine Products, L.L.C. v. McBride, 2014 OK CIV APP 34, 324 P.3d 430.
- MTG Guarnieri Mfg., Inc. v. Clouatre, 2010 OK CIV APP 71, ¶17, 239 P.3d 202, 211.
- See Blue Star, 2017 WL 6210901, at *7.
- Gaedeke Hold. VII Ltd. v. Baker, 683 Fed. App’x 677, 683-684 (10th Cir. 2017) (Oklahoma law).
- Amoco Production Co. v. Lindley, 1980
OK 6, 609 P.2d 733.
- Id. ¶¶٤٦-٤٧, ٦٠٩ P.٢d at ٧٤٤-٧٤٥.
- Id. ¶47, 609 P.2d at 745.
- See 15 O.S. §§217-219.
- Autry v. Acosta, Inc., 2018 OK CIV APP 8, ¶٣٠, 410 P.3d 1017, 1023 (quoting Howard v. Nitro-Lift Techs., L.L.C., 2011 OK 98, ¶22, 273 P.3d 20, rv’d on other grounds, 568 U.S. 17 (2012)).
- Herrington v. Hackler, 1937 OK 720, ¶10, 74 P.2d 388, 391 (restrictive covenant “void to the extent that it prevents [a party] from engaging in a like business beyond the confines of the county.”).
- See Cardio. Surg. Spec. Corp. v. Mammana, 2002 OK 27, ¶17, 61 P.3d 201, 214-215 (finding noncompete void because it effectively banned a surgeon “from practicing ... within 100 miles” of the community where he had previously been employed).
- Tatum v. Colo. Life & Acc. Ins. Co. of Am. 1970 OK 27,¶7, 465 P.2d 448, 451 (Approving two years).
- Loewen Grp. Acq. Corp. v. Matthews, 2000 OK CIV APP 109, ¶21, 12 P.3d 977, 982.
- Id. ¶¶٢١-٢٢, ١٢ P.٣d at ٩٨٢. (emphasis in original).
- Cf. Callmann on Unfair Comp., Tr. & Mono. §14:18 (4th ed.) (Nov. 2019 Update).
- Mammana, 2002 OK 27, ¶17, 61 P.3d at 214-215 (emphasis added).
- Howard, 2011 OK 98, ¶26, 273 P.3d at 29.
- Id. ¶٢٢, ٢٧٣ P.٣d at ٢٨.
- See 18 U.S.C. §1030.
- Id. §1030(e)(2)(B).
- Id. §1030(g).
- Id. §§1030(a)(4)&(a)(5)(A).
- Int’l Airports Ctrs. v. Citrin, 440 F.3d 418, 420 (7th Cir. 2006).
- Nilfis-Advance, Inc. v. Mitchell, ٢٠٠٦ WL ٨٢٧٠٧٣, at *٢ (W.D.Ark., Mar.٢٨, ٢٠٠٦); Ervin & Smith Adv. & Pub. Rel. Inc. v. Ervin, 2009 WL 249998, at *8 (Feb. 3, 2009).
- Creative Comp. v. Getloaded.com LLC, 386 F.3d 930, 935 (9th Cir. 2004); EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577, 585 (1st Cir. 2001).
- See OUJIs Nos. 4.16; 23.1; 24.1; Gaylord En’t Co. v. Thompson, 1998 OK 30, 958 P.2d 128 (civil conspiracy); Keel v. Hainline, 1958 OK 201, 331 P.2d 397 (aiding and abetting).
- Sw. Stainless, L.P. v. Sappington, 2008 WL 3013548, at *26 (N.D. Okla. Aug. 1, 2008), aff’d in part, rev’d in part, 582 F.3d 1176 (10th Cir. 2009) (“[A]n agent is not prohibited from taking actions, not otherwise wrongful, to prepare for competition following termination of the agency relationship.”).
- Feddeman & Co. v. Langan Assoc., 530 S.E. 2d 668, 672 (Va. 2000).
- Auxton Comp. Enterp. v. Parker, 174 N.J. Super. 418, 424 (1980).
- See Williams v. Dominion Tech. Part’nrs, 576 S.E. 2d 752, 758 (Va. 2003).
- Id. at 758-759.
Originally published in the Oklahoma Bar Journal -- OBJ 91 No. 8 (October 2020)